Yes, the RROD was a huge debacle and too many lost money on broken Xboxes. That doesn't change the fact that people bought 70 million of the things, and generally seemed to love them.
A whole cottage industry of aftermarket console cooling apparatus was spawned due to the first Xbox's history, and it didn't help whatsoever in staying the problems that the second one had.
It was a business success regardless, but that's not the topic at hand.
If you had actually used one as a real phone, I doubt you would be saying that the "hardware" isn't good. The core components are as good as the competition. The amount of sensors available to developers is ludicrous. Not only that, if the build (phone body) forms part of what you would call "hardware" - it truly lives up to the Nokia reputation.
So, Surface won't be replacing Windows/Office any time soon, but nearly a billion in revenue for what a lot of people try to frame as a failed product is not too shabby.
I wouldn't say it's a key profit area for them yet, and we also can't call it a success yet (as they haven't reported the total retail purchases).
[1] http://blogs.wsj.com/digits/2014/10/24/a-win-for-microsofts-...