Microsoft's Ballmer Hobbles His Own Horse Just Minutes Before the Starting Gun
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oh, Steve. Steve, Steve, Steve.
I thought we had an agreement.
I agreed to wait for the Surface to arrive in October or November or whatever, patiently leafing through customer reviews while ignoring the rising chorus of appleholics gloating over the new iPad Mini. You agreed to price the Surface competitively. That was our agreement, and you just broke it with all the pomp and ceremony of a restless, 5 year old boy taking a hammer to his piggy bank.
I know there's nothing legally binding between us. Nobody signed anything. We did what friends do: we spit on it. Spit is sacred. Spit means I trust you not transmit really nasty germs like flesh-eating bacteria to me. It may be a completely unscientific approach to commit to someone else's germs as a mark of faith. Yet, here we are.
You want to ignore our little arrangement? Fine.
Two can play that game.
This is the conversation that I fear all too many consumers, captivated by the June 18th sneak peak, waiting only for a decent price point to justify ditching their keyboard-deprived Android tablets and assorted iDevices to themselves, their family, and their friends are having with themselves today.
Consumers give themselves permission to buy things by employing a number of rational-sounding justifications that favor making the purchase. These justifications give people the illusion that they are acting rationally when they go to buy something, when in reality, the purchase is driven by purely personal desire.
In the case of a significant purchase, the number of justifications required goes up, as consumers privately anticipate justifying the purchase to someone else.
Now, Microsoft's (NASDAQ: MSFT) CEO Steve Ballmer is not -and has never claimed to be- a technological wunderkind. He's a marketing guy. (Says so right here, in Vanity Fair.) As a marketing guy, Ballmer should be well acquainted with the fact that not only is “buy cheaper” the simplest information processing model, but also the most predictive in terms of success. Don't let Tiffany's 5th Avenue store, Prada or Donald Trump fool you: Brands go out on a limb when they decide to sell flagship products for luxury prices. Tiffany's 2012 sales estimates are down, my friend. Prada's shares have tumbled by 20% since May. Trump is washing dishes.
Yet, Steve Ballmer has apparently decided to ditch this tidbit of marketing wisdom in favor of a pricing strategy that is dependent upon profit maximization. On September 25th, he told the Seattle Times:
I think most people would tell you that the iPad is not a super-expensive device. ... (When) people offer cheaper, they do less. They look less good, they're chintzier, they're cheaper.
If you say to somebody, would you use one of the 7-inch tablets, would somebody ever use a Kindle (Kindle Fire, $199) to do their homework? The answer is no; you never would. It's just not a good enough product. It doesn't mean you might not read a book on it....
If you look at the bulk of the PC market, it would run between, say, probably $300 to about $700 or $800. That's the sweet spot.
That's the sweet spot if your tablet sports an apple with a big chunk bitten stamped on the back, but not when you're wading into a war of attrition for ownership of the tablet space. There's a reason Amazon (NASDAQ: AMZN) routinely undercuts Apple's (NASDAQ: AAPL) prices: Peer pressure. Apple's products are “in-group” products. Consumer don't have to justify buying an iPhone, they have to justify buying something that's not an iPhone. This “social premium” is priced into every iPhone, iPad and iTouch that Apple markets.
The Windows 8/Surface roll-out is the single most important event in Microsoft's history since the release of Windows 95. It's Ballmer's last chance to convince Wall St. that he can fill Bill Gates' out-sized shoes. It is not just another product release. It's the product release. Microsoft has to score a win in two out of three product divisions this fall to rescue the stock from the “dead money” designation it has worn around its neck like a cow bell for a decade. The company has to
a) make a winning Windows operating system.
b) make a winning Windows phone.
c) make a winning Windows tablet.
We have yet to gauge the reaction to Windows 8. We have yet to see a winning Windows phone. (Unfortunately, Nokia is suffering from an Elop Effect.) That just leaves a Windows tablet – and Microsoft's CEO has decided to cede the low end of the tablet market to Amazon and pick a no-holds barred, 1-on-1 fight with the biggest, baddest kid on the playground. Investors can cheer from the sidelines if they want this fall. Everyone likes an underdog. In the meantime, a $31 stock price in a $26.26-$32.95 trading range sounds like a sweet spot to take some money off the table.
FatalX has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Microsoft. Motley Fool newsletter services recommend Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.