What Lies Beneath the ‘Surface’

By Jonathan Hawes - September 7, 2012 | Tickers: AMZN, AAPL, MSFT, NOK | 0 Comments

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With the recent rumors of a $199 price tag on the new Surface tablet that is scheduled to hit stores at the end of next month, Microsoft (NASDAQ: MSFT) has consumers in a frenzy. Scrolling through forums, it is quickly apparent that buying the Surface at this clearance price is a foregone conclusion for many tech junkies. Rather, it is how many tablets to purchase that is cause for debate.

In all likelihood, the price will probably lie north of two hundred, while still undercutting the iPad. Apple (NASDAQ: AAPL) is clearly on top of the tablet pyramid (not to be confused with Sabre’s pyramid tablet - http://www.sabre-corp.com/products.shtml ) and the release of the Surface is unlikely to do anything to upset this balance. However, Microsoft is aiming a blow towards the (relatively) weak link in Apple’s chain – pricing. Consumers are willing to pay more for Apple’s products thanks to their innovation, usability, and interface capabilities. However, Microsoft is betting that there is a share of the market that would choose a solid product at a lower price. Not necessarily a bad strategy, given the current recession and the recently curtailed spending habits of many people.

Another facet of Microsoft’s strategy lies in selling the platform at a loss and proceeding to recoup these dollars in revenue from add-ons and software. Microsoft has experienced a measure of success with these methods in regards to the Xbox, and their latest earnings report indicates an upward trend in sales of online games and services for Xbox Live (the online complement of the game console). Amazon (NASDAQ: AMZN) used a similar approach when developing the pricing strategy of their Kindle Fire – sell the tablet at a loss, and make the profits through the sale of media content. While this is becoming a commonly accepted method of pricing when it comes to platforms and digital media, it has the potential for dramatic and lasting impact.

While arguments about capitalism, predatory pricing, and regulation will no doubt rile up parties on both sides of the issue, there will certainly be fallout from these pricing techniques in the financial world. There are always two sides to the coin – while consumers pay less for the latest technology, the producers receive lower revenues. While Microsoft, Apple, and Amazon are snugly enjoying the profit from digital media sales, other companies will be left out in the cold. Although it is difficult to predict the future effects of this pricing strategy on the tech giants themselves, the potential effects on their smaller competitors are ominous. There is no need to look further than Nokia (NYSE: NOK) to find a prime example. After being driven out of the phone market by Apple, a last gasp attempt to remain relevant involved partnering with Microsoft and selling Nokia phones with Windows as the operating system. However, as this fell short, Microsoft began to distance itself and developed its own tablet, rather than seeking another hardware-operating system based partnership with Nokia.

Which stocks should be avoided? Certain Microsoft partners and tech companies are beginning to look like risky investments.  Hewlett-Packard was certainly disturbed by news of the Surface tablet; or more accurately, disturbed by the lack of news from Microsoft about the Surface.  Their lack of comment to reporters regarding the Surface is indication alone. Although Dell has said they look forward to a continued partnership with Microsoft, there is no doubt that they are wary of any impending products and competition. Although the industry leaders are commonly viewed as solid investments, some of the smaller tech stocks require caution and additional research before taking a long position.

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