Microsoft’s Surface for $199: Dream or Reality?

By Rajesh M. - August 22, 2012 | Tickers: AMZN, AAPL, DELL, GOOG, MSFT | 0 Comments

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Microsoft’s (NASDAQ: MSFT) Surface tablet is one of the most anticipated products this fall. The company prefers to keep the suspense going and has therefore scarcely revealed much about the tablet. As expected, rumors about the device are bound to spread. There are speculations that the software giant is to offer the 10.6 inch Surface at $199. This means that Surface is getting prepared to join the league of Amazon’s (NASDAQ: AMZN) Kindle Fire and Google’s (NASDAQ: GOOG) Nexus 7.

Also, with the specifications that Microsoft claims it could damage the sales of Apple’s (NASDAQ: AAPL) iPad if the company actually sells at this basement price. The Redmond company is rumored to release the Windows RT version of the Surface at $199 on October 26 when it has scheduled to launch Windows 8.

Quite a few price estimates have been made since the announcement of the device was made a couple of months back. The tablet will be available in four versions: the 32GB and 64GB versions that would run on the Windows RT, and the 64GB and 128GB versions which would run on Windows 8. Most likely the 32GB base model on Windows RT would be priced at $199. As nothing was heard from the horse’s mouth, estimates were made earlier that the Surface RT versions would bear a price tag of $599 and $799, while the Windows 8 Pro versions would come for $599 and $999 respectively.

However, is the new rumored price actually feasible?

Too low to be real
There is no doubt that if Microsoft sells its tablet for $199, it should be able to capture the market in a big way particularly as competing products, like the Kindle Fire and the Nexus 7, do not sport a number of features. The kickstand and higher storage capacity along with a bigger screen than the iPad are attractive value additions by Microsoft. The obvious question that arises is: What is the manufacturing cost of the Surface? Let’s do a bit of analysis.

Tablets with lower specifications such as the 7 inch 8GB Nexus 7 costs about $159.25 to Google as per the research firm IHS iSuppli and is offered in the market at a margin of $40, Kindle Fire is sold at a premium of over $60 on the cost Amazon incurs. And finally, the tablet king Apple, experiences a super cool margin and reigns the market selling its high priced iPad for double the material cost.

Given the above price range, the Surface with such value added features cannot cost so low that it could be sold for $199. This means that the $199 price would be lower than the cost incurred by the company. So what is the purpose to sell it at such a big discount? Simple! The idea is to gain market share and penetrate deeper. Microsoft has deep pockets and can afford to bear the loss. It can make up for it from the revenue earned from the consumer spending on its apps and media.

True that Microsoft can afford to digest such losses given its huge cash reserves, but should it actually do so?

What’s good, what’s not?
Does it make sense for a software giant to enter a market to make losses? The company at the time of the announcement had itself said that the price would be comparable to other similar tablets. As per their saying, it should be priced around $500. So how can the rumored price of $199 benefit the company?

It could turn the tablet market in a tremendous way in favor of the Surface maker. At this price range, people can just choose from the Kindle Fire, Nexus 7 and a number of Android tablets. With the entry of Surface, Microsoft can gobble up their market share as the temptation of possessing this tablet at such a discounted price is irresistible. In addition, it would put pressure on the other Windows 8 tablets to lower their prices and also assist in capturing market share from the Androids and the pricey iPads.

This being said, one shouldn’t ignore the repercussions of the low price. Such a low price could upset the company’s OEM partners Asus, Lenovo, Dell (NASDAQ: DELL) and Samsung. These hardware makers would have to purchase Microsoft’s OS but wouldn’t be able to lower their tablet rates as much as Microsoft can, and this would make them lose their market.

Also, Microsoft has put in a lot of effort in the making of Surface. To sell it at such a subsidized rate, particularly when there is opportunity to charge high for the brilliant features, would be foolish. There is no point in gaining market share at the cost of huge losses. Such a pricing strategy would make Microsoft a loss leader. The company would later find it difficult to increases prices as customers will get use to buying it at a lower rate. I would rather choose the Apple strategy. The Cupertino company first sold its iPhone for $599 and then a couple of months later slashed it to $399. This would be better than selling a device for a low price first and then start increasing it. In fact the iPad Mini, expected to release this fall with the launch of iPhone 5, has been designed to combat the Surface and other tablet players in the lower range tablet market. The Mini version is expected to come at a comparable price as Apple desires to venture in the low range market to continue to remain the unprecedented king.

Concluding thoughts
Microsoft might be having huge reserves to offer the Surface at a loss. But this is not all. There are several other things that the company needs to think about. Nothing regarding the price has been confirmed as yet. We need to wait and watch as the launch is just a couple of months away.

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