There were various reports about Microsoft pricing their Surface Tablet for $199 this week and it caused a lot of media and even consumers to hyperventilate about this possibility. Sure, many with wishful thinking would like it if the Surface is priced this low, but the chances that this will happen are slim to none.
I spoke with my contacts in Taipei and they pointed out that the bill of material cost of the Surface is at least $250 and could be as high as $300 depending on the configuration. For Microsoft to sell this at $199 they would have to take a serious loss on this product, something that in all my years of covering Microsoft, they have never done.
Indeed, their pricing goes in the opposite direction, especially in software where their mark-up could be as high as 70-80% depending on the product. And while the margins on the XBOX are much lower, the idea that they would sell this game console under cost is ridiculous.
The only companies that can afford to sell hardware under cost are Amazon and Google. In these cases, the hardware is almost a loss leader so that they can offer products and services through the device. In Amazon’s case, they amortize anything that is bought through the Kindle tablet for a period of time so that in the end, they actually book a small profit. However, the real goal is for consumers to continue to buy eBooks, music, movies and products through this portable tablet that is at people’s fingertips and makes buying these products very easy.
And Google’s model is similar although we believe they sell their Nexus 7 close to cost and then amortize money made through advertising related searches as well as Google Play to bring in any profit tied to their tablet itself.
But Microsoft does not really have enough successful services that they can count on to bring sufficient additional revenue to the Surface if they price it at $199 in order to make up the actual BOM cost as well as make any profit on the device itself.
The pricing of Surface will most likely start at $499 for the 16 gig model and move up from there based on additional memory or accessories. And these prices are more in line with business products like the Surface anyway.
Now I heard one theory that circulated that Microsoft is so far behind in tablets that they might price it at $199 just to buy into the market for tablets and gain a foothold through aggressive pricing. While that is a possibility, Microsoft’s history does not suggest that they do these types of things just to buy market share.
While this first version is coming from Microsoft, their hardware partners have been reaming them for doing this and have been lobbying hard to get licenses from Microsoft to do their own versions of Surface as well. We believe Microsoft may consider this at some point but if they priced it at $199 and well under cost, this would set the pricing for future models from partners and none of these partners are in a place to sell any hardware at a loss.
The most likely scenario that will play out is that the first generation of their Surface tablet will be around $499-$599 and if they have problems moving big numbers, they can always reduce pricing to move them. But if they priced it at $199, it would be impossible for them to up the price at anytime in the future since pricing a product higher then when it came out most often spells the death of that product.
While Microsoft’s Surface tablet does seem to have potential and serious interest at least from business customers, I highly doubt that Microsoft will enter this market just to lose money. That is why the idea of selling this way below cost does not make a lot of sense.