Microsoft Surface Tablet for Under $200 Sounds Crazy, Like a Fox

NEWS ANALYSIS: Microsoft has sold hardware in competitive markets at subsidized prices before to build market share in a big way, and might do it again with the Surface for Windows RT tablet.

The latest PC market news that Microsoft might sell the eagerly anticipated Surface for Windows RT for $199 sounds crazy. In fact, it might be crazy. But then it might not be as crazy as it sounds.

The shockingly low price that's circulating around the Internet news sites was first announced by Engadget, which claims to have talked to a participant in Microsoft's TechReady15 conference in which the launch details were laid out.

So now that everybody from CBS to the LA Times has taken that number and run with it, the obvious question is whether it's true. Would Microsoft really sell the entry level Surface RT for under 200 smackers? Could they?

The answer is that Microsoft, if the company so chose, could indeed sell the Surface RT for $199. The company has done the same kind of thing in the past. For quite a while Microsoft sold the Xbox for $99, which some analysts estimated amounted to a loss of about $150 per unit, and did that for years as a way to build market share. Eventually, Microsoft built up its market share and the price of an Xbox these days is about twice the original price. But even there, Microsoft may be taking a small loss on the hardware, and making it up in software, subscription and accessory sales.

There's no reason financially why Microsoft can't do the same thing with the Surface RT. But that's not the same thing as saying there's no reason not to do it. So here's a possible scenario: The Surface 32GB Windows RT tablet hits the street with a recommended retail price of $249. This keeps the Windows RT partners happy since the price is high enough for them to make some money on sales, and more on accessories, but low enough to ensure robust sales. Remember, it's the market share for Windows RT that matters more to Microsoft than hardware sales.

Then, once the initial crazed early adopters have had their way with Windows RT sellers, Apple feels the pressure–especially if the Surface is as good as it appears to be. Then Apple is forced to start discounting the iPad just in time for the holidays. Apple won't be able to attempt to sue Microsoft into submission, because Microsoft has purchased licenses to Apple's patents and agreed to a "no-clone" provision. There's no chance that a Windows tablet could be taken as an Apple clone, so lawsuits won't happen.