Even Apple Might Feel the Heat From $199 Surface Tablets

By Wayne Rash  |  Posted 2012-08-15

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

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.

Even Apple Might Feel the Heat From $199 Surface Tablets

If Surface sales are hot enough that Apple feels compelled to lower prices, then Microsoft also lowers prices, incrementally at first until it finds a sweet spot. Once the market is being flooded with Windows RT devices the tablet market will be in chaos. Sales of more expensive tablets will drop to near zero unless there's some really compelling reason for people to buy them.

If Surface sales aren't hot enough to force Apple to lower prices, then Microsoft can lower prices to $199 as a way to heat things up. One way or the other the price slides down to around $200 during the critical holiday shopping period.

But remember, there are partners that Microsoft has to treat well enough that they'll keep selling Windows RT and Windows 8. Since messing around with pricing isn't the best way to endear you with partners, Microsoft has to do something to keep those partners on board.

So think of a package of incentives that will help Microsoft's Windows RT OEM partners keep prices down for their devices. Perhaps Microsoft will lower license fees to help Windows RT get off the ground. Or perhaps Microsoft will offer significant rebates on every new Windows RT device sold, such as coupons good for accessories or software. Or perhaps Microsoft will take a page from the auto manufacturing world and offer a direct cash rebate to buyers as well as rebates behind the scenes to partners.

Now, suddenly the partner, in this case Lenovo, can keep the price of its mythical Yoga tablet at $299, but be able to sell it for far less and the ultimate customer sees an even lower price.Let's use Lenovo and its secret Yoga tablet for example. Let's suppose that Lenovo would normally sell the Yoga for $299, but Microsoft has knocked $50 off the price of the Windows RT license and has created a $50 incentive rebate on top of that. Meanwhile, Microsoft is including a $100 coupon good for accessories and applications.

Could Microsoft do this? Yes, the company has the cash to do this until the sun cools to a white dwarf. Will Microsoft do this? That's unclear, but it has done something like this in the past, so it might. Will this throw the Android tablet market into chaos? Darn tootin' and it'll drive Apple nuts as well, so Microsoft gets a twofer there.

Ultimately, the real winner is the tablet buying public who is already paying more for tablets than they need to be. But that's competition for you; sell stuff and drive your competitors crazy in one fell swoop. Who could ask for more?

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