Why a $200 Surface tablet makes sense for Microsoft

Does the $200 price point for the new Microsoft Surface tablet sound a little bit too good to be true? We examine why it might not be too far fetched.

When Engadget broke the news that the Microsoft Surface would be sold for $200, it caused quite a stir. Can it possibly be true? Microsoft is refusing to comment. An anonymous source kicked off the fuss by saying that the Microsoft Surface for Windows RT tablet would be going on sale on Oct. 26. That’s believable enough because it’s also the launch date for Windows 8. What’s harder to swallow is the idea that even Microsoft can afford to sell it for $200. (By the way, in case you are wondering, Windows RT is a version of Windows 8 for ARM devices such as tablets.)

Competition is good for consumers

This kind of pricing is the sort of thing that capitalism fans always argued should come about because of fierce competition in the market. In theory, companies vying for our affections will drive prices ever lower. In practice, it rarely happens for a variety of reasons, or it happens until the competition goes out of business and the survivor can charge whatever it wants.

In any case, if it is true, then it’s great for consumers currently considering buying a tablet. Stats from IHS recently suggested that Apple’s share of the tablet market is heading toward 70 percent with a range of Android manufacturers accounting for the bulk of the rest. Of course, that was before Google launched the Nexus 7. If you were to buy a tablet right now and you wanted the best value for your money, it might be tough to see past the Nexus 7. If you want the best tablet and price is of no concern, then the iPad is the obvious choice.

Microsoft would really stir things up by releasing a 10.6-inch tablet at a $200 price point. Unfortunately, beyond the inclusion of Windows 8, we don’t know much about the Microsoft Surface right now when it comes to specs. However, the 10.6-inch display and the choice of 32GB or 64GB storage is enough to suggest a higher price. So, how could Microsoft afford to sell it at $200?

Could it be a loss leader?

It would not be unheard of for a company to sell a product at a loss in order to stimulate sales of other products or services. It might be a practice that’s more common in major supermarkets, but tech companies do it too. Sometimes, they can afford to lose money on something to gain market share. Microsoft poured cash into establishing the Xbox brand, building a user base for Xbox Live services. Once it was established, it began selling hardware that did turn a profit. The Xbox 360 made money and there was room to sell it below cost because it could be subsidized by a subscription to Xbox Live. Clearly it’s a high risk strategy, but Microsoft knows it can pay off.

Techland at Time conservatively estimated the build cost of the Surface and suggested that Microsoft would lose at least $50 on each one, if it sold for $200. As it turns out, Microsoft lost more than that on the original Xbox. VentureBeat suggests a loss of $168 on each machine sold.

That still doesn’t make it likely, but it is a possibility.

Bundle it with a contract or subscription

This is one of the most popular theories floating around. You get the tablet for $200, but to use it, you also have to sign up for a two-year contract or a subscription to a service. The fact that carriers are backing away from subsidizing tablet costs suggests that it won’t be a 4G contract scenario. Microsoft also won’t want to limit sales channels.

Maybe it’s a subscription to Office 365, as the Guardian blog suggests? A subscription bundle could also involve Sky Drive, Xbox Live, or the newly branded Xbox Music (previously Zune Music). A monthly subscription that bundles all of Microsoft’s offerings and maybe even ties in a deal with a third-party service could be in the cards, as well. Some kind of tie-in with a subscription to services seems far more likely than a straight grab for market share that Microsoft will look to capitalize on later.

Partner problems

There are some compelling arguments against the suggested price point. As our own Geoff Duncan points out, Microsoft has to keep its RT partners onboard. It is expecting Dell, Lenovo, and Samsung to make Windows RT devices, so a loss-leading Surface tablet wouldn’t help, especially when you consider Microsoft’s licensing fee on top of manufacturing costs and marketing. A $200 Surface could make it impossible for them to compete.

Does Microsoft have to do this?

Amazon might be losing a small amount of money on each Kindle Fire in order to build a market share and sell content, but they aren’t taking a huge risk. Google makes a modest profit or breaks even on the Nexus 7, but once again, the profit comes from elsewhere. Google makes its money on content and advertising. Apple makes a huge profit on every iPad sold and then makes more from selling content. Microsoft does have to work hard to break in here, but there’s room to maneuver.

There’s some middle ground between the bargain basement $200 price and the premium $500 plus price. The competition outside of the iPad is not unmanageably intimidating. A lower price could help Microsoft establish a foothold with the Surface. Selling a big tablet with decent specs at a break-even price or a slight loss is probably necessary if Microsoft expects to catch up with the competition.

Microsoft doesn’t have to be as aggressive as $200, but if they go with that price point, the Surface would fly off the shelves. Maybe it ultimately comes down to this: How desperate is Microsoft to catch up?