Whacky Rumors – Will Microsoft Subsidize the Surface?

The Microsoft Surface tablet computer.

As I’ve written before, I’m generally opposed to all the silly tech rumors that fly around, such as what features may or may not be in the next Apple or Android device.

However, this idea is just too juicy to let go. Massive disclaimer upfront, I haven’t read this anywhere and have absolutely no proof whatsoever that Microsoft (MSFT) has any such plans. That being said, I’ve certainly wondered about it.

From the day the Surface was announced rumors have been flying about what the thing will cost. Microsoft said:

Suggested retail pricing will be announced closer to availability and is expected to be competitive with a comparable ARM (ARMH) tablet or Intel (INTC) Ultrabook-class PC.

This has lead a lot of people to speculate that the Arm version will be about $500 and the Intel version about $1000 give or take a hundred bucks. A few people asked about them going low like Google (GOOG) and Amazon (AMZN), say in the $299 price range, but conventional wisdom seems to be the higher figure, say Apple (AAPL) price range for Arm and Notebook price range for the Intel.

Personally, I immediately started thinking about the Microsoft strategy for X-box. Give the thing away for as close to cost as possible, even less if you can find a way to do it. Spend a few years subsidizing it and then make it back after you’ve clawed your way up to major market share.

For the most part this worked for X-box. Recently the division has had downturns, but so has the gaming industry on the whole. Overall most would say it’s been a successful strategy for Microsoft. In fact, many point to X-box as proof that the Surface will be successful, although I haven’t seen any such commentary that mentions the pricing strategy that was used. Note also that recently Microsoft began offering subsidies, further lowering the price of the hardware.

It’s undeniable that Microsoft has some work ahead of them if they want to make a dent in the tablet market. Apple has a pretty good lock at the moment. Amazon has gained some traction although with their method of sales reporting it’s difficult to get an accurate count. Google appears set to put some heavy competition on the low-end and small-device market with their Nexus. The Surface is exciting to Microsoft fans because of the OS and because it’s from Microsoft, but aside from that, for tablet customers there is nothing really new or outstanding about the Surface. This is evident from the obviously heavy attention given to the fact that it has a keyboard and a stand, both of which aren’t core issues and are available for every other tablet on the market. I’m not saying it’s a bad tablet, to the contrary it appears to be a decent machine. But nothing special to make it stand out, which is what you need if you’re going up against the iPad.

This is why I keep thinking about the pricing strategy. Microsoft could price it high and call it a premium device. This will keep the margins high, but undoubtedly limit its potential sales. Or Microsoft could go on and really attack the new market like they did with Xbox. This has the risk of alienating their OEM partners, but the upside is capturing real market share. Tell me Microsoft hasn’t at least discussed it internally.

This brings me to the rumor that I never actually heard but have thought about. Microsoft recently announced their Q4 earnings. In their 10-K filing with the SEC Microsoft says:

We may not achieve significant revenue from new product and service investments for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced historically.

This got me thinking again about Surface pricing. If Microsoft is warning that they’re releasing a new product and it might cost them money, it may just be that they’re doing the fiduciary duty in warning investors. On the other hand, maybe they’re expecting to lose money on Surface initially, and if that’s the case, is is the price?

Maybe, just maybe, Microsoft will lowball the price of the Surface and following Amazon and Google’s lead, blow the tablet market wide open. This might not be good for Apple, but a tablet pricing war would be great for consumers. Cross your finger!

What do YOU think? Let me know in the comments, on Twitter, Facebook, or Google+.

[Update Aug 14, 2012]
Today Engadget is reporting to have a source that says the Surface RT will be $199. Hmm… maybe I was right?

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