Microsoft Can Afford to Sell Surface for $200, But Pricing Would Be ‘Suicide’

Wait, what? All this for just $200? _Image: Alexandra Chang/Wired_

Of all of Microsoft’s upcoming products, Surface is the most highly anticipated. But the company has revealed so little about the tablet that it’s bound to face at least a few speculative rumors. The latest: Microsoft is planning to retail the Surface RT tablet for just $200, according to Engadget’s sources.

At Microsoft’s July TechReady15 conference, the company reportedly revealed that Surface will launch on October 26 — the same date as Windows 8′s official release, which isn’t too surprising. What’s more shocking from the report is that the ARM-based Surface tablet would significantly undercut the iPad, putting the 10.6-inch tablet at a similar price to 7-inch counterparts like Google’s Nexus 7 and Amazon’s Kindle Fire.

While Microsoft might have the cash reserves to sell Surface at a dramatic loss, it still wouldn’t make much sense for the software giant’s debut entry in the tablet market.

“When you take a product like the Surface, where they’ve obviously put a lot of energy into industrial design, including the keyboard cover option, there’s a lot of planning. You run a huge risk of cheapening the brand by [pricing low],” IHS iSuppli analyst Rhoda Alexander told Wired. “You set the bar really low and set customer expectations really low. It’s very different than the Android universe, where pricing is already in that ballpark. Microsoft has a chance to write something new here.”

If Microsoft prices its Surface RT tablet for just $200, it would certainly capture some market share. But at $200, the company would be selling Surface for less than what it costs to make. While nobody has yet done a part-by-part teardown of Surface, we do know what other competing tablets cost to make. For example, Google’s 8GB Nexus 7 costs around $159.25 to build, according to IHS, and that’s just a 7-inch tablet. For the 10.6-inch Surface, the glass and the casing alone will cost more than $159. And Surface sports several features that are not included in the Nexus, such as a kickstand, and also packs more storage.

It’s not that Microsoft can’t afford to price Surface at $200 — it can. The company sells the Xbox for less than it costs to make, and has lost around $168 on every Xbox console sold. That’s not uncommon in the gaming industry, though. “Strategic pricing” has also hurt Sony, which has lost even more from its PlayStation 3 console.

The tablet market is a different story. The Nexus 7 sells for about $40 more than its material costs, while the Kindle Fire sells for about $60 more. As for the iPad, it enjoys a huge profit margin, where materials cost only about half of the retail price.

“Could [Microsoft] afford to do it? Yes, they have tons of cash, they can do whatever they want,” Forrester analyst Sarah Rotman Epps told Wired. “But it would be suicide. In one fell swoop, they would handicap their partners, and it would prevent them from releasing higher-priced products. That pricing would be suicide. Nothing about that strategy makes sense.”

Alexander agrees.

“Frankly they’d be leaving money on the table. There’s an opportunity to charge significantly more for the product, and it doesn’t make sense that they would put a bargain basement price on it out the door,” she said. “If they give the device away or sell it at a loss, it’s difficult to see where a profit opportunity comes from. Can it be done? Yes. Should it be done? Questionable.”

Since a $200 price tag is highly unlikely and makes very little sense for Microsoft, the question becomes, What _is_ a reasonable price for Surface RT? The company itself has already said it will be “comparable” to other tablets. Alexander estimates: “Somewhere in the $500 range.” http://dlvr.it/20gq5n