Reports surfaced (no pun intended) today that Microsoft was going to offer the Surface at the $199 price point. This should come as no surprise really, but read on for the catch.
I telegraphed how Microsoft could reach the $199 tablet price point in my June posting on Windows RT Pricing. There are four important data points to consider when looking at the validity of the $199 rumors:
- Microsoft learned from the Xbox gaming console business how to sell hardware at a loss in order to make money selling software (accessories, etc.) for it. They understand this business model, and they understand how to make it work for them even though it doesn’t work for traditional OEMs (because OEMs have no significant software/service revenue stream).
- The tea leaves increasingly indicate that Microsoft is moving to a subscription model wherever they can figure out how to do so. The Office 365 Home Premium offering is the latest evidence of this. The Zune Pass and Xbox Live Gold are other consumer examples. And Microsoft is reportedly working on a streaming media service that could debut this fall.
- Most of today’s $199 tablet are either explicitly or implicitly subsidized offerings. Some are carrier subsidized with a traditional cellphone-like contract, others are subsidized by the media services that you are expected to buy. Amazon charges $199 for a Kindle Fire because they expect most people to consume books, movies, and music from Amazon. Ditto for the Nook Tablet and B&N store. Ditto for the Google Nexus 7 and Google Play.
- Microsoft has been experimenting with a $99 Xbox offering that requires a 24-month subscription to Xbox Live Gold.
So it is completely within expectations, and in fact the $99 Xbox deal is just telegraphing it for all who are willing to listen, that Microsoft is going to offer the Surface for $199 when you sign up for a TBD subscription of some sort.
I’m sure that the subscription offering will make Microsoft’s take from a Surface sale a minimum of $399 over a two-year period. That would match Apple’s iPad entry point (using the previous generation iPad) as well as the entry point for ~10″ tablets being established by Android OEMs. This would give Microsoft an edge versus its Windows RT OEMs selling to customers who want the Microsoft services, but leave the OEMs positioned to compete for those who’d rather forgo the subsidy because of their commitment to other ecosystems (e.g., Amazon). Another possibility is that Microsoft will offer the OEMs a commission for signing up customers to the Microsoft subscription offering and the OEMs will have the choice of pocketing that commission or using it to subsidize their own Windows RT tablets! OEMs or no OEMs, Microsoft would be in the tablet market at a very competitive price point with very compelling hardware.
So go ahead and believe the $199 price for Surface. Just remember you’ll probably also be committing yourself to a subscription for that amount or more over two years.
Hal's (Im)Perfect Vision 
Typically, multi-hundred dollar price reductions come from high priced subscriptions. Wireless data plans have $50 per month or higher price points allowing carriers to cut $100 to $300 from the price of the phone. I wonder what Microsoft subscription has that high a price point so they can financially justify cutting $200 from the cost of a device?
It is also relevant to note, carriers like Verizon & AT&T have stopped subsiding tablets and instead moving towards multi-device shared data plans. It also doesn’t help that the first iteration of Surface won’t have built-in wireless (3G, LTE) but simply WiFi. (http://techcrunch.com/2012/07/03/verizon-wireless-stops-subsidizing-tablets-now-selling-them-at-full-retail-sans-wireless-contract/)
Xbox + Kinnect bundle is $299, or $99 with a $15/month Xbox Live Gold subscription. So $15 a month can justify a $200 price subsidy.
Don’t forget the additional one year warranty in that price point…
I believe the Surface will come with 4G LTE built-in. The spec sheet is located at http://www.microsoft.com/global/surface/en/us/renderingassets/surfacespecsheet.pdf
The spec sheet shows both tablets will have 2×2 MIMO antennae installed. I don’t know much about hardware but Isn’t that antennae used for 4G connection?
MIMO is used for 802.11N WiFi, so that alone doesn’t give a hint if Surface will come with LTE or not.
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This subscription model which may allow them to sell the surface at $199 upfront is brilliant honestly. Microsoft has snuck through the back door and will give customers the ability to circumvent the OEMs altogether. First with the Surface, with its kick stand and keyboard cover, serves as both a tablet and laptop replacement. Secondly with the upcoming Xbox, which may be used as a general purpose PC since metro applications will be available to it.
This is beyond the scope of this article, but I wouldn’t be surprised if Microsoft releases a WinRT based TV panel utilizing the technology they acquired from Perceptive Pixel, which also offers the full PC experience.
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Yeah, that sounds like a much more likely scenario assuming the $199 actually end up being offered. But like Xbox, it’s not going to be pretty for margins or shareholders.
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And then, there’s the keyboard. My guess is that Microsoft has a good guess at how many of each keyboard/cover accessories (of each type (thin and tactile)) they will sell. My other guess is that the margin on these will be higer than on the device itself.
And they can play games with having multiple models based on included memory (selling the low-memory/cheap one at a lower margin than the more powerful model). Then you get people in the door with the low price and upsell them to the higher priced model.
I agree
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