Rumors are flying that Windows RT (with Office 2013 included) will cost OEM’s $85 a copy. This is causing a bit of an uproar because at that price there is no way an OEM can build an Amazon Kindle Fire ($200, subsidized by Amazon’s services) competitor. Indeed it extrapolates to tablets that will be in the $500-700 range, just like the current generation iPad! And, btw, the new Samsung Galaxy Note 10.1 which priced at $550. So if this pricing is correct then it says to me that Microsoft decided it wanted to target the premium part of the tablet market rather than the bargain part of the market. Good decision? Maybe, maybe not. But it is important to consider that Microsoft can always reduce the price later, but it can’t realistically raise it.
Pricing is, of course, far more complicated than a simple “$85 a unit” conveys. For example, Microsoft typically has co-marketing plans in place so that it effectively rebates part of the unit price back in exchange for certain marketing activities. An OEM who advertises a tablet and includes a Microsoft Windows logo and tagline might get a $1 back for each $1 they spend up to some number of dollars per unit sold. That could effectively lower the price per unit by several dollars. Microsoft could also share other revenue streams, such as from app sales, further reducing the effective cost per unit. In fact there is a rumor that they are going to do just that. They could extend this to Xbox Music and Video sales, making for another effective reduction in cost per unit for the OEM. So you really have to look at what the net cost is going to be for the OEM, not the headline price.
And what if you really did want a competitor to the Kindle Fire? Keep in mind that this is a heavily subsidized device. Amazon is at best breaking even on the device itself, and losing significant money when Sales and Distribution costs are factored in. Microsoft has a number of ways it can enable lower priced tablets to compete with the Fire. They have the same media subsidy possibilities with a combination of Xbox Music and Video and their new Nook e-book joint venture. They could offer a lower price on Windows RT for 7″ screen devices. They could offer a Windows RT variant optimized for media consumption devices (by removing Office 2013, for example). In other words, they have options for competing in this space.
My first reaction to the $85 price was that it was out of line, but now I’m not so sure. A friend pointed out that the OEM price for Windows 7 Starter Edition was $55, and that let Windows successfully compete against (free) Linux in the Netbook market. In fact, Netbooks running Windows 7 Starter Edition were available for as low as $300. Windows 7 Starter Edition didn’t include Microsoft Office, so when you factor that in the $85 price doesn’t seem all that outrageous. Particularly if customers really value having Microsoft Office built-in. And if they don’t? Well then Microsoft could rather easily offer OEMs a lower priced Windows RT without Office!
So don’t get too caught up in the furor over the $85/unit pricing rumors or the $500-700 tablet pricing predictions. They might be outright wrong, and they certainly are operating on incomplete information.
Hal's (Im)Perfect Vision 
Kindle Fire. Flame is espionage software 🙂
Obviously my subconscious equates the Fire with malware too 🙂
I was on a phone call when I wrote that line. Teach me to write a blog post when I’m distracted.
Wow, GREAT observations!!!
I was really upset with the projected price points, but you’ve effectively demonstrated that we probably substutited ignorance of MS’s options for fact.
Thanks for this post!
Not surprising. This is the Internet. People like to type first and think later.
Sort of reminds me of all the complaints about the Windows 7 SKUs prior to release. “Too many SKUs! Didn’t Microsoft learn its lesson with Vista?” Well, as it turned out, the problem with Vista was not too many SKUs — but that the feature matrix was a checkerboard, so that you actually *lost* features as you upgraded from Premium to Professional. Windows 7 kept the SKUs but made sure that upgrades gave you a superset of features.
I do wonder what the revenue split will be between the Windows and Office divisions. In other words, how much of that $85 is considered to be for Windows, and how much for Office? Microsoft used to be pretty factious internally — but perhaps this has changed now that Microsoft is no longer top dog and has a number of external threats to face.
There is a balancing act between letting various businesses focus on their own success versus getting them to cooperate towards common goals. What has changed with this latest product cycle is that Steve stepped in and made cooperation a higher priority, with himself as the moderator of where strategies should intersect and where they can deviate. So what we are seeing is both much greater cooperation, and much more tolerance for going off the reservation (e.g., by releasing software for IOS and Android). But mostly I think what we are seeing is that a lot of leaders in the company smelled blood in the water and it became clear that the best thing they could do for their businesses was hook on to the attempt to reboot Windows. Let me give a perfect example, Bing. Bing is in a head to head battle with Google in web search, and head to head battles against truly dominant players are nearly impossible to win. So Microsoft’s strategy has been to first become a qualitatively equivalent alternative to Google, and then to change the entire search experience. With Windows 8 the focus isn’t on “web search”, it is on having a set of applications that use Bing as a system service behind the scenes. For example, the user runs a cool news app or finance app. They don’t do “web searches”, but the news and finance apps do Bing searches on their behalf. Windows 8 wins by having these apps as part of the OOB experience. Bing wins because a greater percentage of searches for news and financial information come through it.
For Office 2013 RT I think there is a similar synergy. They’ve been trying for many versions to figure out the secret sauce to increase both penetration and actual usage of Office amongst Consumers. Office gets most of its revenue from Office Enterprise and very little from Office Home and Student. So now along comes the paradigm shift to Tablets, and a new opportunity to make Office more relevant for Consumers. Overstating the case, would you take a small number of $ for 100% penetration or a larger number of $ for 5-10% penetration? Let’s assume that Office gets $30 per Windows RT Tablet sold. That would be HUGE compared to what they could get with a retail product achieving 5-10% penetration. Not only that, the other limitations of Windows RT means that these Tablets likely won’t canibalize Office Enterprise licenses much. So this is a big win for Office.
How will the revenue recognition split for Windows RT really work? That is 100% Steve’s decision. They’ll take various proposals to him, but in the end it is all Steve. They’ll use historical data (just like that $55 price for Windows 7 Starter Edition, and sales of Office Home and Student), assumptions about just how many people will buy Windows RT because Office is included, etc. But if I had to bet I would say the most important criteria is what split provides the best margin maintenance story for each business. In other words, I don’t think either group can make an argument for a split that improves their margin at the expense of the other group’s margin.
You can argue whichever way, but the fact of the matter is Windows 8 has to compete at the $399 price level – as dictated by the iPad 2. The way consumer electronics market is structured is that one has to compete on multiple vectors, design, price, functionality, battery-life, ecosystem, etc. and failing badly in one or more critical factors can be fatal – a la Zune (no apps/ecosystem) or Playbook (lacked basic functionality). So I’d argue that hitting the $399 price point will be critical because that’s one of the important completing vector. As for the market below that price point, well it could likely be addressed by subsidising/partnership, like with B&N, mobile carriers, or even the XBox.
Also keep in mind the x86 versions (if the battery life and form-factors sort-of match) would define the upper limits to what the RT version can be priced at. And AMD has indicated it could target a price point as low as $500 (see http://www.theregister.co.uk/2012/06/07/amd_windows8_tablet_computex/), which IMO puts some pricing bounds, not considering the added functionality like LTE or other points of differentiation.
Lastly, given MS is coming from behind and three years late (again), it should act a lot more flexibly, and I’d personally suggest a variable pricing model (% share perhaps) whereby it takes less if the OEM offers a lower price point. This way it could retain its margins but also go for the critical market share before either Apple and/or cloud computing cannibalizes/disrupts the traditional PC/Windows market.
The point of the piece is that we don’t actually know what the NET pricing for Windows RT is. And for that matter we don’t know what the gross pricing is either (see https://hal2020.com/2012/05/28/what-makes-you-think-they-know-anything/) But Microsoft is certainly aware of all the competitive factors and no doubt has provision for how to address the $399 price point. For example, they could very easily price Windows RT differently based on screen resolution and number of cores. That would allow a dual-core 1024×768 tablet to compete with the iPad 2 at the $399 price point. In the end though they are betting that right now buyers are valuing premium experiences over lower prices.
Also keep in mind that there have been few signs of the Tablet market being particularly price sensitive. If it were then Samsung et al would simply undercut Apple by a bit on their Android tablets and gain rapid market share. It hasn’t happened. So far though the only evidence of price mattering is when something drops to less than half the price of the iPad. And that, unless you have a great way to sell razor blades, is the path to bankruptcy.
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