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.