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.