Microsoft Has a 'major dilemma' Pricing The New Surface Windows Tablet vs. the iPad

[dgstorm]

According to Chris Whitmore, an analyst with Deutsche Bank, the new Microsoft Surface Tablet will have a major uphill struggle against Apple's iPad. In his analysis he indicated that Microsoft is "grasping at a competitive response," and will have a "major dilemma" when trying to price the new Suface competitively against the iPad. He does a cost breakdown analysis with projected parts costs for the components and manufacturing between the two tablets, and things look somewhat bleak for Microsoft if his figures are correct.

Based upon his estimates, Microsoft and their partners will need to price their tablets at about $650 in order to keep a gross profit margin of just 20%. This is well below half of the 44% gross profit margin that Apple has with the iPad. As you can see from the middle column of the chart above, for Microsoft to compete on a level profit margin with Apple, they would have to sell the Surface at $820 for the RT version.

The Pro version of the tablet will not even compete directly against the iPad and is more likely to go up against ultrabooks and the Macbook Pro. Still, Whitmore believes that the Surface Pro will actually find better success than the RT version because it is more likely to be adopted by IT departments in the Enterprise market. This will slow the adoption rate of iPads into that market segment. Here's a quote with additional details,

Still, Whitmore believes Surface models running Windows 8 are more likely to find success because they offer backwards compatibility with traditional Windows software, like full support for Microsoft Office. He said the Surface Pro has the potential to slow adoption of Apple's iPad in the enterprise, but even that would be the best-case scenario for Microsoft, in his view.

"In such a scenario, Microsoft will be swimming upstream against the consumerization of IT trend with a heavier, bulkier and more expensive product," Whitmore wrote.

He projects total tablet shipments in 2012 will reach 97 million units, growing to 124 million in 2013. He sees iPad sales exceeding 60 million this year, and growing to 74 million in 2014.

Projections from Deutsche Bank call for Apple to maintain between 60 and 65 percent of the tablet market, while Surface RT and Android tablets will struggle to gain traction.

What do you think of this analyst's predictions?

Source: AppleInsider

 

[J515OP]

I have said it before and will say it again, MS doesn't have to pursue a strategy of manufacturing profitability here. They are not a hardware company, period. Of course they aren't going to have economies of scale, dedicated suppliers, factories they own, etc. which all contribute to lower price hardware. That is irrelevant to the success of Windows tablets and the reason MS has actual hardware partners.

All MS has to do is show that Windows tablets are a viable and worthy alternative to iPads and Android tablets. So they made Surface to prove what Windows tablets can be. They don't even have to show they are better than either of these options just an alternative to them. This allows MS and Windows to expand to a whole new device range beyond PCs. If MS gets more copies of Windows out then they are a winner despite profit margins on their exclusive hardware offering.

Why does it seem people insist that MS has to become a successful hardware company all of a sudden? They have never been Apple (hardware and software) and are doing just fine. It is a different strategy and one that has absolutely worked out for them and their hardware partners. Apple may have been one of the first companies to bring PCs to the average person but MS supports an entire PC industry and has thus have made PCs available to every average person.

I know this comes off a little fan-boyish but it is certainly not. Nothing changes just because we start talking about tablets. After all tablets are just smaller more portable versions of PCs which until they are available with Windows can't even do all the things PCs do. MS doesn't need to replace every iPad and Android tablet with a surface tablet. All they need to do is get Windows introduced to the tablet conversation. Windows 8 as strictly software seems perfectly primed for that very objective.

 

[J515OP]

On another note, I think the break down is excellent even if it seems to be used in a strange way of thinking. I mean heck, 23% isn't a bad margin at all and this is where anybody but Apple fans normally says 44% is gouging, the products should be reduced in price

 

[dgstorm]

^^. Agreed on both posts! When you think about it a bit, it seems a little ridiculous that Apple's profit margins are so ridiculous compared to the rest of the tech world. It cannot last forever.