Microsoft can price the Surface for $199 and make a profit. How?

Everyone has focussed on the headline price tag for Microsoft’s forthcoming tablet, and forgotten about the alternative ways that exist to get customers to pay for things they buy.

A Microsoft Surface for $199? Everyone is aghast. The news has leaked (perhaps intentionally) from a Microsoft event. Everyone is aghast, or agape. That’s the same sort of price as a Nexus 7! Also: it will destroy the market for OEMs who want to make ARM tablets running Windows 8, who will have much higher prices, because they don’t have billions in the bank, unlike Microsoft.

If you do the maths, then it certainly seems to make no sense. Microsoft can’t possibly make any money if it sells a Surface – a 10in tablet with much of the functionality of a PC, and certainly with the guts at least equivalent to an iPad, which sells (in the US) for around $399.

OK, and now consider this: $199 is an entirely feasible upfront price for the Surface. And Microsoft wouldn’t have to lose a penny in the process.

How, you ask. How can that possibly be done?

Simple. Same way you get a smartphone for free. You know – a two-year contract to some service.

And since we know that the Surface won’t have 3G, the sort of contract we’re talking about here isn’t going to be a mobile telephony one. It will be something that Microsoft can make money out of.

Why not Office 365, its desktop-and-cloud Office offering? That has a $200 price tag attached in the shops; you could instead sign up to buy a Surface for $199 and agree that you would take a two-year subscription to Office 365.

This would have multiple benefits for Microsoft:

• it gets Windows 8 tablets into peoples’ hands;

• it gets those users tied into Office 365, which for Microsoft is a giant bonus when it is trying to get customers not to defect to Google Apps

• it cements the position of Office in corporations

• the low initial cost and ongoing cost are easier for cash-stretched companies and individuals to justify. In the lingo, it shifts a big capex (capital expenditure) into a smaller capex, plus some opex (operational expenditure, ie the subscription).

In case you think Microsoft can’t do this, it already does: in May it introduced a scheme in the US where it offers the Xbox 360 for just $99.

$99! How can it do that when the console costs far more? Because it ties it into a two-year Xbox Live Gold subscription at $15 per month.

So in that respect, completely simple. Sure, Microsoft will have to bear the upfront cost of getting the devices manufactured, and even after the contract is signed it will not be level in cashflow terms. But it’s not a struggling startup where cash is king. It’s got billions in the bank to cushion it past.

I can’t claim to have had this idea: I first saw it on ex-Microsoftie Hal Berenson’s blog, where he notes that

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.

He also points out that

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.

You might wonder: how will Microsoft deal with people who stop paying? That’s quite simple: these devices have to connect to the internet, and being tablets, they’re pretty hard to take apart (considerably more so than a desktop computer). Attempts to offer subscription-tied desktop computers have failed, but with internet-connected hard-to-disassemble tablets where you won’t be able to change components, it will be easy to identify machines (by their MAC address, licence number and so on) that are on the subscription deal. And disabling them if the owner falls into default will be simple too; it already happens with Windows on desktops and laptops, after all. Plus it’s likely that many of the first buyers will be corporations – it’s the capex/opex thing, remember – though consumers might also offer up their credit cards, and the same will apply.

This means that yes, you can really believe the basement price of $199 for a Surface. But what you shouldn’t believe is that that is all there will be to it. When you do the maths, you’ll end up at a price that will be much higher. How much higher? Ah, that’s the hard part. Shall we start at $399?


Source: Guardian

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