Why Microsoft Can Get Away With Overcharging for the Surface Tablet

What’s the right price for Microsoft’s upcoming Surface tablets? Some observers are arguing that the company should charge more rather than less for the innovative Windows 8 devices.

(Update: Since this story was written, Paul Pallath of Techie-Buzz said he contacted Webhallen, which told him that it set a "high preliminary pricing " for the Surface to allow customers to pre-order them. ReadWriteWeb believes that the central thesis of this story is still valid.)

If the price list posted to a Swedish website had been correct, then the lowest price for Microsoft’s Surface tablet would have been just over $800 - with other models significantly higher. But even if we don't know what price Microsoft will actually charge for the Surface, at least one analyst says Microsoft shouldn’t worry about overcharging, given that a premium pricing strategy leaves room for the company’s manufacturing partners to fill in the gaps.

Microsoft Avoiding Competition - With Itself

Sarah Rotman Epps, a consumer and mobile analyst for Forrester Research, noted that Microsoft could be worried about competing with its manufacturing partners like Asus or Dell. One way to avoid that problem, she said, would be to price the Surface high enough to avoid direct competition.

“Keeping the price point of the Surface high limits the threat to Microsoft’s OEM [original equipment manufacturing] partners,” Rotman Epps said. “At a $1,000 price point, this won’t be a mass market product, but it will still have the desired effect of exciting consumers and inspiring OEMs to do more with hardware design for Windows 8.”

That would set up an intriguing mix of business models: companies that sell their tablets below cost, such as the Amazon Kindle Fire; vendors that take a middle-of-the-road approach, building in a profit margin; and Microsoft, which under Epps' model would position the Surface as a sort of aspirational product designed to show what Windows 8 can do rather than being a money-maker on its own. It’s kind of like the sexy Corvette in the Chevy showroom primarily designed to inspire Impala and Malibu buyers.

“Microsoft clearly isn’t interested in competing on price,” Rotman Epps added. “They want to preserve the value of the ecosystem they’ve created. But premium pricing also limits the market for who can afford your product.”

Premium Is Not A New Approach

Adopting a premium strategy wouldn’t be a new approach for Microsoft when selling direct. Take Microsoft Signature, for example.

Users can buy specific, optimized (and more expensive) laptops directly from Microsoft itself, free of the trial programs, printer utilities and other “crapware” that Microsoft’s original equipment manufacturing (OEM) partners install. For $99, users can also take their existing notebooks to a Microsoft Store to receive the “Signature Experience.” In this case, Microsoft is positioning itself as the, well, signature experience.

Rival Google has also taken this approach, positioning the premium-priced Google-branded Nexus products as the epitome of the Google hardware experience and leaving the discounts to its partners.

One could also argue that both AMD and Intel also offer premium microprocessors optimized for gaming under their own brands - AMD’s “Black” Edition, for example.

Who's Gonna Pay?

ReadWriteWeb has already made the case that Microsoft designed the Surface Pro as a business tablet, even as some corporations have already begun adopting Apple’s iPad as a business tool.

Corporate budgetmakers may accept a premium for Windows Surface, if they decide that it provides a better return on investment than the iPad or other competitors. The fact that the Surface Pro runs a native version of Windows 8, and not the ARM-optimized version of Windows RT, may help its cause. The Surface will also be able to run versions of the new Microsoft Office.

Apart from collectors and gadget freaks, though, most consumers might not be so willing to shell out the extra cash, as Rotman Epps noted. But that’s important only if Microsoft is really looking for mass sales of the Surface.

If Surface sales are indeed the goal, said Patrick Moorhead, president and principal analyst at Moor Insights and Strategy, pricing will indeed matter.

“I believe Surface Windows RT tablets must be priced starting at $499 or less without the keyboard case,” Moorhead said. “The keyboard case adds around $100 in value on top of that. For Windows 8 Pro, users are looking more at a tablet with PC functionality and could garner an additional $100 for a total of $599, or $699 with the keyboard case. The wild card in all of this are the number of high quality Metro apps. I believe Microsoft will need at least 5,000 high quality apps at launch, which based upon the apps in the Consumer Preview Store, looks to be a difficult task.” But the best strategy for Microsoft, however, might be to stake out a high-end price point that its OEM partners need not match.

What Would Be “Competitive”?

At the Surface unveiling, Microsoft announced that the tablets would be “priced competitively” with current tablet offerings, and that the Pro version would be competitively priced against ultrabooks.

But what does “competitive” mean? In general, manufacturers who release a product after a competitor have two choices: “upsell” users, convincing them that the Surface’s feature set justifies a premium price, or try to lure customers through pricing discounts.

“In the case of competing with a market dominating product [like the iPad], it means either coming in as a feature rich but value-priced proposition, or demonstrating a higher value proposition at the same or relatively close price point,” Michael Gartenberg, a mobile analyst for Gartner, explained. “Zune showed coming with a similar set of features to a market dominated by a competitor at the same price point isn’t going to get consumers to switch. At this point, iPad is the ‘safe’ choice for consumers, Microsoft will need to convince consumers that their products are a viable alternative, and more importantly, that their approach to the consumer digital ecosystem is the correct one in a post-PC world.”