Molly Riley/ReutersThe circuit board of the first iPad. A major factor in the price of a tablet is the type of chip it uses.Does Microsoft then have any hope of competing with the iPad on price?
Apple, for many years, had a reputation for charging a premium for its products, but the aggressiveness of its iPad pricing was a surprise to many people. In October, when I “looked at changing perceptions of Apple’s pricing, the cheapest iPad (its second-generation model) started at $499. Now that same product starts at $399, while the third-generation iPad with a high-resolution retina display starts at $499.
That price proved hard for competitors to equal. When Motorola introduced its Xoom tablet, based on Google’s Android operating system, early last year, it priced the cheapest model without a wireless contract at $800. It steadily discounted the Xoom after that, but it never caught on.
The cheapest PlayBook from Research in Motion, maker of the BlackBerry, was the same price as the iPad. It, too, fizzled and is now on sale for as little as $199. Hewlett-Packard’s Touchpad couldn’t get under Apple’s pricing until after the company discontinued the product.
The only clue Microsoft gave about the price of the Surface was that the version of the product that ran on a class of chips call ARM would be competitive with similar tablets. It did not mention the best-known ARM-based tablet, the iPad, by name. The huge sales volumes Apple has in the tablet market give the company an enormous advantage in buying parts cheaply for the iPad, which gives the company greater flexibility in pricing the product for consumers.
One big expense for Microsoft’s PC partners traditionally has been the licensing fee they pay for Windows. Microsoft could, in theory, forgo those licensing fees to itself with Surface to offer a cheaper tablet.
But that would create another problem for Microsoft. If it took that path, the company might undercut its license-paying hardware partners, making it difficult for any other company to get traction in the Windows tablet business.
But even if Microsoft does price Surface aggressively, it’s unclear how helpful that will be. In the smartphone market, the premier phone running Microsoft’s Windows Phone operating system, the Lumia 900, is selling for $99 with a two-year contract, $100 less than the iPhone. The Lumia 900’s sales, so far, have fallen far short of expectations.
In the tablet market, Amazon’s $199 Kindle Fire also has not had the corrosive effect on Apple’s market share that many people predicted.
Microsoft will face a pricing issue of a different sort with Surface. About three months after it releases the ARM-based Surface, Microsoft said, it plans to come out with a “pro” version of Surface that runs on chips made by Intel, the company that makes the microprocessors inside the vast majority of traditional PCs. The pro version will be priced competitively with ultrabooks, the thin laptops, which usually cost around $1,000.
That will be quite a sight for consumers on store shelves: two different breeds of Surface, one priced like a $500 iPad, one priced like a $1,000 laptop. The two products will resemble each other, but the more expensive version will have an invisible Intel chip that allows it to run a broader range of traditional Windows applications — like a laptop.
As Sarah Rotman Epps, an analyst at Forrester Research, points out in a blog post, that situation is likely to be very confusing for the average person. “Consumers aren’t used to thinking about chipsets,” she wrote. “Choice is a key tenet of Windows, but too much choice is overwhelming for consumers.”