Sterne Agee: Microsoft Surface Pricing Could Be Fatal Mistake

| Apple Stock Watch

Microsoft's decision to price its new Surface Windows 8 tablet at $499 without a keyboard, and $599 with a keyboard, could end up being a "fatal mistake," according to Sterne Agee analyst Shaw Wu. The analyst said that Microsoft should have priced its device starting at $299 with a keyboard if it wanted the device to be competitive.

Microsoft Surface

Let's Talk About Price

Mr. Wu noted that Apple's iPad 2 starts at $399 with 16GB of storage. On the low end, Amazon's Kindle Fire HD is priced at $199 with 16GB of storage and Google's more technically advanced Nexus 7 device is also priced at $199, but with 8 GB of storage.

Microsoft has positioned the 32GB Surface tablet at $499, but that doesn't include a keyboard that Microsoft has touted as being the bee's knees for tablets. The analyst called that keyboard "a key differentiator," and believes it should have been included with the device out of the box, rather than being an option.

"We believe a key risk for [Microsoft] is that pricing for its Surface tablet could end up being a fatal mistake with the delta too significant, particularly against [Google] and [Amazon]," the analyst told clients in a research note obtained by The Mac Observer. "We believe MSFT needs to price aggressively to give it a fighting chance in the highly competitive tablet market."

He added, "We believe $299 including the cover-keyboard would have been much more compelling. So far, non-iPad tablets buyers have proven to be ultra price sensitive."

Build Plans

The analyst said that his checks with Microsoft suppliers in Asia found very modest build plans for the December quarter—Microsoft will ship Surface for Windows RT on October 26th. According to those checks, Microsoft is planning to build only 2-3 million Surface devices.

This compares to Google's build plans for 5-6 million Nexus 7 devices and Amazon's plans to build 3-4 million Kindle Fire HDs. Mr. Wu is modeling for Apple to sell 22.3 million iPads during the same quarter, with iPad mini adding an incremental 3-4 million units.

The Whole Widget

Lastly, Mr. Wu offered a note of caution to those companies who want to build vertically-integrated markets like Apple's iOS ecosystem, writing that, "It isn't easy to deliver a similar or higher level of quality and seamless integration as [Apple] and IBM [have done]."

He added, "MSFT attempted to do so with the Zune in MP3 players and Kin in smart phones, both of which didn't turn out too well. While Xbox has had some success with leading market share in gaming, one could argue that on a financial basis, it has not done well given the billions in investments and losses it has incurred in the past decade."

Thursday's Action

Shares of AAPL traded lower on Thursday, ending the day at $632.64, down $11.974 (-1.86 percent), on light volume of 17 million shares trading hands. MSFT also closed lower, at $29.495, down $0.095 (-0.32 percent), on heavy volume of 57.8 million shares.

Google led tech stocks south after missing September quarter estimates. GOOG closed at $695.00, down $60.49 (-8.01 percent), on very heavy volume of 12.3 million shares.

While we're at it, Amazon also lost ground, closing at $244.85, a loss of $2.64 (-1.07 percent), on heavy volume of 5.3 million shares.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

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Comments

vpndev

>Shares of AAPL traded lower on Thursday, ending the day at $632.64, down $1.974 (-1.86 percent)

1.86% is more than $1.974. Let’s try “down $11.97”

mhikl

I don’t see a problem with Microsoftie’s pricing. It ain’t like hammering out droid phones in back of garages. These are tricky devices, costly devices, device chameleons with purpose from serious original study groups with veritable intent of spanking new design; with not a Facsimile Sam in the herd, not a Fagin on its board, and like a self-anointed Mosses, full with grand desires to lead the masses on its way. I am sure the lineups will be orderly.

Maybe pricing at cost or below would be compelling but there is also something compelling about paying to value. Sock drawer tosser this tablet will not be!
Value added reporting is to be found on the funny pages of neither Sterne nor Dvorak. For that we scramble to TMO, Gruber, ASYMCO, The Macalope . . . .

ipaqrat

It’s possible that folks are taken in by the “Whole Widget” concept, knowing that Microsoft’s widgetality extends into Microsoft’s enterprise applications. They figure, well, MS Office comes with it, so an extra $100 is justified. Lack of the flappy-cover keyboard suits me; seriously, where can you ever find a flat, steady surface when your mobile. PSYCH!  Office 2013 RT’s license prohibits commercial use (like the student-teacher versions of 2010 and 2011). And whatever browser there is probably won’t work with sharepoint. Forget about full Outlook.

Dorje Sylas

$299 and cover? I think Mr. Wu is perhaps under estimating things just a tad.

Lets look at the facts of the device, keeping the iPad (actually iPad 2, I’ll get to that) in mind a reference point.

• 10.81 x 6.77 x 0.37in & 1.5lbs (iPad 2 9.50in x 7.31in x 0.34in & 1.33lbs)
• 1366x768 pixels ( 1024x768)
• 2 cameras 720p (1 720p, 1 VGA)
• NVIDIA T30 (A5)
• Windows RT (iOS 6)
• Full USB (30-pin dock)

If you look real hard the Surface RT is an iPad… more less. The Tegra 3 doesn’t have the same graphics *pow* of the A5, and this is I think were Microsoft is in perhaps more trouble then not. However for a 1st gen tablet MS is not off to real bad start here.

Now specs, as we know, only go so far. At 499 it needs to bring 100 dollars worth of additional value that an iPad 2 can’t bring (currently 399). Any tablet running against the iPad needs to cover three areas.

1. Responsiveness. This is an area that some Android OEMs have struggled with historically. Almost every review I’ve seen of Android tablets typically include a phrase along the lines of “not quite as responsive as the iPad.” If Window RT and the Surface are responsive at the same level as the iPad they’ve got a solid foot in the door at any price above $250.

2. Build quality. Is it plastic or metal? Is it going to take the abuse of being manhandled around an office or school environment, not to mention home. MS looks like they covered that, wish I was confident enough to skateboard on my iPad. Hey Apple, can I get an iBike?

3. Interoperability. This is where Microsoft can win big or lose hard. The Zune and the Kin failed here. The Surface has connect and integrate well to seamlessly into the Home -> Work -> Home cycle of life. It has to do a better job of file management (of which the iPad has virtually 0) and workflow then iOS. The only thing Microsoft has to trump iOS and Andriod is to be both simple to integrate with existing networks/assets while still giving users a degree of control. iOS does a fairly good job integrating with other iOSish things and to a degree Macs, but still needs 3rd party Apps to really get something resembling file management and a workflow (most of the time I have to pass files in and out of GoodReader). Android does this way better then iOS, but isn’t exactly simple about it, nor does it have a simple to use ‘one button’ integration with home PC systems (and lets not talk security).

If the Surface (mostly on Windows RT here) can pull off a simple, quick, and elegant integration with existing PC infrastructure it wins at 499. Buying itself a seat at the tablet table. At that point it’s up to Microsoft to bring the Surface 2 up to iPad 3/4 par… that or find some good OEMs that will back Windows RT to that level and won’t blow on quality.

Lets be honest, iOS is not that great at integrating into a network well on its own. It needs serious help from 3rd party apps and full 3rd party services to do so. No one in cooperate positions wants to touch Android out of the box for security reasons. If Microsoft can walk that line between lockdown and access while keep a comparable interaction experience, they are in.

Considering how much some of hose 3rd party workarounds cost to get iOS usable outside a purely consumer environment, an extra 100 dollars on an iPad 2 is not all that much. Not if it means people can BYOD and not give IT security fits.

Terrin

Microsoft might not make a dent. However, it simply is not realistic to provide a quality tablet at a price under Apple’s iPod unless you are taking out the up front profit.

Amazon and Google reach their low prices buy 1) cutting the quality out (e.g. not as good screen, lower power processor, etc.), and 2) gambling on subsidizing the device through media and advertising.

Microsoft is attempting to offer a quality product in which it makes a profit up front. I am an Apple guy, but if I weren’t I would embrace Microsoft’s mobile ecosystem over Android. I think it is better designed. Nokia also makes good phones compared to Motorola, HTC, and Samsung.

b9bot

I thought the surface tablet came with the keyboard as part of its great features. So now it is a $100.00 accessory that you have to pay for. I don’t think that will go over well with anyone who is crazy enough to buy one of these. Especially since no one has ever seen that keyboard actually work in person. Microsoft never let anyone touch it or try it out when they announced the surface months ago.

b9bot

UH, excuse me but all of Apple’s IOS devices can get onto any standard or locked wireless network without the help of any 3rd party applications. And IOS devices are being integrated in more businesses than any other portable devices on the market basically replacing blackberries. 
You don’t need any work arounds to get and iPad, iPod Touch or iPhone on a wireless network.

mrmwebmax

+

I agree that the keyboard cover should be included, especially given how much MS is hyping it in their ads for the Surface. I think a lot of people who see their commercials are going to be a bit shocked when they go to an MS store and find the keyboard cover costs $100+ as an extra.

Krabbie

The Surface is the best NETBOOK that has come out in a long time.
This is where the Netbook series would have come to.
This is the netbook PUCK.
If you want a disassemble-able net book this is it
You will need a table for this tablet.
Forget mobile…

George Mells

I personally believe that Microsoft always over prices their initially.  Apple also has traditionally over priced their products (I remember the $2500 I paid for my 128K single side drive Mac) but they also have a fanatic following that believes if has the Apple logo its great.  Microsoft does not have the same following or else Firefox wouldn’t be such a major challenge to Explorer.  All the manufactures push price somewhat, like $50 for an extra $10 16MB of RAM,  but $100 for what is probably a $10 keyboard that should be standard based on the ad campaign is ridiculous.  And don’t tell me that the inclusion of what is probably a old version of Office is worth an extra $100 value.  Summation, a Surface at Ipad price might fly but not for more. Big question is it might be discounted at retail to make it more competitive.

wab95

Bryan et al:

Interesting points, all.

Dorje: nice summary, many thanks.  I concur with b9bot that iOS devices certainly integrate through iCloud with each other, and for most uses, with networks without 3rd party workarounds. I can think of only one or two exceptions to this (that I know of). For most users, it’s plug and play.

Bryan: the one thing missing at this stage, in my view, is that most quintessential of iPad selling points - hands on use and reviews. One only has to go back to the iPad’s original release in 2009, and read the initial pundits’ take post-presentation; they were dripping with scepticism about the iPad’s sale-abilty at stated price. Not until independent reviews, and those from ordinary customers that made it to social media (at its 2009 state of being) did things change. Pundits’ tones changed literally overnight to, ‘You’ve got touch this thing. It’s not just an out-sized iPod Touch after all. We can’t explain it. (And, in a nod to Morpheus on Matrix) You have to see it for yourself”.

If MS have done their homework, and people, after handling the product and putting it through its paces under real world conditions, deem it to be value for money, then it’s value for money. End of story.

It’s the customers who rule in the post-PC era, not the pundits; and Apple have shown that it is quality of user experience that wins the customers.

I, for one, will wait for those hands-on reviews.

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