Microsoft Is Letting NVIDIA Down

Microsoft  (Nasdaq: MSFT  ) , you acted like you wanted to change, and then you do this?

The Redmond giant took the wraps off its Surface tablet's pricing today. After Amazon.com  (Nasdaq: AMZN  ) hit the $299 price point with its 8.9-inch Kindle Fire HD, rumors swirled that Microsoft would attempt to make its own splashy entry-level price. After all, the only way competitors have really managed to take market share away from Apple's (Nasdaq: AAPL  ) iPad is through more aggressive pricing. 

So, on the day Apple sends out invites to an event on Oct. 23 where it's expected to announce an iPad in the sub-$300 price level, what price point did Microsoft hit?

$499. Oh, and that's the price without the tablet's most talked about feature-its Touch Cover. If you want the Touch Cover, the price ratchets up to the $599 price level. 

Really, Microsoft?
I understand why Microsoft's bureaucratic layers brought the Surface in at the price point they did. First, the company doesn't want to step on the toes of its OEM partners by offering a device at a price level they have difficulty competing with. Second, at $499, users get an entry-level model with twice the storage of a comparable entry level iPad at the same price. It all works on paper!

Here's the problem: most users don't care. With the ARM-based model, there are only currently about 2,000 apps available in the Windows Store. Sure, there will be heavy-hitter apps certain users want on a tablet, such as Excel, but that alone can't carry the sales load Microsoft needs to make Windows a legitimate tablet player. We've seen Android models attack the iPad at price levels above $400 and not make a market share dent time and time again. The iPad has a huge amount of cachet among consumers as the best tablet; going head-to-head on price is a losing proposition. 

If Microsoft wanted the Surface to build buzz for Windows tablets, it needed to do something far more remarkable with the tablet's pricing. 

Compromise by committee, made in Redmond
Instead, the company took a measured approach that makes all the right compromises to land the tablet in sales mediocrity. Who cares if Microsoft steps on the toes of its partners with very aggressive pricing? Google  (Nasdaq: GOOG  ) saw Android not gaining traction in the tablet space and made a decisive move: it launched the Nexus 7 at $199. Tablet partners aren't jumping off the bandwagon either; if anything, Google's efforts proved the viability of low-priced Android tablets to partners. Who cares if Microsoft loses money with this venture? Look how much it has already poured into mobile efforts. Jump starting Windows as a tablet platform would be worth the gamble. 

However, in the end, the Surface's uninspired pricing structure won't hurt Microsoft the most. Microsoft itself is priced for less than 10 times cash flow; little dominance over tablets or smartphones is priced into its share price.

The biggest Surface loser?
Instead, NVIDIA  (Nasdaq: NVDA  ) , the company which is providing the processor to the Windows RT Surface model, is the one suffering at Microsoft's hands. With Apple dominating the tablet space and using an in-house processor, NVIDIA has been in need of another platform. 

Microsoft looked like a decent bet, especially after Amazon went with Texas Instruments'  (Nasdaq: TXN  ) processor again in the recent Kindle Fires. Moreover, the reliable Wall Street Journal is reporting Microsoft is producing 3 million to 5 million Surfaces in the holiday quarter. That's a good-sized production run. 

However, the problem is that even with a large initial test run, the bigger spoils come from a platform with continuing success. Maybe Microsoft's partners will find Windows tablets to be better sellers than expected. Perhaps creating Surface will be enough to drive manufacturers to innovate with their Touch-Cover-like innovations that appeal to consumers who want a tablet, but one that still retains more links to the PCs they're used to. 

Yet, as of right now, I think Microsoft is fumbling Surface's launch from the get-go. That's bad news for Microsoft, and worse news for a supplier like NVIDIA. 

But, hey, at least NVIDIA has the processor slot in Google's Nexus 7. That's a decisive company who's willing to take a real shot at getting up off the mat.

More Microsoft advice
Microsoft is one of the world's dominant software companies. The Windows operating system has been the market leader for decades and Office is installed on more than 1 billion PCs worldwide, but the real question investors like yourself should be asking is, "Does a strong profit opportunity remain?" Whether you’re an existing shareholder or you’re thinking of becoming one, even for a giant like Microsoft, there are risks and areas you must be watching. Motley Fool analyst Charly Travers has assembled a special reporting detailing these facts and much more. To gain instant access to this report, simply click here now.

Eric Bleeker owns shares of NVIDIA. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Google, and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 16, 2012, at 8:10 PM, joshpritchard wrote:

    "Microsoft itself is priced for less than 10 times cash flow; little dominance over tablets or smartphones is priced into its share price."

    You can replace "Microsoft" with "Nvidia" in that sentence and it'd still be true. Nvidia also trades at less than 10x FCF, and that's before netting out the ~40% of the market cap that's cash.

  • Report this Comment On October 16, 2012, at 8:26 PM, jwtrotter wrote:

    I can't disagree with you more on this. The Surface is looking for a niche that isn't simply just a tablet. It's also trying to work into the enterprise zone for business with something akin to Ultrabooks but even more portable and flexible. The price point is not for the Amazon class of tablets at all, which in my opinion is a loser from the getgo, based on word of mouth alone.

    Your articles lately are disappointing because I think you are falling for what the analysts see, not what consumers and businesses will see with Surface. The numbers will tell obviously, but the price point isn't the final say on the success of the Surface product line.

  • Report this Comment On October 16, 2012, at 9:20 PM, kthor wrote:

    i was dissappointed with the Kindle Fire HD, sure bet that the MSFT tablet will also be the same, I will stick with the ipad!

  • Report this Comment On October 16, 2012, at 9:49 PM, jwtrotter wrote:

    Again, it's a big mistake to line up the Surface with either the Nexus 7 or the Kindle Fire HD in my opinion. Nexus 7 is a league above Kindle Fire HD in any case just on how the operating system/software is integrated alone. Surface isn't even a direct counterpart to iPad because it actually accomplishes some things iPad can't yet . . really. It's closer to Ultrabook and a Mac book (Air) in concept seriously. That's ASUS has a part in the Surface line up since they really do have one of the most successful non-iPad tablets out there that actually crosses over to functions critical for enterprise level laptops with their Prime lineup.

  • Report this Comment On October 17, 2012, at 2:36 AM, jhf678 wrote:

    Microsoft could be playing with fire because if they do their own hardware, soon or later every computer company will turn to Android OS.

  • Report this Comment On October 17, 2012, at 9:13 PM, chilero wrote:

    The problem is that consumers often associate a low price with low quality. The Surface is, by all accounts, fantastic build quality with an innovative cover and OS. It is a premium product in every way (except for the number of apps which is isn't biggest negative right now).

    They are not looking to compete in the world of cheap Android tablets, they are taking on the king of tablets. If they can pull of some type of success with a quality tablet at the current price point it will be much more beneficial to them than grabbing market share at a loss in those lower price levels.

  • Report this Comment On October 17, 2012, at 9:15 PM, chilero wrote:

    I wish there was an edit button. Should be (...which is it's biggest negative right now)

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