Microsoft Surface More Profitable Than Apple iPad

By most indications, Microsoft's (Nasdaq: MSFT  ) foray into hardware is meeting, if not exceeding, expectations. Of course, you'll never hear that from CEO Steve Ballmer, and by extension the rest of Microsoft's management team. Ballmer is notoriously hush-hush about sales results, and not just those pertaining to Microsoft's new Surface tablet; most anything to do with what he views as "predictions" are taboo.

For example, when the Wall Street Journal asked about early sales of Microsoft's Surface a week or so back, his response was vintage Ballmer, "Numerically there's not really much that's interesting to report. If you were to call the retailers, they would say, 'Hey, off to a very good start.' We're out of stock a lot of places on touch[screen] machines." So you can bet there won't be any comments regarding the report issued on Nov. 5 by research firm IHS iSuppli detailing the results of a teardown analysis of Microsoft's Surface vs. Apple's iPad.

Surface, piece by piece
Microsoft's Surface RT comes with a minimum of 32 GB, flash memory, and an optional screen to protect your tablet called a "Touch Cover." There's little doubt Surface RT is designed to go head-to-head with the Apple iPad, and the profit each tablet generates for its respective manufacturer is significant, particularly for the more established Apple iPad because of both solid margins and sheer volume. But on an individual basis, Microsoft has a couple of margin-related tricks up its sleeve.

At $599, the Surface RT sporting the touch cover screen carries with it a bill of materials cost of $284. The 53% profit margin for each Surface tops the approximately 50% Apple generates with each iPad sale. Three percent may not seem like a lot, but with as many as 1 billion mobile computing units -- smartphones and tablets, in particular -- expected to be sold in 2013 (according to Gartner Research), 3% adds up in a hurry.

One of the more intriguing aspects of the IHS Surface and iPad comparison teardown report is the estimated manufacturing costs of the optional touch cover for the Microsoft tablet. The cover has a retail price of $101, but costs Microsoft an estimated $16 to $18 to manufacture, according to the IHS review. Even without the cover, the $499 Microsoft Surface has a higher profit margin than a comparable Apple iPad.

A smartphone cometh?
The profit margins for Surface reinforce the notion of a Microsoft in-house smartphone on the horizon. The only surprise surrounding Microsoft manufacturing its own smartphone is if it doesn't happen. In a sense, the Nokia (NYSE: NOK  ) Lumia and smartphones from Samsung and HTC running Windows 8 are the ultimate beta tests. As the inevitable glitches and user feedback occurs, it will be Nokia, Samsung, and HTC that will bear the brunt of their customers' feedback.

Come 2013, or perhaps early 2014, a Microsoft smartphone will hit the shelves with an OS that's been fully vetted -- in this case, on someone else's dime. And you can bet a Microsoft smartphone will generate industry-leading margins per unit, just as the Surface does. A $100 smartphone cover, anyone?

Google's (Nasdaq: GOOG  ) Nexus got a jump-start on Microsoft's tablet offering, and Amazon.com's (Nasdaq: AMZN  ) Kindle Fire remains a competitive, entry-level alternative. But iPad sales, Google hitting 1 million Nexus units sold per month, and what most agree are solid Surface sales numbers, all make it pretty clear the tablet bar is being raised. If Amazon wants its Kindle to attract more than e-reader users, it's going to need to keep up.

With profit margins over 50%, it's easy to see why Microsoft's strategic shift to becoming a hardware provider was just a matter of time. The potential profits are simply too big to ignore.

Microsoft's 3.15% dividend yield, conservative valuation relative to its peers, and a highly profitable hardware business that's already picking up steam make it a must-have portfolio addition for mid- and long-term investors.

Even after the release of its Surface tablet, it's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, MIcrosoft is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


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  • Report this Comment On November 09, 2012, at 1:23 AM, RandomMeaning wrote:

    "At $599, the Surface RT sporting the touch cover screen carries with it a bill of materials cost of $284"

    "The cover has a retail price of $101, but costs Microsoft an estimated $16 to $18 to manufacture"

    For decades we have heard Microsoft fans berating Apple for over charging the buyer (sometimes with reason and other times unfairly). Now Microsoft is clearly charging even more. Where are those some people now? Where are the complaints of Microsoft over charging?

    The funny part is every review agrees that the hardware is decent if a little on the lesser side of cutting edge technology (decent but not impressive chipset and serviceable but not top-of-the-line screen, oh yes, and a non-adjustable kickstand - why aren't those standard on laptops? because they're not useful) but the software is sub-par and buggy. So you're getting over charged for hardware running mediocre software.

    Why are Microsoft fans OK with this?

    And no, I don't mean Microsoft paid posters who hit every review with "the Surface is perfect in every single way, it's all the reviewers fault because s/he is a hater who must be biased since they didn't write that it's perfect as is".

  • Report this Comment On November 09, 2012, at 1:32 AM, RandomMeaning wrote:

    As a side note, Microsoft (like any company) is welcome to charge whatever they think they can get out of their customer base. Clearly they aren't going for market share with this price tag. Personally, I think they are using a rather common tactic these days: using their most loyal customers as beta testers. Which may even turn out to be a good idea. Unless this first iteration cements the idea that Surface is ok but not as good in most consumers' minds. We should know within the next 3-9 months.

  • Report this Comment On November 09, 2012, at 10:07 AM, lucasmonger wrote:

    I think most agree that Microsoft probably put too high of a price tag on the Surface RT, especially in light of Apple's recent $329 iPad mini announcement. If Microsoft went for $399 instead of $499 I think there would be much more buzz about Microsoft as a major threat to Apple, but instead they chose to make the initial offering equal in price to the iPad 4 offering. We'll have to see what the consumers do, I'm sure there will be many early adopters buying the Surface because it's a shiny new object and the iPad is what, a little over 2 years old? Whether Microsoft can sustain any momentum past the initial offering is the real question. Given the iSuppli estimate, I'm really surprised Microsoft didn't cut into their margins a bit to try to gain more customers. What's the use of a higher margin if you don't sell very many of them? Also having the tablet wifi only without an LTE option really limits the tablet use. The ability to use your tablet anywhere/anytime has some appeal that I'm sure must be coming in the next version of Surface.

  • Report this Comment On November 09, 2012, at 5:31 PM, Lexnc wrote:

    Here is Why the Folks Saying the Surface is Priced to high are Wrong -

    1. The Surface is Not Just a Tablet. Its Actually a Great "Ultrabook" Style Device, I Bought One, and I have yet to find a reason to bring anything but the surface with me on business trips.

    2. It Comes With OFFICE!

    3. Someone Brought up the Ipad Mini, The Ipad is Not a Stand alone Device, Its a "Companion" Device. Don't Get me Wrong. The Ipad is Cool. But its More Expensive than a Surface (Yes, Even The Mini Is more Expensive, I Will Explain in a Second), and Its Much Smaller!

    Now, Why Do I say the Mini is More Expensive?

    The Mini that Comes with 16 GB is 329.00, the Comparable Mini (32gb) is 429.00. Then you Figure in the Cost Of Office on an Ipad (MS Office Is Not Available) So you have to Buy Each App Separately, and You are already Higher than 499.00

    Now, You Can Add a Keyboard for the Surface for 112.00

    How Much is a Cover, and a Keyboard For the Mini?

    Lets Do a Fair Comparison! a Ipad 3 Is 599.00 (100.00 More than Surface),

    Last But Not Least .. The Surface (Even the RT) Runs WIndows 8! The Same O.S. your Windows PC Runs. Why am I Mentioning that? Well, You Only Have to Buy an App once! Since all new Windows apps run on Windows 8 Pro AND Windows 8 rt.. Can't Do that With a Mac and an Ipad!

  • Report this Comment On November 10, 2012, at 6:03 PM, lexnciswrong wrote:

    LEXNC IS WRONG!!!!

    The Microsoft Surface IS overpriced.

    LEXNC has made the same mistake that Microsoft has made when deciding how much to charge for the 32gb base model. Microsoft thinks that by charging the same amount for the Surface 32gb model as a 16gb ipad model means it's good value. WRONG!!! when going up against the market leader and the most well known tablet you can only compete on price. you CAN NOT compete on eco system as you do not have one. You CAN NOT compete on apps as there are hardly any. You CAN NOT compete on hardware as spec wise it stacks up the same as the Ipad or any other tablet out there of similar size. This only leaves price. so if it is a case of either the base model of the best known and best tablet out there or a Surface tablet with double space for same money, then most people will buy the Ipad. Some people have brought the Surface but they will be people who buy any new device to be first in line or Microsoft fans. Balmer has not said how many Surface RT's have been sold, could this be because the figures are not that great? Plus we do not know how many were available in first place, he said that some models(not all you will note)were sold out quickly at launch but if that was only 100,000 units then that is not impressive. Note that it was only the 32gb base model without the included cover that was sold out, this says that people do not see the Surface as good value for money and therefore by the same token do not see it as a premium device either.

    the kickstand on the Surface is only useful when on a table, hard to use on lap so it is not therefore like a ultrabook!

    It uses Windows 8, but it is Windows 8 RT, this is a cut down version of Windows 8. You can not explore the file system etc or do all the nitty gritty things you can do on Windows 8 desktop version

    You can not use x86/x64 progs on it, only apps. Therefore is just Microsoft's version to the Ipad. All about the apps in other words to which Microsoft hardly have any and they are not as polished(yet)or as good as Apple's

    You can not use the usb port to connect anything, such as external hard drives. In fact the only things you can connect are peripheral devices such as printers and speakers etc. In other words the same stuff as Apple's Ipad or Android tablets etc. That is what the pro version is for. the pro version is more like an ultrabook you idiot!! the Rt version is Microsoft's Ipad

    It has no 3g/4g lte connectivity so at present is useless with out that option

    the build quality of units so far has been reported to be very bad. though that will get better I am sure in time to come but hardly helps Microsoft and it's fans say the Surface is premium and should be sold at hefty prices when It is not built so.

    yes Windows 8 desktop and Windows RT would work well together and apps would work on both versions, though I hardly see million sof consumers saying they absolutely want that abillity. Most consumers want to use apps on their tablets then use progs and different apps on their laptops etc. as for Apple, no body is better at making software work well across all of it's platforms. just look at the app store and how virtually all of it's apps need no reworking to work on a new device such as the Ipad mini. where as with android virtually all end up being stretched or have black borders to work on an android tablet when they were created for an android phone. In time to come maybe Apple will enable most/all app store apps to work on macs, and anyway so what?? a macbook is a different device to an Ipad. One is a computer and the other is a tablet. or do you think that tablets are just computers repackaged? if so then your not a techno wizard.

    so for all these reasons and more the Surface is a fail and a year from now will be another flop for Microsoft and any Microsoft fans hoping to rival apple or even trouble them(or Samsung etc)will have to keep dreaming. Before any of you Microsoft sheep or Samsung sheep or android sheep etc call me an Apple sheep then think on! I am tech neutral, only an idiot gives loyalty to a tech company. loyalty is for sports teams, country, politics , your family etc...not a tech firm. and you lot are all just as big sheep as any Apple fanboy, just as guilty and just as blinkered.

    in a year to come Microsoft will not have sold even 3 million units across both RT and PRO models. Apple sold that many in one weekend regarding Apple Ipad mini and Ipad 3(4th gen). Samsun have sold a few million Galaxy S3's in a few months.

    OH AND AS FOR THE FACT THE SURFACE IS 32 GB COMPARED TO THE IPAD BEING 16GB AND THEY ARE BOTH SAME PRICE. I BET ALL YOU MICROSOFT FANS WILL NOT SHOUT THAT THE SURFACE IS NOT 32GB, ONCE YOU TAKE INTO ACCOUNT WINDOWS 8 RT AND OTHER THINGS THE SIZE YOU HAVE TO USE IS ACTUALLY ABOUT 16GB. SO HALF YOUR SPACE IS WASTED AND CAN NOT BE USED. THATS NOT GOOD IS IT SO NOT THE BARGAIN AFTER ALL IS YOU IDIOT!!

    AND AS FOR THE FACT THE SURFACE HAS A MEMORY CARD SLOT IS NOT GOOD EITHER AS JUST LIKE ANDROID DEVICES YOU CAN NOT SAVE APPS TO IT. THE MAIN REASON YOU HAVE A TABLET IS FOR THE APPS, THE FACT YOU CAN ONLY SAVE VIDS/PICS/MUSIC ON THE CARDS IS NOT VERY GREAT AS MOST PEOPLE DO NOT USE THEIR TABLETS MAINLY FOR SHOOTING VIDS ON(TOO UNWEILDLY)OR PICS(SAME). iTS ALL ABOUT THE APPS SO THEREFORE HAVING A MEMORY CARD SLOT YOU CAN NOT SAVE APPS TO IS POINTLESS AS IS BUYING A 32GB TABLET BUT ONLY HAVING 16GB SPACE. ALL DEVICES INC TABLETS LOSE SOME OF THE SPACE ADVERTISED, BUT THE SURFACE IS THE LEADER AND LOSES THE MOST COMPARED TO OTHER TABLETS.

    MICROSOFT HAVE ONCE AGAIN FAILED TO LIVE UP TO THE PROMISE AS THEY KEEP DOING(REMEMBER WINDOWS VISTA??????)

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