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Microsoft (Nasdaq: MSFT ) will apparently be sitting pretty if its new tablet is a hit. The crafty deconstructionists at IHS iSuppli took apart the Microsoft Surface to value each of its components, and the results are surprising. Just $284 in components and manufacturing costs go into making the $599 tablet with its attachable keyboard cover.
By IHS iSuppli's math, that makes the Surface more profitable -- with a 53% profit margin -- than Apple's (Nasdaq: AAPL ) industry-leading iPad.
"It's about time," Microsoft fans may rejoice. They've seen the company reportedly sell its Xbox consoles at a loss. They've seen desperate tablet makers sacrifice margins to get below the critical $200 price point on smaller 7-inch gadgets to gain market share. Why can't Microsoft -- which until just two years ago was worth more than the iEverything company -- feast on Apple-esque tablet margins?
Well, before we get into the dim chances of the success of that strategy, let's start with a more problematic development: Surface buyers may be getting what Microsoft is underpaying for.
Get ' em while they're not hot
We don't know how many Surface tablets have been sold, but the number probably isn't impressive. Microsoft is selling them only through its dedicated website and the dozens of permanent and pop-up Microsoft Store mall locations.
Since there are fewer than 70 places in the country where somebody can physically try the tablet before buying one -- and nearly half of those places are temporary holiday kiosks -- it would seem as if Microsoft's online store is getting slammed with orders.
Yet when the Surface hit the market two weeks ago, Microsoft's store showed a three-week delay on new orders, and now, just two weeks later, there's no indicated shipping delay.
Was Microsoft simply trying to orchestrate an illusion of scarcity?
"It controls the supply," I wrote at the time. "It can blur the demand."
Frayed and stuttering
It also doesn't help that Surface reviews have been generally mixed. The knocks are now growing beyond the first wave lamenting the learning curve of Windows RT or the tablet's uninspiring response times.
The Verge is reporting on "widespread reports" relating to audio stuttering and random muting on the tablet. These could very well be issues that can be corrected through an operating system update, but then we get to the build-quality issues on the actual covers.
The Guardian reports that some owners' magnetic covers are splitting after just a few days of use. The Verge also has a screen cover whose cover itself has frayed to the point where the wiring is exposed.
Microsoft is offering replacement covers, but why should those be any better? Furthermore, IHS iSuppli is reporting that these touch covers cost between $16 and $18 for Microsoft to make. So why is it charging as much as $120 for them?
Adding insult to injury, the original Surface television commercial played up the magnetically attaching touch covers. Everyone was clicking covers to tablets. It certainly seemed to portray these covers as sturdy. Come on now, Microsoft. Tell us how many touch covers were harmed in the filming of that commercial?
More than just the mistakes
We live in the golden Internet age, and an IHS iSuppli report can do more harm than good, especially since there were already plenty of good reasons to wait on a Surface purchase.
- Let the early adopters suffer through the bugs.
- The few examples of tablets selling at similar price points that weren't running iOS or Android -- Research In Motion's (Nasdaq: RIMM ) PlayBook and Hewlett-Packard's (NYSE: HPQ ) TouchPad -- quickly slashed their aggressive pricing within weeks of release.
- The more PC-centric Surface -- the one running Windows 8 Pro -- hits the market in two months.
- Why risk buying an orphan? Microsoft was surprisingly quick to pull the trigger on the Kin smartphone two years ago.
- Given the weak app support, there's no harm in waiting until developers embrace a platform before following suit.
However, now that folks know they're paying twice as much for these devices as they probably should be, will that nip this revolution before it had a chance to get started? Consumers don't have a problem getting gouged by Apple because they know that lower prices or discontinuations aren't coming.
Apple isn't perfect, of course. Antennagate, anyone? However, the Surface is coming up short beyond the initial sticker shock.
It's one thing for Microsoft to misprice the Surface because it doesn't want to upset future Windows 8 RT hardware licensees. It's another thing entirely to put out a product that isn't worth its ransom.
Scratching the Surface
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, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company 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.