Microsoft Surface Pricing Could Be Fatal Mistake

Microsoft SurfaceMacobserver – 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.

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 toprice 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 $1.974 (-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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