Analyst: Microsoft to price Surface RT tablet at $US400 to $US500

Based on 'bill of materials,' Windows 8-powered Surface Pro will run $US800 to $US1000+

Microsoft's new Surface tablet, slated to ship later this month, will be priced between $US399 and $US499, an analyst said, in the same ballpark as Apple's iconic iPad.

Sameer Singh, an analyst with Finvista Advisors, an India-based mergers and acquisitions consulting group, pegged the price of the Windows RT-powered Surface based on his preliminary -- and sight-unseen -- estimate of the tablets BOM, or "bill of materials."

Although Microsoft unveiled the Surface RT -- and the companion Windows 8-equipped Surface Pro tablet -- in June, the company has yet slap price tags on either.

"Microsoft has been very tight-lipped about the price of its Microsoft Surface range of tablets," said Singh on his Tech-Thoughts blog, where he posts analyses not directly related to his day job. "With a launch set for later this month, speculation has intensified, with some sources stating a price less than $399 for the RT version. Let's get to a more educated estimate of the BOM cost and pricing for the Surface RT and Pro."

Singh assembled a BOM, a list of the expected components and their likely costs to Microsoft, then added a 25 per cent to 30 per cent markup to arrive at his $US399 to $US499 price range for the Surface RT.

That BOM came in at $US299 for a 32GB Surface RT, with the $US67 display module its most-expensive part. Many of Singh's estimates were derived from similar components in known tablets, such as Apple's 9.7-in. iPad. Adding in manufacturing costs of $10 per unit, his final BOM for the Surface RT was $US309.

A retail price of $US399 would give Microsoft a 23 per cent margin, while $US499 would produce a margin of 38 per cent.

But profit margin, Singh argued, is not as critical to Microsoft as is its existing relationships with hardware partners, known as OEMs, for "original equipment manufactures" -- the Acers, Dells and Hewlett-Packards of the industry.

"Microsoft would be under considerable pressure to ensure that the Surface is priced in the same ballpark as tablets from OEM partners," Singh argued. "Unfortunately, OEMs are also at a cost disadvantage as they need to pay Microsoft a license fee of $US50-$US65 per Windows RT device."

With that license in the mix, Singh said the BOM of OEM tablets similar to the Surface RT would be in the $US300-$US350 range. To keep OEMs happy, Microsoft will have to price its tablet with enough room for OEMs to sell theirs at a profit: Thus his price range of $US399-$US499 for the Surface RT.

Microsoft said as much earlier this year, when it promised prices for the Surface RT would be "competitive with a comparable ARM tablet."

Singh did not include the Surface keyboard-cum-cover, dubbed "Touch Cover" by Microsoft, in his estimate. On its Surface website, Microsoft says, "Surface comes with ... a revolutionary, 3mm thin, pressure sensitive cover that doubles as a fully functioning keyboard and trackpad," referring to the Touch Cover.

Microsoft will also sell a more capable keyboard/cover as an accessory. Called the "Type Cover," it is thicker and provides some key travel for a more notebook-like feel.

"Estimating the BOM of the cover is a major challenge as the cost drivers are a bit of a shot in the dark," acknowledged Singh in an email reply to questions today. "But based on pricing trends for similar accessories, I'd say it could be priced around $US50-$US100."

Singh also estimated the BOM of the Surface Pro, the tablet powered by Windows 8 that Microsoft will launch in late January 2013.

Unlike the Surface RT, the Pro will run not only touch-style, tablet apps, but also traditional Windows software, such as Adobe Photoshop, the full version of Microsoft Office and PC games.

A 64GB Surface Pro, said Singh, would add a minimum of $US320 to the BOM of the RT, resulting in a total of around $US629. The biggest part of that increase? The expected Intel Core i5 processor, which adds $US204 to the Pro's bill.

The BOM led Singh to peg the Surface Pro's list price at $799 to $899, which would give a margin of 21 per cent to 30 per cent. An $US899 price, for example, would put the margin at 30 per cent.

"Most mid-range x86 Windows 8 tablets should retail at the same price [range], with higher-end models priced above $US1000," said Singh.

Again, his estimates were in line with earlier prognostications from other analysts, who interpreted Microsoft's pledge to price the Surface Pro near an Intel ultrabook-style notebook to mean $800 at a minimum, more than $1,000 at the top end.

At a price between $US399 and $US499, the Surface RT will have to compete with Apple's iPad on cost as well as features, app quantity and app quality.

Apple sells the newest iPad at $US499 for a 16GB model, $US599 for 32GB and $US699 for 64GB. It also retained 2011's iPad 2, which sells for $US399 (16GB).

And it looks increasingly likely that the Surface will also have to face a smaller, less-expensive iPad, tagged as the "iPad Mini," which Apple is expected to announce next week and start selling Nov. 2 at a price between $US250 and $US299.

Singh was confident in his estimates, saying that because the BOMs were based on previous teardowns of other tablets, "They should be within a 10-15 per cent range of the actual BOM."

But he admitted that the process isn't foolproof.

"Guesstimates come into the picture for components that don't really have an existing cost estimate, for example a ~150 PPI [pixel-per-inch] display on an iPad Mini or a magnesium casing for a Microsoft Surface," Singh said in his follow-up email. "Here, part of the guesstimate involves finding out the cost drivers for that particular component based on existing estimates."

Microsoft will begin selling the Surface RT on October 26 at its online store, and at both its established and temporary "pop-up" retail outlets.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

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