Microsoft Surface tablet pulling in PC-level license fees in a post-PC world

Microsoft Surface tablet pulling in PC-level license fees in a post-PC world

Summary: Microsoft has priced its Surface tablet is such a way that it can pull in PC revenues in a post-PC world -- but only by cutting out the hardware partners and selling the tablet itself.

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An analysis of how Microsoft has priced its Surface tablet shows that the Redmond giant is more than willing to make the shift to the post-PC era -- as long as it can continue to pull in PC-level license fees.

This is the assessment of Asymco founder and analyst Horace Dediu, who claims that the software profit margins that Microsoft pulled in from selling PCs is now "captured in hardware," and that this in turn explains why the Surface tablet comes with a $499 price tag.

Dediu claims that Windows revenues for PC have held steady for the last three years, at around $52, while Office have increased slightly to $67.

"The problem for Microsoft," writes Deidu, "is that pricing systems software at $50 and a suite of apps at $67 for a tablet that costs $200 to the end-user is prohibitive."

The reason for this is two-fold. First, OEMs would be hard pressed to complete against Android tablets that incur zero operating system costs, and IT buyers would balk at paying almost $70 for tablet software that they can get on other platforms either for free, or for under $10. Office suites costing $70 are unheard of on post-PC tablets and startphones.

By slapping a $499 on the Surface tablet Dediu says that Microsoft is pulling in a profit margin similar to that Apple does with the iPad -- about 30 percent -- which works out to be about $150 per tablet. This figure is pretty close to the $120 that Microsoft gets from a PC kited out with Windows and Office.

Dediu says this figure also explains the lack of appetite for "partnerships."

"OEMs which would normally compete on hardware would have to deal with zero margins (or less) after license fees and would be encouraged to cut corners and shave costs, compromising the experience and causing the platform to suffer."

In other words, the only way Microsoft can continue to pull in PC revenues in a post-PC world is to cut out the hardware partners and sell the tablet itself.

This leads us to a number of unanswered questions.

  • Can Microsoft sell enough Surface tablets to keep revenues up?
  • How quickly will price erosion take its toll on the Surface's $499 price tag?
  • Will the hardware OEMs sit on their hands and allow Microsoft to cannibalize their profits by cutting them out to the deal?
  • Does Microsoft have a strong enough brand image to sell high-priced tablets to cash-strapped consumers and IT buyers?
  • Is this the catalyst hardware OEMs previously faithful to Microsoft need to start looking seriously at Linux and Android?

I expect that these questions will be answered over the next few years, and we'll know if Microsoft's post-PC era strategy is a success or a failure.

Topics: Microsoft Surface, Microsoft, Windows, Windows 8

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55 comments
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  • These people are high!

    Big OEMs didn't pay anywhere near that price for Windows! It was like $25 a machine for the smaller OEM and $14 for the larger.

    The mom and pop shops paid the fees they describe.
    slickjim
    • WTF are you smoking?!

      The price you see at Newegg in US$ is exactly why I pay a Cdn Microsoft Authorized Distributor at cost. Larger OEM's pay half that price @ ~$50 for a copy from Microsoft.
      Joe_Raby
      • Another brilliant plan from Ballmer. Except it will fail.

        It's a tax. A Windows tax.

        Microsoft CEO Ballmer has priced the Surface so that he can extract a PC-era price from the customer.

        What a great idea. Pity it will fail.

        Back in the PC era, these sort of plans would work. Now, in the Post PC era, people will just flock to Android instead. Look what's happened: Surface RT has already failed. Surface Pro (the "Pro" means it gets half the battery life) will go the same way, joining Windows Mobile, Windows Phone 7 Kin and Zune in the great Microsoft platform graveyard.
        Vbitrate
        • Wow

          Love my job, since I've been bringing in $5600… I sit at home, music playing while I work in front of my new iMac that I got now that I'm making it online(Click on menu Home)
          .......http://goo.gl/TP21R
          VictoriaEva
          • flags

            How many flags does it take, before ZDNet actually pays attention, and cleans up the spam? Does it ever bother at all?
            jaybyrd
          • sad

            The sad thing is that these spam posts have all nearly identical wording, so auto-flagging them should be easy.

            Maybe they're actually paid comment spam? Wouldn't that be funny.
            dsf3g
        • I am a pc and MS fan but

          Something has to give. They need to cut the price somewhere...whether its hardware or software. I think Surface is great, but it would do better if they slashed the price by $100.00.
          Rob.sharp
          • Dollar for dollar, the Surface RT ...

            ... is already a better buy than the iPad. At some point, Microsoft may have to decide that they need to cut the price of the Surface RT to compete with the iPad 2 instead of the new iPad "3.5" but I think that day is several months away. And, we may find that the Surface RT is meeting Microsoft's expectations.
            M Wagner
        • The Windows Tax is a myth

          The Linux fan-boys love to bring this one up but, feature for feature, a Linux based system still costs the same as a Windows-based system from the same vendor. Linux is only less expensive only if you are qualified to do your own technical support. Few consumers are so qualified.
          M Wagner
          • So Windows is free, is it?

            Where on Earth did MS make its money then?
            Zogg
          • Windows isn't free, but neither is Linux

            You missed the point Wagner was making. Linux-based systems still have a support cost-element comparable to Windows UNLESS "you are qualified to do your own technical support."

            Reading for comprehension...
            Nierteroth9
          • You've missed the point

            Even people qualified to do their own *Windows* technical support pay money to MS.

            When people talk about the Windows Tax, they're talking about the cost of the Windows license.
            Zogg
          • Re: Linux-based systems still have a support cost-element comparable to Win

            Linux is a lot easier to support, because you can actually understand what's going on and fix it, instead of the old "reboot, and if that doesn't help, reinstall" Windows voodoo dance.
            ldo17
          • Thanks

            actually linux is easier to use than windows , MINT Is more easy and practical and with linux you learned about computers . no with windows
            Diego Novo
          • Most windows users

            Do their own technical support via google.
            johnsmith9875
          • Windows tax not a myth

            You're ignoring that the cost differential is also offset by the many parasitical companies that pay OEMs to load bloatware onto a device. That helps obscure the price delta (e.g., it's why many OEMs, if they sell a Linux PC, do so at a price comparable to one with Windows installed).
            daboochmeister
          • you are wrong

            in fact now a days linux is easier to use than windows it seems you never tried MInt or Ubuntu.
            LInux is far superior and practical for desktop than Windows and that is a fact.
            Diego Novo
          • Linux consumers support Android

            It doesn't happen, I'm an LPIC Level 2 and I don't get near those things...so even though I'm great with a client of some kind sitting in front of me, when my 'Droid or my OSX machine goes awry, I pray for support.

            As far as the MSFT Surface goes, I'll pass, I have a laptop and that'll do it for me.

            It used to be so simple....
            wuboyblue
        • Lot's of "fails" to go around

          Just because Microsoft has had some fails (haven't they all?) doesn't mean that this or anything else they try will (they have had one or two wins as well, yes?). It should stand on it's own merit, and it will. Good or bad.
          hey-frankie-boy
        • Post PC Era

          I am sick of that crap. We are NOT in a post PC era. We only have more choice now, to select a device that can do the job.
          lloydkuhnle