Microsoft's Surface RT 'more profitable' than Apple's iPad

Microsoft's Surface RT 'more profitable' than Apple's iPad

Summary: Microsoft has managed to build the Surface RT tablet in such a way that it not only competes directly against Apple's iPad, but also has a higher profit margin than Apple's flagship tablet.

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A teardown of Microsoft's new Surface RT tablet suggests that it generates a healthier profit margin than Apple does with its low-end iPad.

The teardown, carried out by IHS iSuppli, the Surface RT (32GB) tablet carries a bill of materials of $271, and an additional $13 manufacturing costs. This brings the total cost of manufacturing to $284.

The most expensive component is, as expected, the screen, which costs Microsoft an estimated $101. The 32GB NAND storage and the 2GB DRAM adds another $34 to the cost, and the Nvidia Tegra 3 processor another $21.50.

With an estimated total bill of materials and manufacturing cost of $284, and selling for $599 (a price which includes the Touch Cover keyboard), IHS say that the Surface RT generates profits that are, in percentage terms, greater than Apple's low-end iPad (16GB, Wi-Fi). Even at a price of $499 (without the Touch Cover keyboard), the Surface RT still generates a profit margin that is greater than the low-end iPad, both in percentage terms, and on a per-unit basis.

In emailed remarks, IHS analyst Andrew Rassweiler explained the importance of the high profit margin: 

"The Surface represents a key element in Microsoft’s strategy to transform itself from a software maker into a devices and services provider," said Rassweiler. "Key to this strategy is offering hardware products that generate high profits on their own, similar to what Apple has achieved with its iPad line. From a hardware perspective Microsoft has succeeded with the Surface, offering an impressive tablet that is more profitable, on a percentage basis, than even the lucrative iPad based on current retail pricing."

While Microsoft has made a big deal of the keyboard that comes with the Surface RT tablet, Apple has distanced itself from associating the iPad with a keyboard. While there are numerous third-party keyboards for the iPad, Apple has not yet released an iPad-specific keyboard.

Not only does the healthy profit margins bring more dollars in to Microsoft, but it also gives the company wiggle-room if it ever has to cut prices in order to invigorate sales.

While IHS thinks that high profit margins are good, some analysts are not convinced. Sterne Agee analyst Shaw Wu believes that Microsoft hasn't been aggressive enough it its pricing of the Surface tablet, and that the $499 price tag for the base model is too high, and therefore "could prove to be a fatal mistake and relegate it to be a niche No. 4 or No. 5 player."

An iFixit teardown of the Surface RT tablet revealed a device that is easier to take apart and repair than the iPad, with several components being modular and replaceable without requiring desoldering. The battery inside the Surface RT -- a consumable that will need replacing after a few years -- is also easy to remove once the tablet is opened.

Image Gallery: Microsoft Surface tablet

Image source: IHS iSuppli.

Topics: Tablets, Hardware, Microsoft

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28 comments
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  • Of course it is!

    Surface sells you 14 Gb of free memory for teh cost of 32, what can be more profitable than that?
    polarcat
    • Yes, I read the same

      Win8 RT takes an exhorbitant amount of the available storage. I consider it to be deceitful and disingenuous marketing to sell a person a 32G device when, in reality, it is effectively only 16G. I think that most buyers understand that a small part of their storage is for the OS, but 50% is ridiculous!
      Wakemewhentrollsgone
      • ....

        >>>I think that most buyers understand that a small part of their storage is for the OS, but 50% is ridiculous!
        Mr.SV
        • ---

          RT 'eat' 'only 8GB:
          http://www.microsoft.com/Surface/en-US/support/surface-with-windows-RT/files-folders-and-online-storage/surface-disk-space-faq

          Rest of space is reserved for recovery. I wonder if surface gives access to diskpart...
          Mr.SV
        • 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/FJRmJ
          RichardBig
      • If it actually were true

        That's an OS and a full productivity suite. Big difference.
        WebSiteManager
        • Full productivity Suite...??

          Of course... you mean personal productivity, since this one doesn't have Outlook, nor allows you to use it for anything that's business.
          cosuna
  • Interesting but missing important facts

    I find these tear-down articles interesting but I'm always surprised how the tech journalist who report them forget to mention that they don't take into account R&D-, support and marketing costs.

    If MS has really been developing Surface for 3 years then I expect the R&D cost has been enormous and yes they might be able to reuse the processes learned in future products but they still probably take the biggest hit for that upfront.

    No-one is immune to these extra costs except for people like Google and Amazon who sell at cost because they don't really care about the device but want you to pay for the services that come with the device.
    ernonewman@...
    • R&D costs are huge

      and many people forget that part of the cost of their device needs to contribute towards that cost - and that means development of the OS, the hardware and the special version of Office.
      Wakemewhentrollsgone
  • And as always...

    No regard is given at all to the exorbitant cost of R&D. Apple doesn't have to worry so much about that now they've had a few generations of iPad out the door and, quite frankly, they make enough profit as it is!
    SupaRawr93
  • This is only guesswork

    Who knows the real value of the contracts.
    Alan Smithie
  • Profitability is also affected by the product lifecycle

    iPad users need to replace their device every 1.5 to 2.5 years if they want continued iOS software support from Apple. Apple's support duration for the original iPad was between 1.5 and 2.5 years, depending on when the device was purchased. Support for the original iPad was very recently dropped when iOS 6 was released and iOS 5 updates simultaneously ceased.

    Microsoft, thus far, has been silent on their product lifecycle for Windows RT:

    http://support.microsoft.com/lifecycle/search/default.aspx?sort=PN&alpha=Windows+rt&gadate=0&msdate=0&esdate=0&medate=0&spdate=0&Filter=FilterNO

    The Lifecycle Start Date is 10/30/2012. However, there is no information regarding the Mainstream Support End Date and Extended Support End Date.

    At what frequency will customers have to purchase a new Surface RT tablet to obtain continued software support? One cannot discuss device profitability without this information.
    Rabid Howler Monkey
  • It's not overpriced

    And there is one very easy metric to judge that on. Try to go buy one. Oh, they're sold out? Then they clearly aren't overpriced. If you sell out at a price point then an argument of "it should be cheaper" is clearly a bad one.

    Google sold out of the Nexus 7 because it was cheap. Microsoft sold out of the Surface because it's not cheap. Personally I think Apple has it right and that's where MS is going. I'll pay for quality any day of the week.
    LiquidLearner
    • Ignorant

      "Selling out" means nothing unless you know the number of units that were available for sale, which is never disclosed. Claiming something sold out can also be a marketing gimmick to stimulate demand. You should not be so easily (mis)lead.
      D.T.Long
      • You fail at the argument

        Not sure why you would call me ignorant. I didn't say it was a success. I said that, at the given price point, they sold the number of devices available. Therefore saying it's overpriced is "ignorant".

        So no, I'm not mislead. I'm simply stating a fact. If it was 200k or 200 million it wouldn't matter, they still sold out at the price it was being sold for. Making a lower price point insanity until they have issues moving units. It's called economics.
        LiquidLearner
  • Pricing

    I find most consumer's idea of pricing naive. No-one mentioned overhead costs. A new product gets loaded with the full cost of plant, personnel, and development. I have seen businesses with overhead 3 times direct cost. Microsoft is new in the business. Surface and Xbox are the only products to share hardware manufacturing overhead costs.

    The price model you are using goes back to the pre-PC days when the computer company shipped you a bag of parts with a 10% markup and an instruction book on putting it together.

    The good news for you (and Microsoft) is that electronics has a steep learning curve. Moore's law says that you should be able to halve the costs in 18 months or less.

    If you really want to see price gouging, take a stroll down the bottled water aisle at the super market. It sells from 30 cents to 3 or 4 dollars a bottle. The cost of the bottle is the main cost and is about the same for everyone. Look up the federal specification for "Spring Water". The bottled water market panders to the same purchased status syndrome that operates in the tablet market.

    I feel that the Surface price is not out of line for a premium product introduction.
    larrybacker
    • Perhaps, but ......

      At the end of the day costs do not matter much when it comes to pricing. No profit oriented enterprise in their right mind uses cost based pricing. The only thing that really matters is what consumers are willing to pay.

      Given that some producers are willing to sell their HW at close to the cost of the HW itself to develop a market, gain market share and/or make money on related goods and/or services, MS may find that a very large percentage of consumers are simply not willing to part with the amount of money MS wants for the product, in which case it IS overpriced if the objective is a large market share. The cost of production and all other indirect costs are then totally irrelevant.

      As an aside, I feel that MS may have misjudged the currently more mature tablet market due to Apple's success with the iPad. I think the optimum tablet size/weight for most typical consumer uses is 7"/300+g and think the iPad Mini will bear this out in over the next many months, as have the 7" tablets from Amazon, B&N and Google.

      I also find the MS solution cludgy. A light keyboard and heavy screen with a stand is very awkward to use in many situations when compared to an ultrabook with a heavy base keyboard and a light and fully adjustable screen (in bed or on the couch for example). As indicated above, the tablet itself is just too darn heavy for use in similar situation.

      I have no doubt there are many users and situations out there for whom/which the MS tablet will be the most useful device. As a large ovlume consumer product, I think it will fail miserably for the reasons outlined above.
      D.T.Long
  • Microsoft's Surface RT 'more profitable' than Apple's iPad

    Not surprising considering the contracts Microsoft already has in place with OEMs. I wouldn't think it would be too hard for them to get into the supply chain at a pretty cheap price.
    Microsoft Surface RT = Winning!
    Loverock Davidson-
    • Another premature and ignorant LD post

      If you hardly sell any of them = failure

      MS may control the cost, but they do not control the market - any longer.
      D.T.Long
      • Surface sold out

        So they did sell plenty of them
        Loverock Davidson-