Microsoft Surface and iPad Mini: The race to the right price

While the Apple iPad continues to hog most of the sales in the tablet market, two other tablets are grabbing most of the spotlight right now -- Microsoft Surface, the flagship Windows 8 tablet, and the iPad's long-rumored little brother, the iPad Mini. The key factor in both cases is the price tag. We've just got word on the Surface's base price ($500) and the iPad Mini price will be revealed on October 23. Price -- and how buyers react to it -- is going to determine how much these two devices shape the future of the tablet market.

Microsoft Surface

While the iPad Mini is going to tackle the Kindle Fire and the Nexus 7 at the low end of the tablet market, the Microsoft Surface is going to try to give the iPad 3 a run for its money at the high end. Microsoft is pitching the Surface as a more productive tablet than the iPad and one that combines the convenience and usability of a tablet with the power of a PC to get real work done.

The most innovative feature about the Surface -- aside from Windows 8's radical new tablet UI -- is the tablet's cover with a built-in keyboard and trackpad. The cover, combined with the tablet's built-in kickstand, can quickly transform the Surface into a laptop-like experience, but without having to carry around a clunky keyboard dock like you do with the ASUS Transformer Prime or the Samsung Series 7 Slate.

That's the Surface's killer feature, and Microsoft is betting that a lot of users will choose it as a full laptop replacement. That gives the company some wiggle room on price, since it can convince users that this is a two-for-one purchase and that they are saving money by buying a Surface instead of a laptop and a tablet.

Still, the Surface had to come in around the same base price as the latest iPad: $500. At that price, Microsoft can make a good case that its tablet can do virtually everything the iPad does and more, all for the same price. That's an easier sell than convincing users to pay a premium over the market-leading iPad for a device that has extra bells and whistles -- just ask the Motorola Xoom.

The $500 price tag for the base model of the Surface is as much a psychological marker as anything. Most people will end up spending more than that -- in some cases a lot more. The keyboard cover will cost an extra $100. It will also be an extra $100 to upgrade from 32GB of storage to 64GB. If you do both, all of the sudden you're spending $700. And all that's for the light version of the Surface running an ARM processor like the one in the iPad. The heavy duty version of the Surface running on Intel chips is due later this fall is likely to be pushing $1000 once you get enough storage and add the keyboard cover.

That's pretty salty and it's likely to price out a lot of buyers, unless the Intel-based Surface turns out to be a truly viable laptop replacement for the masses and Microsoft does a convincing job of selling people on the idea that it's saving them money from having to buy both a laptop and a tablet.

Also, keep in mind that this price tag issue is the primary reason why Microsoft had to build its own tablet itself. Under the old Windows model where Microsoft charged its hardware partners a big fee for the operating system, it was going to be virtually impossible to come up with a tablet that was comparable to the iPad at the same price. As Windows 8 hardware gets pre-announced, we're seeing that play out as hardware makers are gravitating toward more expensive hybrid laptop/tablet products. The old Wintel model can't compete with the iPad on price because too many companies have to take a cut of the money. More than any amount of Apple envy, that's why Microsoft had to create the Surface.

iPad Mini

The iPad Mini, of course, is still a rumored product. Apple has not officially announced or acknowledged that such a product is in the works, but the consensus from technology industry sources is that the product is going to be announced in the coming weeks to help Apple fend off the upstart 7-inch tablets, Google Nexus 7 and Amazon Kindle Fire HD.

The primary reason I see Apple doing a smaller tablet is not for the size, but the price. While there are a few people out there who prefer the smaller form factor of a 7-inch tablet, in most cases the size is not that much of a selling point. However, a $200 price tag like you get with the Nexus 7 and Kindle Fire HD has a lot of appeal versus $400 for the cheapest iPad--and that's for last year's model.

A 7-inch tablet is obviously cheaper to build with its small multi-touch panel and I expect that Apple could make the iPad Mini a "lite" version of the iPad with less expensive components to really drive the price down. Still, it's unlikely that we'll see a $200 version of the iPad. Amazon has admitted it's selling the Kindle Fire tablet at cost and simply making money off the content. Apple isn't going to do that.

Even though Apple can get components like Flash storage and RAM cheaper than Amazon and other tablet makers since it buys them in large volumes for the iPhone, iPod, and iPad, the company is not going to give away the devices at little or no profit just to generate revenue from iTunes purchases.

It's difficult to see Apple selling the iPad Mini for any less than $250, at a minimum. And that's if Apple can whittle down the component costs to about $150, which would give the product a 40% gross margin (which falls about halfway in between its margin on the iPad and the iPhone). If Apple doesn't limit the hardware and tries to make the product more innovative, it's also possible that the base price of the iPad Mini could come in somewhere between $300 and $350 (as indicated by the latest reported price leak).

However, I don't expect that. The primary reason to do the Mini is price. If it's $350 or higher, that negates the whole strategy and I don't see it attracting a whole lot of consumers or businesses. Apple needs to come in at around $300 or less in order to make buyers hesitate before paying paying $200 for a Google or Amazon tablet.

Microsoft hit the price it needed to hit with the Surface. We'll see if Apple can do the same with the iPad Mini.

Also read

• Microsoft finally takes the wraps off its Surface hardware
• An inside look at Microsoft's Surface RT
• Microsoft Surface: Will you 'click in' for $120 extra?
• Microsoft's Surface: Critical to Windows 8 launch as PC hedge
• Microsoft's Windows 8 biggest wild card: The hardware