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

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.

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.