Is Microsoft alienating PC partners with Surface?

Microsoft is likely to price its Surface tablets at below market value in an effort to compete against Apple’s wildly popular iPad.

According to Deutsche Bank analyst Chris Whitmore, the low-priced tablets will alienate Redmond’s longstanding PC partners. Indeed, Whitmore believes Microsoft is simply “grasping at a competitive response” which will inevitably “fall short” of effectively competing with Apple’s iPad.

In an industry note obtained by AppleInsider, Whitmore described Microsoft’s “major dilemma” in terms of Surface pricing. For the low-end ARM models running Windows RT, the analyst says Redmond must undercut Apple’s tablet to achieve any form of success. However, in doing so, Microsoft could make it impossible for its Windows partners to compete.

To be sure, Whitmore estimates PC makers will be forced to price their Windows RT tablets at approximately $650 to generate gross margins of about 20 percent. Of course, if Redmond competes full-on with the iPad on price, it would lead to the “collapse the PC OEM profit pool.”

Nevertheless, says Whitmore, simply matching the iPad in terms price would be insufficient given Apple’s extensive iOS app ecosystem. Rather, Surface tablets running Windows RT would need to be priced at a significant discount if they are to gain any real traction.

The analyst also weighed in on Microsoft’s Surface “Pro” tablet designed to run the full Windows 8 operating system. The x86-powered device – featuring Intel processors – is slated to carry the same $1,000 price tag as Ultrabook notebooks. 

According to Whitmore, Surface “Pro” tablets will offer a 20 percent premium over the high-end 64-gigabyte iPad with 4G LTE – even though they are hobbled by lower batter life, fewer third-party apps and a thicker form factor. 

Despite the relatively high price point, Whitmore believes the Surface model running a full-on version of Windows 8 will be more successful than its ARM counterpart, as the x86 version offers backwards compatibility with traditional Windows software such as Microsoft Office.

“In such a scenario, Microsoft will be swimming upstream against the consumerization of IT trend with a heavier, bulkier and more expensive product,” Whitmore wrote.

Indeed, the latest projections from Deutsche Bank estimate Apple will control 60-65% of the tablet market, while Surface RT and Android tablets struggle to gain serious traction.