Atlhough the ultimate success of Microsoft’s indigenously designed Surface remains uncertain, we do know that Redmond is making a rather tidy profit off each tablet sold.
Indeed, according to IHS iSuppli analyst Andrew Rassweiler, the $599 Surface RT model with a minimum 32 gigabytes of NAND flash memory and an optional black Touch Cover carries a bill of materials (BOM) of just $271.00, with a $13.00 manufacturing expense.
“The Surface represents a key element in Microsoft’s strategy to transform itself from a software maker into a devices and services provider,” explained 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.”
As Rassweiler notes, at an estimated total BOM and manufacturing cost of $284 and a retail price of $599, the Surface RT generates hardware and manufacturing profits that are, in terms of percentage, higher than the low-end iPad. To be sure, even at a price of $499 without the Touch Cover, Microsoft is expected to generate a profit margin that is greater than the low-end iPad, both in terms of percentage and on a per-unit basis.
“One key differentiating hardware feature of the Surface hardware is the optional Touch Cover, which is essentially a cover that also acts like a full-function keyboard, but uses only capacitive touch sensing to operate. The keyboard works very well and even has a touchpad at the bottom, making the device feel and operate very much like a notebook PC when the Surface sits on its kickstand and the Touch Cover is laid flat,” said Rassweiler.
“The Touch Cover represents a best-of-both-worlds approach for the Surface, giving it the most attractive features of both notebook PCs and media tablet. This feature differentiates the Surface from the iPad, [making for] a very compelling product that is impressive. It’s also clearly more Microsoft friendly – so enterprises and major users of Microsoft Office likely will gravitate to this very competent product as a possible substitute to conventional notebook PCs when used for travel.”
Essentially, says Rassweiler, the Touch Cover serves as an example of a feature that can encourage users to upgrade to a higher-end model and generate more profits for a company – similar to premium-priced tablets that feature larger quantities of memory.
“With options like the Touch Cover or extra flash, a manufacturer can offer a low-end model at a base price that meets a psychological threshold – $499 in this case – with the hope that consumers will impulsively opt for extra features or memory upgrades that generate major profits,” he added.