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4/9/2013
03:29 PM
Michael Endler
Michael Endler
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Windows 8 Tablets: Why Microsoft Must Slash Prices

Microsoft can maintain its market dominance with Windows 8 if it tries something not in its normal playbook.

When consumers evaluate personal electronics purchases, one principle can generally sum up the experience: good, fast, cheap -- pick two. It's a tried and true business formula, a twist on the notion that customers get what they pay for. Microsoft needs to erase that two-out-of-three strategy from its tablet playbook.

With the first wave of Windows 8 tablets, consumer mileage has varied on the "good" and "fast" fronts. "Cheap," though, has rarely been a blip on the radar, least of all for Microsoft's Surface tablets. With both Windows 8.1 (Windows Blue's current nom de jour) and a new spate of devices on the horizon, this needs to change. Redmond needs to rush satisfying tablets to market -- and they can't just be competitively priced. They need to be downright cheap.

Here's the reasoning: The Surface RT, decried though it's been, is actually a pretty nice device. If Microsoft had charged $250 for the tablet and maybe another $50 for the Type Cover, I probably would have bought one at launch, and I suspect I'm not alone. At that price, I'd have been willing to remain patient while Microsoft developed its lackluster app library. Yes, the iPad would have offered more variety and polish, but the Surface RT would still have been a decent media-viewing tablet that, with its watered-down version of Office, would have featured better content-creation tools than anything on iOS. That's enough use to justify a couple hundred dollars.

[ How much does touch matter? Read Windows 8 Doubt: 3 Ways Touch Won't Help. ]

Unfortunately, the Surface RT costs nearly twice as much as I am willing to pay. Ultrabooks and even the Surface Pro -- the most thought-through Windows 8 device to date -- are no better. Newer, faster and more energy-efficient models that run on Intel's next-gen Haswell processor are just around the corner, so why should someone buy an expensive item today when a better, and perhaps less costly, alternative is only a few months away?

Windows 8 and Windows RT have struggled, in other words, due only partly to their UI awkwardness, mediocre apps and various rough edges. Cost has been the other culprit; there's a price beyond which customers simply aren't willing to deal with learning curves, impatience and other frustrations that might be more palatable with cheaper devices. For many consumers, the Windows 8 devices evidently cross that discouraging cost threshold, and the result has stuck Microsoft in a holding pattern of bad press.

Microsoft seemed to assume that Windows 8's dual identities would be an obvious game-changer, and that Windows RT's native Office app would trump the iPad. Had Redmond been correct, the story would be different. People deal with learning curves if the payoff is a premium experience. But it's become clear that most customers have decided Windows 8 asks too much while offering too little.

Asking less of the consumer would not only help Redmond stimulate adoption, but also help address its other lingering problem: apps. Where the user base goes, developers will follow. According to MetroStore Scanner, the Windows Store currently has around 57,000 Metro-style apps, and app submissions, which had been on a downward spiral since launch, but have risen steadily throughout March and April. The progress is nice -- but the libraries of iOS, Android and even BlackBerry 10 put Redmond's catalog to shame.

Microsoft allegedly spent $1.5 billion to promote Windows 8. It's an astronomical sum, enough to fund a typical Hollywood marketing blitz three or four times over. All that money was directed at the consumer market, which, as analysts have recently made clear, has the power to determine whether Microsoft remains a leader or regresses into a role player. Imagine if Microsoft had instead tilted its budgets such that an iPod Touch was more expensive than a Windows RT, and a MacBook Air more costly than a Surface Pro. Imagine if OEMs had been incentivized from the start to produce low-cost models, a process that has, according to unverified reports, only recently unfolded. How many millions of additional users might be in the Live Tiles ecosystem? How many more apps might there be?

But there's not much use at this point in criticizing Microsoft's earlier strategy. Hindsight is 20-20, and Redmond has probably reconsidered a number of previous decisions. The point in bringing up the company's earlier missteps is not to pour salt in the wound, but rather to prescribe appropriate remedies.

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Andrew Binstock
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Andrew Binstock,
User Rank: Author
4/10/2013 | 8:11:54 PM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
I know you're intentionally conflating nom de plume/nom de guerre and soupe du jour, but to get it right: nom de jour s/be nom du jour Only the latter means "today's name" The former means the "name of the day" such as the names of the days of the week. Here's the usage in context in French grammar: http://grammaire.reverso.net/4... Cheers!
Don108
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Don108,
User Rank: Apprentice
4/10/2013 | 8:38:39 PM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
So what you seem to be saying is that people will buy cr@p if you make it cheap enough. Maybe, but eventually people will realize that they're buying cr@p.
Michael Endler
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Michael Endler,
User Rank: Author
4/10/2013 | 9:27:47 PM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
During college, foreign language credits were the only ones that could be taken pass/ no pass--i.e. without a letter grade. Evidently my liberal attitude toward this policy has come back to haunt me.
Michael Endler
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Michael Endler,
User Rank: Author
4/10/2013 | 9:37:32 PM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
Sort of, but not exactly. If Microsoft and its OEMs drive down tablet costs by using cheap components, they won't get very far. The devices need to be inexpensive AND solidly constructed. So if "crap" refers to build, no, not at all what I meant.

If "crap" refers to Windows 8 itself, that's a different conversation. But even then, I think we define "crap" partly in terms of price and expectation. Windows 8 doesn't give a lot of users what they'd expect from an expensive device. But for a consumer-oriented cheap consumption device, it's decent enough. Not great, no-- which is why I suggested being cost-competitive with the iPad and other alternatives won't be enough. The new, small form factor Windows 8 tablets would need to be even cheaper. I wouldn't buy a Surface RT for $500 when I can get an iPad Mini for 65% the cost. But if I could get a Surface RT for 80% the cost of the cheapest iPad, I think I'd be pretty happy with the purchase.

That Windows 8 needs refinement is clear, and Microsoft is working on it. But it's not clear if Microsoft is making the correct refinements. It's also not clear how quickly these refinements might arrive. If Windows Blue doesn't deliver them, how many more update cycles will it take? So, If Windows 8 is going to gain market share before these enhancements hit (which is a necessity, since Microsoft could otherwise fall too far behind to catch up), it will take well-built, cheap devices that pitch Windows 8 or RT to consumption-loving consumers. Windows is about much more than this-- but Microsoft needs these consumers now. Windows 8's end game is in the ecosystem, and developers won't help create the ecosystem unless there are more users. These small tablets could help.
melgross
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melgross,
User Rank: Ninja
4/11/2013 | 2:05:26 AM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
Michael, you're presenting an absurd argument. If Microsoft needs to discount to that low price level, then they've lost before they start. Microsoft is trying to compete with a quality tablet, at least in hardware. As that tablet costs about as much to make as the iPad, pricing must be about what the iPad's is. If they sold it for $250, they would lose at least $100 on the sale of each tablet, and possibly $150. It could be even more!

So how would that help? Sell a million tablets and lost $100 to $150 million? Sell 10 million and lose $1 to 1.5 billion? Yeah, that would be brilliant thinking , right out of the box. And if they sold 100 million over a couple of years, as they would need to for success, though those numbers would still be well below iPad sales, they would lose a staggering $10 to 15 billion!

Is this a way to run a business? Sure, right into the ground. Like so many other so called business writers, you don't seem to have a clue on what running a business means.

They already lose so much money on most of their businesses that they can't afford to lose more on this. And what would this tell everyone? It would say that no one wanted this so they had to sell it at fire sale prices. That would be true even if they came out at those prices.

The same thing would be true for the Pro. Selling it at half the price might actually bring sales to an acceptable level, but at what cost?

Nothing can save a product that people don't want to buy.
hrlngrv
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hrlngrv,
User Rank: Apprentice
4/11/2013 | 2:25:45 AM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
I'm not convinced Office is a selling point for tablets. Small screens just aren't that pleasant to use for word processing and spreadsheets. Office on Windows Phones have made them a market leader. In a docking station, maybe, but that's even more additional cost.

Where's the price reduction going to come from? MSFT itself can eat the cost of the Windows license, but if OEMs would also need to sell their tablets at lower cost, the only place with significant give is Windows OEM license fees. I doubt MSFT is going to subsidize Windows tablets like they subsidized the Xbox, so how much less could they charge for Windows 8 or RT for tablets?

However, it's apps that are the weakest spot. I just can't believe enterprises are going to be big Windows 8 tablet buyers for the small screen issue mentioned above as well as wanting to avoid supporting a different tablet OS than the standard desktop OS (7 or XP, for now). That means Windows 8/RT tablets have to catch on with consumers, and cost is secondary to what they'd do with the tablet after they bought it.

Windows tablets need to run new UI apps, and there has to be enough apps to tickle the fancy of tens of millions of different people. What MSFT really needs to figure out ASAP is how to quadruple the number of apps by 4th quarter for the 2013 holiday season. One idea might be MSFT cutting its share of Windows Store revenues to 10% and capping their take at, say, US$25,000 for really popular apps. Yes, that may put a huge dent in Windows Store revenues, but what does any retailer do when sales have been in the tank? SALE!
Michael Endler
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Michael Endler,
User Rank: Author
4/11/2013 | 6:48:04 AM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
Thanks for the comment, melgross.

No, I don't think Microsoft or the OEMs would be happy losing $150 per tablet. But why does each tablet have to cost $350 or $400? The Surface RT might have cost that much, but the iPad Mini costs less than $200 in components and manufacturing.

I used the RT as a starting point because consumers found it too expensive for what it offered. But the main thrust of the column is that the forthcoming 7-inch tablets should be priced very aggressively. If Apple can engineer an iPad Mini for less than $200 per unit (per iSuppli), then I don't see why Microsoft and its OEMs couldn't target this price point without losing hundreds of millions of dollars in the process.

Microsoft and its partners probably won't dip as low as $200 but I $250-$299 could be possible without risking financial ruin. As noted, I think it would be a mistake for Microsoft to merely meet the iPad Mini's price point. But if attractive tablets can be priced noticeably below the Mini, I think people would give the WIndows devices a chance. Consumers won't expect the moon at that price, especially if Microsoft et al market them competently.

The end game for Microsoft and its partners isn't defined by the upcoming spate of devices; it's defined by the ecosystem that Microsoft is trying to build for the long term. This is why it makes sense for Microsoft and co to accept lower margins - and who knows, maybe even a few losses - on the upcoming hardware. If some short-term weakness injects a few million additional users into the ecosystem, that's a few million more people using SkyDrive, being tempted toward Office 365 and buying apps. It's also a few million additional reasons for developers to create more and better apps. Losing hundreds of millions of dollars would be bad in any context-- you're right. But I don't think my argument necessitates such losses. Small margins or minor losses are a different issue, particularly if they stimulate business elsewhere.

You mention that "nothing can save a product that people don't want to buy." That's true. But I'm not satisfied that people don't want Windows 8; they just don't want it on some of the current devices, or at the current prices. Expectations can shift if the messaging and price change. As I suggested in the article, a cheap but solid Windows 8 tablet doesn't sound half bad: nice media viewing and web browsing, light word processing tools, etc.

Plus, the platform will get better as more developers come onboard. If more users equates to more attention from developers, then cheap tablets, even with ugly margins, could give WIndows RT some polish relatively quickly-- much quicker, I think, than waiting for Microsoft to iron the UI out on its own.

Plus, Microsoft will still be selling more expensive, high-margin products. I'm not suggesting that ALL WIndows 8 devices need to be ultra-cheap. I said the Surface Pro is too expensive because its specs will be outdated by this summer. I'd have no problem with its Hasewll-equipped successor running $1000. But I wouldn't buy an expensive new tablet if I knew an improved version would be coming within the same year. But should Windows 8 come in a variety of flavors, from sub-$300 RT (and maybe Atom) tablets to $1000+ hybrids? I think so
johnitguru
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johnitguru,
User Rank: Apprentice
4/11/2013 | 8:55:20 AM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
But the one thing you failed to say about the Microsoft product is it is a horrible virus trap with a registry in it that will slow down the machine within weeks of operation. This is because it has an ancient DOS FAT file system. So if I were you I would buy a keyboard for your modern iOS Unix iPad and then just use google docs which is free instead of paying Microsoft for Office. Oops there is no MS Office for iPads yet. Go figure!

I disagree with you about Android when you say it lags, freezes up and crashes which leads me to believe that your paycheck has an address on it that says "Redmond Washington".

I own an Asus Transformer 10" tablet with Linux Android and it is the coolest tablet I have ever tried. Plus it has a quad processor in it and it only cost $369 I bought the keyboard for it, not much more money and I use Google docs. But the best part is no viruses as long as I stick with the Google Play authorized apps.

My money is on the Android Asus Transformer!

I wouldn't even consider an overpriced MicroKlunk junk virus trap tablet.

No one needs to put up with that now because we have so many better choices.

The Microsoft monopoly is crumbling fast!
Mike_Acker
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Mike_Acker,
User Rank: Apprentice
4/11/2013 | 4:18:20 PM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
unlikely at best. the entire "microkernel" experiment is a failure. It's Torvalds 1, Tannenbaum 0.
melgross
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melgross,
User Rank: Ninja
4/11/2013 | 5:33:14 PM
re: Windows 8 Tablets: Why Microsoft Must Slash Prices
This is a more complex issue than you assert. It's been estimated that Surface costs about as much as iPad to produce (for RT). The Pro model costs a good deal more to produce. How much can they reduce those prices by then? $50? Maybe. Any less than that and they are again walking into the dreaded area of losses, which must continue, as that becomes the expected pricing model.

We've seen that boondoggle with the XBox, where Microsoft has now lost over $9 billion over the years, with no end to those losses in sight, particularly with a new model coming out. If you need to subsidize a product to accumulate sales, then the product has failed. That's basic business 101.

The only reason why Microsoft can afford to lose so much money on most of its businesses is because of the dual monopolies of Windows and Office. But the good times of Windows is coming to an end, and Office is following.

So now we get the rumors that Microsoft will have a 7" tablet in order to cut prices. Not the same thing at all. A problem is that the 10.6" screen is already too small for anything other than the "Modern UI" portion of the OS. I used some of the "convertibles" Microsoft was pushing as tablets, and they were difficult to use because of the "small" 13-15" screens. The current models, with their even smaller screens are even harder to use. Can you really imagine using Office on an RT machine with a 7" screen? How about the Pro? Nuts!

And then we have the gorilla in the room, which consists of all the OEM's who must sell their own tablets. If Microsoft cuts pricing, they will be forced to cut to the same level, or more likely, even more so. We already see a number of OEM's who are reluctant to bring forth Win 8 tablets in any form, and the ones who have, are seeing very microscopic sales. These companies are already having the burden of paying Microsoft for the OS, and in the case of RT, which included a truncated version of Office, a rather lot of money, estimated at up to $80 per tablet. How can they cut prices?

I understand Microsoft's dilemma. But that dilemma is of their own making. Management at Microsoft is very poor. Ballmer is not a good CEO. He's failed to reign in the various fiefs, and for that, Microsoft is suffering.

It's very possible that Apple has it right, and Microsoft has it wrong. Perhaps the exact same OS should not be on a tablet and a "classic" computer.. Perhaps there should be a merging of major functions, but on separate OS's. Even so, RT offers nothing of real value other than a version of Office that doesn't belong on it. If sales are any indication, that's the case. How many people want to buy a tablet that really NEEDS to have a keyboard? Few, I would think.

With its advertising for these devices, as with their smartphones, Microsoft shows that it is out of touch with potential buyers. With their smartphones, Microsoft continues to push the myth that users don't want to use their devices, and that Win Phone is the best OS for doing just that, not using it. Microsoft doesn't realize that people love using their smartphones, so they are preaching something that people don't believe in.

The same thing is happening with Surface. Their advertising has kids jumping around, clicking the keyboards onto their tablets, but shows little else. All this does is to tell people that you need a keyboard with Microsoft's tablets, something that people don't want.

If there's a lesson to be learned by business, it's that you don't try to sell people something they don't want. Microsoft hasn't learned that lesson, so every one of their business other than those involving Windows and Office continues to lose major amounts of money, because Microsoft is like AT&T was, they don't know how to sell to anyone who isn't already a captive audience.

If that doesn't change, Microsoft will go the way of AT&T, and I don't mean the current AT&T, which was a merger between AT&T and Cingular, I mean the one that disappeared.
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