Microsoft's (NASDAQ:MSFT) earnings last week were a big disappointment for Wall Street. Most notably was a big write-off of 900 million dollars for the Microsoft Surface for Windows RT Tablet. This comes as no surprise as not only was Microsoft a late mover in the tablet industry, but it also gravely overpriced the Surface compared to the Apple (NASDAQ:AAPL) iPad and Google (NASDAQ:GOOG) Android tablets already on the market. This strategic mistake could explain the lower-than-expected sales of the Surface tablets in the fourth quarter; Microsoft only shipped about 900,000 of them compared to around 22 million Apple iPads sold in the same quarter. With Microsoft's recent 30% price drop on the Surface for Windows RT to $349, is Microsoft's tablet problem fixed?
The Windows Surface tablets, which I praised in a previous article, had the potential to compete in the tablet market against Apple's iPad, with its unique work/enterprise usability due to its built-in keyboard and Microsoft Office support. However, Microsoft's initial price point on both tablets, with the RT version starting at $499 and the Windows 8 Pro Version starting at $899 are uncompetitive price points for targeting the mass market. In fact, tablet prices have been moving in the opposite direction, with the Apple's iPad Mini starting at $329 and Google's Nexus 7 at $249. To make matters worse, Microsoft did not include the touch/type cover in the base price of either tablet, a fundamental aspect of the Surface tablet's competitive advantage over other tablets on the market. The free version of Microsoft Office included with the Surface for Windows RT isn't included in the Pro version either. So when all is said and done, a fully equipped Surface Pro can go for over $1,100.
Surface for Windows RT
Surface for Windows 8 Pro
NVIDIA Tegra-based ARM
Intel Core i5 (Ivy Bridge)
10.6-inch ClearType HD (1366 x 768)
10.6-inch ClearType Full HD (1920x1080)
9.7-inch Retina Display (2048×1536)
Windows RT and Office Home & Student 2013 RT
Windows 8 Pro
2×2 MIMO Wi-Fi
2×2 MIMO Wi-Fi
4G LTE, Wi-Fi, Bluetooth
32GB or 64GB
64GB or 128GB
16, 32, or 64GB
Touch Cover, Type Cover, VaporMg Case & Stand
Touch Cover, Type Cover, VaporMg Case & Stand, Pen with Palm Block
microSD, USB 2.0, Micro HD Video
microSDXC, USB 3.0, Mini DisplayPort
At these price points, Microsoft is pricing itself out of the tablet market. Only die-hard Microsoft enthusiasts would be willing to purchase the Surface Pro at around double the price of tablets already on the market. The majority of customers looking in that price range would rather purchase a more fully equipped Ultrabook or Macbook. Therefore, instead of gaining ground in the tablet market, Microsoft may end up cannibalizing its own laptop market by taking away market share from its OEM laptop manufacturers that support Windows 8 OS.
Microsoft's Surface for Windows RT/Pro tablets had the potential to be a game changer in the tablet arena with its superior work/enterprise usability. However, Microsoft made a big strategic error by overpricing the tablets, especially the Surface Pro. With Microsoft's recent price drop of the Surface for Windows RT Tablet to $349, I do believe that Microsoft will be able to gain a few more customers. Nevertheless, I think it may be too little, too late as a simple price drop won't be enough to spark the interest of the mass market this late in the game. As of right now, I would stay away from Microsoft's stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.