Why Microsoft’s $85 Tablet Software May be Dumb, but not Fatal

Posted on June 16, 2012

Source: businessinsider.com

Oh the outrage engendered this week by Microsoft’s rumoured $85 per tablet software tax. Many people consider it to be really, really stupid. Just look at Microsoft. They are no-where in the tablet market. Not even number four. Today they have no offering at all.

What should Microsoft be doing? Shooting for marketshare. This game is about building an ecosystem, and for that you need a large installed base. What price should Windows 8 be? $5. Five bucks. That’s it. Android is “free”, so Microsoft can charge almost nothing without having competition issues. It’s also a signal that Microsoft will charge for their OS, but in the future, when it’s successful. Microsoft and their partners will share the fruits of success.

But, it appears Microsoft has taken the short term profit gouging route. This may not be fatal. I am sure that there are a lot of CIOs who will sanction Microsoft products whatever the price. They can argue that with Windows, there are cost savings well above the $85 over three years – hey an IT professional easily costs over $50 an hour. CIOs that are willing to look at other platforms, such as the iPad, will probably already be swaying in that direction.

Hence Windows-oriented CIOs may not be that price sensitive on hardware, especially if they get good discounts anyway from the likes of Dell looking to sell 10K computers over three years.

Yet, what this does signify is that Microsoft is abandoning consumers, who are very price sensitive. Consumers who buy Windows machines generally do so because they are cheaper, so why would they buy a tablet that is more expensive than an iPad? Most consumers won’t buy the argument that there are OS synergies between their cheap laptop and their tablet. Also, more and more consumers will be moving to a tablet only scenario (think of Steve Jobs’ Mack Truck analogy), so in the long-run, Microsoft will be abandoning them.

The tablet market is very different from the PC market. In terms of cost advantage, Apple has that locked down – no other company can source components as cheaply as Apple. In the laptop world, Microsoft makes money at the expense of manufacturers (OEMs) who buy cheap components and that offsets the consumer price. In the tablet world, this is just not possible. Look at all the Android tablets that are more expensive than the iPad.

In the end, Microsoft may have a successful tablet business, but it will be increasingly niche and will make Windows increasingly niche as Apple powers ahead.