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Microsoft Corporation (MSFT): Surface for $199? How Could It Be?

Microsoft Corporation (NASDAQ:MSFT) has, as it normally is when it is about to launch new products, been very secretive about its retail price for the upcoming tablet called the Surface RT, which is due to come out in October. There has been all kinds of speculation about the price of this new tablet, running all the way up to $1,000 (which was quickly debunked). However, one site has recently quoted that the new tablet would sell for what would be an unbelievable $199.

Microsoft Corporation (NASDAQ:MSFT)

Could it be true? If so, how could Microsoft Corporation (NASDAQ:MSFT) possibly get away with it? Well, there are a couple of ideas. Peter Bright of Ars Technica runs through his argument about why Microsoft could do such a thing, but why it shouldn’t. Perhaps the No. 1 takeaway from Bright’s article is that selling a Surface RT tablet for such a low price to directly compete in the marketplace with past Windows partners like Acer and ASUS would severely cripple already-strained relationships with these hardware partners. As Microsoft Corporation (NASDAQ:MSFT) has not had a self-contained ecosystem before, the company likely will still need these partners for the foreseeable future to produce Windows computers until Microsoft can ramp up its own manufacturing to meet the demand for tens of millions of tablets in the coming years. And what would some of those partners do, if they can’t compete with a $199 tablet? They could switch their allegiance to the Android operating system by Google Inc. (NASDAQ:GOOG) – though Google is also trying its hand at a siloed ecosystem with its Nexus 7 tablet.

On the other side, Erik Sherman writes that Microsoft Corporation (NASDAQ:MSFT) has done this kind of thing before and it has paid off – and makes the argument why the company should do it and what it might mean. He equates such a price to the very low introductory price Microsoft offered for its Xbox game console, which was sold for $99 and Microsoft made up the loss (estimated by some to be more than $100 per unit) by selling monthly subscriptions to Xbox Live and other applications. And now the consoles are used to stream video and music, also for subscriptions. And Sherman states that much of the cell phone market is handled the same way – very cheap for the phone to consumers, and they lock into a two-year overpriced contract that would make up for the loss on the sale of the phone.

The debate is fascinating, which does leave one to consider whether Microsoft Corporation (NASDAQ:MSFT) would pursue the very low price in an attempt to grab market share as it did with the Xbox. The company is known for taking a short-term loss in exchange for a long-term gain – and Microsoft is a company that can certainly afford the short-term in exchange for its trademark user loyalty years down the road. And betting long is certainly a good strategy for hedge funds with positions in Microsoft, like Seth Klarman’s Baupost Group (see Seth’s full portfolio).

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