Revisiting the Mullet: Why Surface is not a MS Business

A few weeks ago a bunch of people (who should know better) were running around like chickens with their heads cut off yelping “Surface will be $199!”

Exasperated, I wrote a post1 describing just how idiotic a concept that would be. I showed that even if Microsoft was serious about Surface being a real business, it could never sell it for $199 this fall. I promised to wear a Kasey Keller like mullet to Build if I was wrong.

In that post, I asserted that

I think it is far more likely that Microsoft will sell the Surface for $599. They’ll sell every one they make at that price and earn a respectable 20% margin (maybe 3 million in 12 months; maybe). And in so doing, will support the broader ecosystem that is required to keep the existing Windows business profitable by shipping 350 million PCs next year.

It turns out the Surface with a cover is $599. Without, it’s $499. I had done my back-of-the-envelope math assuming it did not include a cover. Thus I was very, very wrong when I said Microsoft will “earn a respectable 20% margin”.

The $499 price means Microsoft will not make any real margin2 on the Surface.

They may make some profits on the cover, assuming the cover isn’t ridiculously expensive to make (it might be). But even then there is no way the amount Microsoft will make will come close to the $85 they are reportedly charging OEMs for Windows RT licenses.

Worse, every Surface that sells is one less non-Surface Windows RT unit that sells meaning Microsoft not only doesn’t get the $85 from the Surface sale (they’ve priced it so close to wholesale there’s no margin in it) they won’t get $85 from the OEM.

Surface is a North star product for the Windows business. It is not a “Microsoft business” (Microsoft businesses generate $5B+ a year in PROFIT). The Windows business makes $11.4B in PROFIT every year. This profit margin is under pressure from the price of a Windows license being forced down. Surface makes this worse and provides no path to recouping that profit via other means.

I don’t know how MS plans on generating more profit with Windows. But I’m really sure it is NOT Surface.

 

1A $199 Surface? I Will Wear a Mullet

2Retail Pricing, Markup, and Margins

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