Microsoft (NAS: MSFT) will apparently be sitting pretty if its new tablet is a hit. The crafty deconstructionists at IHS iSuppli took apart the Microsoft Surface to value each of its components, and the results are surprising. Just $284 in components and manufacturing costs go into making the $599 tablet with its attachable keyboard cover.

By IHS iSuppli's math, that makes the Surface more profitable -- with a 53% profit margin -- than Apple's (NAS: AAPL) industry-leading iPad.

"It's about time," Microsoft fans may rejoice. They've seen the company reportedly sell its Xbox consoles at a loss. They've seen desperate tablet makers sacrifice margins to get below the critical $200 price point on smaller 7-inch gadgets to gain market share. Why can't Microsoft -- which until just two years ago was worth more than the iEverything company -- feast on Apple-esque tablet margins?


Well, before we get into the dim chances of the success of that strategy, let's start with a more problematic development: Surface buyers may be getting what Microsoft is underpaying for.

Get ' em while they're not hot
We don't know how many Surface tablets have been sold, but the number probably isn't impressive. Microsoft is selling them only through its dedicated website and the dozens of permanent and pop-up Microsoft Store mall locations.

Since there are fewer than 70 places in the country where somebody can physically try the tablet before buying one -- and nearly half of those places are temporary holiday kiosks -- it would seem as if Microsoft's online store is getting slammed with orders.

Yet when the Surface hit the market two weeks ago, Microsoft's store showed a three-week delay on new orders, and now, just two weeks later, there's no indicated shipping delay.

Was Microsoft simply trying to orchestrate an illusion of scarcity?

"It controls the supply," I wrote at the time. "It can blur the demand."

Frayed and stuttering
It also doesn't help that Surface reviews have been generally mixed. The knocks are now growing beyond the first wave lamenting the learning curve of Windows RT or the tablet's uninspiring response times.

The Verge is reporting on "widespread reports" relating to audio stuttering and random muting on the tablet. These could very well be issues that can be corrected through an operating system update, but then we get to the build-quality issues on the actual covers.

The Guardian reports that some owners' magnetic covers are splitting after just a few days of use. The Verge also has a screen cover whose cover itself has frayed to the point where the wiring is exposed.

Microsoft is offering replacement covers, but why should those be any better? Furthermore, IHS iSuppli is reporting that these touch covers cost between $16 and $18 for Microsoft to make. So why is it charging as much as $120 for them?

Adding insult to injury, the original Surface television commercial played up the magnetically attaching touch covers. Everyone was clicking covers to tablets. It certainly seemed to portray these covers as sturdy. Come on now, Microsoft. Tell us how many touch covers were harmed in the filming of that commercial?

More than just the mistakes
We live in the golden Internet age, and an IHS iSuppli report can do more harm than good, especially since there were already plenty of good reasons to wait on a Surface purchase.

  • Let the early adopters suffer through the bugs.
  • The few examples of tablets selling at similar price points that weren't running iOS or Android -- Research In Motion's (NAS: RIMM) PlayBook and Hewlett-Packard's (NYS: HPQ) TouchPad -- quickly slashed their aggressive pricing within weeks of release.
  • The more PC-centric Surface -- the one running Windows 8 Pro -- hits the market in two months.
  • Why risk buying an orphan? Microsoft was surprisingly quick to pull the trigger on the Kin smartphone two years ago.
  • Given the weak app support, there's no harm in waiting until developers embrace a platform before following suit.

However, now that folks know they're paying twice as much for these devices as they probably should be, will that nip this revolution before it had a chance to get started? Consumers don't have a problem getting gouged by Apple because they know that lower prices or discontinuations aren't coming.

Apple isn't perfect, of course. Antennagate, anyone? However, the Surface is coming up short beyond the initial sticker shock.

It's one thing for Microsoft to misprice the Surface because it doesn't want to upset future Windows 8 RT hardware licensees. It's another thing entirely to put out a product that isn't worth its ransom.

Scratching the Surface
It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

The article Greed Will Be the End of Microsoft's Surface originally appeared on Fool.com.

Longtime Fool contributor Rick Aristotle Munarriz has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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9 Comments

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Uncle Serene

The observation of a computer scientist, MBA, and informed consumer:

The writer's motive seemed crooked, and fishy.
The article is a manipulation of perceptions.
It is like a paid, sponsored piece of ...
There are propaganda wars and smear campaigns crafted to deprive consumers of competing emerging promising fine major products.
Brutal, ruthless, deceptive, unethical, unscrupulous, and repulsive.
Discover and think for yourselves, if your brains are still in good working condition.
Let us ditch the dissimulator ; )

November 12 2012 at 3:08 AM Report abuse rate up rate down Reply
M3T340N

SMH
Really? Please tell me you have an article about this in regards to Apple as well.
No?
Here, do some research.
http://www.latimes.com/business/technology/la-fi-tn-apple-ipad-mini-cost-188-20121105,0,7215639.story

With the bigger models and the carrier models... have a bigger gap in build to price.

So stop trying to bury products that are not Apple, and start reporting fair journalism.

November 11 2012 at 2:12 PM Report abuse +1 rate up rate down Reply
Mack Knife

You really aren't very smart. Microsoft doesn't want to make tablets, phones or anything else but software. It makes Surface tablets to set a standard of sorts and to introduce Surface to the public..

Maybe if tech writers had some experience beyond being mere nerds and instead had some business experience they'd understand how business drand marketing works and then have some relevant comments other than what reads only like some teeny bopper mall hopping.

November 11 2012 at 12:01 PM Report abuse +1 rate up rate down Reply
Jerome

Microsoft has to work on the attitude of their sales-persons in the malls. I went into their store in San Diego and met three salespeople at the door. When I told them I was there to see the new Surface, they giggled, I suppose because there weren't very many people in the store, then lazily motioned to me to what I took as, "Take your pick at any of the empty tables". No excitement, no enthusiasm, no help! Microsoft, retrain all your people. There's one of your weak links.

November 11 2012 at 11:15 AM Report abuse rate up rate down Reply
fabijosy

I dont know how the surface will fare but it is very entertaining to see the apple disciples squrm when discussing microsoft anything.

November 11 2012 at 7:28 AM Report abuse +1 rate up rate down Reply
Khurram

"Given the weak app support, there's no harm in waiting until developers embrace a platform before following suit."

I would like to add at this point that microsoft is charging ridiculous amounts to developers who are trying to get into the development scene for windows 8.. I kinda makes it hard for most individual developers to be able to produce applications for the app store. Considering this point, Windows 8 apps will never be able to achieve the diversity, say android apps have.

November 11 2012 at 4:43 AM Report abuse rate up rate down Reply
1 reply to Khurram's comment
Kunal Nanda

Explain "ridiculous amounts". I have registered for a Windows Phone 8 developer account for $100 and will be getting a refund back of $92. That is only $8 for a Windows Phone 8 developer account. The Windows 8 individual developer account was free. Add to that Visual Studio Express 12 is free and is more than enough to get you started developing apps for both Windows Phone 8 and Windows 8.

So stop pilfering stupidity.

November 11 2012 at 6:16 PM Report abuse rate up rate down Reply
LADUE

The fatal flaw in the logic behind this article is the author assume Microsoft is like its OEM partners that have years of PC development experience and production facilities behind them. Making keyboard, mouse and XBox is one thing, building slim tablet from scratch is another. It is short sighted to rely only on the cost of components to draw conclusion on the profitability of any product without looking at the costs required to bring such product to market.

November 10 2012 at 8:09 PM Report abuse rate up rate down Reply
1 reply to LADUE's comment
ThisIs

That is very correct and astute. When you review your bill after having your car repaired, what percentage of that bill is the parts costs? There's this thing called "labor". And with a brand new product, there's this thing called "design". Proposing that it's shocking and greedy if Microsoft charges more than the cost of the parts is just silly - although typical for nerd-blogging.

November 11 2012 at 5:26 PM Report abuse +1 rate up rate down Reply