Best-guess $349 price for smaller Surface RT pits Microsoft against Apple for high-end Mini market

Cost-of-goods, gross margin estimates by analyst with good track record points to big price for small tablet from Redmond

Microsoft will probably price its own 8-in. Surface tablet running Windows RT at $349, just 6% higher than Apple's iPad Mini but nowhere near the basement $199 of Android rivals, an analyst said earlier this week.

Sameer Singh, an analyst who covers tablets and smartphones at his Tech-Thoughts website, pegged the price of an expected Windows RT-powered Surface RT "Mini" using a bill of materials (BOM) estimate largely based on industry-wide commodity component costs.

Using the same techniques last year -- akin to the "virtual" tear-downs that other research firms have conducted before a rumored product is actually released -- Singh accurately predicted the eventual retail prices of Microsoft's Surface RT and Surface Pro tablets.

His sight-unseen BOM for an 8-in., 16GB Surface RT tablet totaled $203.40, which included a $13 charge for manufacturing.

With that BOM in hand, Singh posited several possible retail prices, showing the margins for each. The margins he spelled out were "gross margins," in that they show the difference between the selling price and the cost of goods, the latter essentially the same as the BOM. Gross margins do not account for other costs, such as research and development (R&D), marketing and sales.

Singh's conclusion: The most likely price of a Surface RT Mini -- the label pundits have slapped on an 8-in. tablet running Windows RT -- will be $349.

That price would generate a gross margin of 42% if the BOM was accurate, or 33% and 50% if the bill of materials was 15% too low or too high, respectively.

"Microsoft sold the original Surface RT at a gross margin of roughly 47%," said Singh on his Monday blog. "A similar gross margin for the Surface [RT] Mini would imply a price of $399, the high-end of the potential price range. Since smaller tablets usually carry lower margins compared to 10-in. devices, $349 may be the most likely price."

Microsoft has not announced a smaller Surface RT tablet, but in April said it would add smaller devices to its Surface line, as would its OEM (original equipment manufacturer) partners. Last week, Acer introduced the Iconia W3, at 8.1-in. the first sub-10-in. tablet powered by Windows 8. The Iconia W3 lists for $379 for a 32GB version and $429 for a 64GB device.

As he did last year when he ball-parked the Surface RT and Surface Pro costs, Singh said that Microsoft could go with a lower price for a Surface RT Mini, taking a smaller margin. But he thought that unlikely. To keep OEMs happy, Microsoft must price its tablets so there's enough room for OEMs to at least match them and still make a profit.

"Microsoft is under pressure to ensure that the pricing is in line with Windows RT [devices] from OEMs, which face the disadvantage of having to pay for the OS license as well," Singh said. "With OEM interest in Windows RT already very low, Microsoft cannot afford to undercut their last few partners, like Dell."

Singh was right: Most of Microsoft's long-time OEM partners have ignored or publicly distanced themselves from Windows RT, the limited spin-off of Windows 8 that runs only apps designed for the "Modern," ne "Metro" UI. Dell has been one of the few that has continued to back Windows RT.

"Even if Microsoft brings down the Windows RT license cost to $20, OEMs would need to price the device well over $300 to make a gross margin of just 30%," Singh pointed out, relying on reports that Microsoft has slashed Windows RT and Windows 8 license prices to OEMs building 8-in. tablets. "I would consider [$300] the absolute floor of the potential price range for the product."

Singh's price-forecasting track record has been solid. Last October, he said that the Surface RT tablet's BOM meant Microsoft would charge between $399 and $499 for a 32GB model, with $499 more likely because it would generate a gross margin of 38%.

Microsoft ended up pricing its entry-level Surface RT at $499.

He also pegged the Surface Pro's price at the range of $799 to $899; the higher price would produce a gross margin of 30%. In January, Microsoft introduced the 64GB Surface Pro at $899.

This article, Best-guess $349 price for smaller Surface RT pits Microsoft against Apple for high-end Mini market, was originally published at Computerworld.com.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

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