The $199 Surface for Windows RT tablet--why the rumors might need to be true

There are legions of reports, starting with Engadget, that Microsoft may price its entry-level Surface for Windows RT tablet at $199. The reports tend to fall into three categories:

1. Microsoft would never do that to its licensees, 
2. It would be awful for its licensees if Microsoft did it, and
3. Microsoft can afford to do it.

In a sense, all three are true: Under normal circumstances, the last thing that Microsoft would want to do is to compete with its hardware licensees. If Microsoft did it, its (four, count 'em, four) Windows RT licensees would undoubtedly be hurt--there's no way that Asus, Dell, Lenovo and Samsung could, or would, match that price. And yes, Microsoft can afford it--and it has a history of deficit-spending its way into markets. It's estimated that the company lost several billion dollars on its Xbox game console business before it became profitable, and the company recently took a $6 billion write-off on its acquisition of online advertising company aQuantive. The company has also lost billions of dollars on its online business, although it's still nowhere near profitability after years of investments.

I fall into a fourth camp: Microsoft has to do it, for the same reason that the company rushed out its Surface tablets with a last-minute, under-rehearsed announcement that didn't include any price or availability details. My premise is that developers simply aren't showing much interest in creating apps for the tablet user interface formerly called Metro. Microsoft knows better than anyone else whether developers are showing interest in Metro--they know how many developers are using Visual Studio to create apps, and at least roughly, how many apps are under development.

Microsoft also knows that the biggest strength of the iOS platform is its enormous collection of apps, and that Android struggled as a tablet platform because of a lack of apps. Without a strong assortment of apps, and with no price advantage over the iPad and Android, Windows RT will be "dead on arrival." Microsoft has probably already resigned itself to having a big "app gap" when Windows RT ships, so it has to come up with another motivation to get consumers to buy Windows RT tablets, and thus build an attractive market for app developers. That motivation is price.

Microsoft's big lesson may be HP's experience with the webOS TouchPad. At $399, TouchPads gathered dust at Best Buy stores around the U.S. However, when HP dropped the price to $99, hundreds of thousands of the tablets flew off the shelves, even though they were discontinued and HP's commitment to further webOS development was in serious doubt. Demand was so great that HP built more of the tablets, and those that are still available sell at prices close to the original retail price.

Microsoft has to get a lot of Windows RT tablets into consumers' hands in order to encourage developers to write for the platform. If the company believed that the tablets under development by its licensees wouldn't be popular enough to make much of a difference, it had to act--first with the Surface pre-announcement, and now, with a $199 price that will be too good for a lot of people to pass up.

I go back to my point above--Microsoft isn't afraid of taking big losses in order to buy its way into a market. It's also not afraid to lose money on hardware--estimates of Microsoft's costs for replacing Xbox 360 game consoles with the "Red Ring of Death" problem range as high as $2.5 billion. So, while selling the Surface for Windows RT below cost would certainly be an act of desperation, it's already in Microsoft's play book.

Microsoft surfaces Surface tablets, but why now?

Yesterday, Microsoft announced two new tablets in Los Angeles: The Surface for Windows RT, which uses an Nvidia Tegra ARM-based processor and runs Windows RT, and the Surface for Windows 8 Pro, which uses an Intel Ivy Bridge Core i5 processor. Everyone's been focusing on the "what" of the new tablets, but I want to focus on the "why." Microsoft's event yesterday seemed to be thrown together at the last minute--the company only gave a few days of lead time to the press, the site it chose for the announcement was a little "no-name" studio in Los Angeles, and the press that covered the event couldn't even get in until more than a half-hour after the scheduled start time.

Once they got in, Microsoft showed them two tablets, both largely clones of the iPad with a bit bigger screen (but even the more sophisticated Intel-based model's display's resolution is far below that of Apple's Retina Display.) The most innovative features were the thin covers with integrated keyboards and trackpads. More importantly, Microsoft announced neither prices nor availability dates for the two tablets. All we know is that the Windows RT version will ship around the same time as Windows 8, and that the Windows 8 Pro version will ship three months later.

Why throw together a last-minute announcement of tablets that Microsoft has obviously put a lot of work into, and not even bother announcing prices and availability? Here's my totally uninformed speculation: Last night's event was a "Hail Mary" pass aimed not at tablet buyers but at app developers. Microsoft knows that it has to have a solid library of apps if it wants to have any chance of competing with Apple. Interest in the Windows RT platform by both tablet builders and app developers has been lukewarm at best: Very few Windows RT tablets were shown publicly before last night, and developers aren't going to write apps for tablets that don't exist. In addition, Microsoft knows, through take-up of its development tools, how many developers are working on Windows RT apps, and the number has probably been very disappointing. The company saw what happened to HP's TouchPad and RIM's PlayBook, and it didn't want the same thing to happen to its tablet business.

Microsoft needed to show app developers that Windows RT is a viable platform, and the best way to do that was to show it running on an attractive tablet. That's what Microsoft did last night. In addition, Microsoft's plan to release the Windows RT tablet at the same time as Windows 8, while delaying the Windows 8 Pro version of the tablet for three months, tells developers Microsoft's priorities: Write tablet apps for Windows RT first, because we can always run existing Windows PC software on Windows 8.

In short, Microsoft is very worried that it's not going to have enough Windows RT apps to compete with Apple. That's why it announced its Surface tablets well before it wanted to, in order to encourage app developers to get on board.