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Microsoft Surface RT teardown reveals huge profit margin
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MacNN Staff
Join Date: Jul 2012
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Nov 6, 2012, 01:05 AM
 
A new teardown shows that Microsoft is generating huge profit margins out of each Surface RT tablet that it sells. According to IHS iSuppli, the bill of materials (BOM) for the Surface RT tablet 32GB is $248 plus $18 for the TouchCover, which Microsoft is selling for $599. By comparison, an earlier teardown of the third-generation iPad revealed that it costs Apple $316 to make, which it then sells for $499 indicating that Microsoft is making a substantially higher gross profit for each tablet it sells.

"The Surface represents a key element in Microsoft's strategy to transform itself from a software maker into a devices and services provider," said Andrew Rassweiler, senior principal analyst for IHS. "Key to this strategy is offering hardware products that generate high profits on their own...[The Surface RT tablet] is more profitable, on a percentage basis, than even the lucrative iPad based on current retail pricing." The most expensive component in the Surface RT tablet is the display, accounting for $101 of its $248 BOM. Nvidia's 1.5GHz quad-core Tegra 3 processor costs $21.50 per chip, while the system RAM, DRAM and NAND flash memory amount to $34. Samsung supplies the NAND flash memory as well as the battery, which it sells to Microsoft for $20. The entry-level version of the Surface RT tablet, which is retailing for $499 is currently shown as out of stock in all of Microsoft's online stores.
     
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Nov 6, 2012, 02:05 AM
 
So it's a hunk of hardware and software junk. That's a surprise.
     
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Nov 6, 2012, 04:28 AM
 
I'm tired of these teardowns from iSupply.

Google is selling its tablet at no profit and Amazon is selling theirs at a loss. Yet, according to this teardown, they must be making a good money because the Surface tablet, which has gotten great praise for build quality if nothing else, is cheaper to make than the price of yhe the Kindle or the Nexus. image how cheap those two plasticky, thrown together tablets must be to make!

iSupply talk of amazing profits includes no cost of design or execution. They greatly underestimate the cost of custom components, and don't include the cost of firmware or software. If the Surface was really that cheap to manufacture, Microsoft would be selling them for $199 in order to gain the market share they need in order to break into the Andriod/iOS duopoly.

Microsoft is pricing this tablet at just under $500 because that is near the break even point to help recover their costs. The Surface's purpose is to show Microsoft is still in the game and isn't quickly sliding to irrelevancy. They still have plenty of money in the bank and Windows and Office still generate billions in revenue. Microsoft doesn't need the Surface to be a cash cow.
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Nov 6, 2012, 04:42 AM
 
Originally Posted by qazwart View Post
They still have plenty of money in the bank and Windows and Office still generate billions in revenue. Microsoft doesn't need the Surface to be a cash cow.
I agree with the general gist of your post, but this last bit is probably not as accurate as it used to be.

In the light of cheap/free system upgrades from Apple and others, Microsoft has been forced to drastically reduce pricing on Windows 8, meaning that it won't generate nearly as much revenue as previous iterations.

Office is still strong, but I think it's safe to say that the days of software being huge money-makers are numbered for most market segments.
     
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Nov 6, 2012, 04:49 AM
 
The surface is being sold at this price because Microsoft knows there will be a lot of them left on the shelf and in storage so they have to make as much as they can on the ones they do sell. They also have to pay for the ridiculous amount of advertising, which is never included in anyone's assessment of the material cost.
     
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Nov 6, 2012, 08:07 AM
 
Agree w/ Spheric...Windows and Office are 2 very mature products so that w/ each new version, there is less of an immediate migration by users. This is most evident in Microsoft's decision to sell Win8 upgrades at $40 instead of the usual $130-$200 (which is ironic when you consider that Win8 is a more robust & radical update than Win7 which was merely a bug fix for Vista).

No, I'd say Microsoft wants to see people buy Office because they have a Surface rather than to have people buy a Surface because it runs Office...the former meaning people have bought into the concept of Surface rather than just a feature of it.
     
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Nov 6, 2012, 08:16 AM
 
Originally Posted by pairof9s View Post
No, I'd say Microsoft wants to see people buy Office because they have a Surface rather than to have people buy a Surface because it runs Office...the former meaning people have bought into the concept of Surface rather than just a feature of it.
And yet, they were desperate enough to have the Surface RT run Office that they added a Windows Desktop layer just to enable Office to run.

Why they weren't able, in over two years since the iPad was released, to build a real touch-based version of Office is beyond me, though. I presume that they didn't take the idea of radically new platform seriously enough to fully invest their engineering clout into making it happen, and it's now biting them in the keester.
     
   
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