Surface Price Cut: Temporary Ploy or the New Normal?

Surface Price Cut: Temporary Ploy or the New Normal?

Either way, Microsoft appears desperate

Microsoft on Sunday lowered the pricing of its poorly selling Surface RT tablets by $150 per model, a move that has triggered renewed questions about the viability of the product line. But is the new pricing just a temporary ploy to clear out remaining inventory and set up the launch of the next-generation version? Or has Microsoft finally succumbed to the realities of the marketplace and priced Surface RT at a more sustainable price point?

Surface RT presents a dilemma for both Microsoft and its users. Based on the ARM chipset and running the Windows RT version of Windows 8, the device offers stellar battery life in a thin and light package. But it is completely incompatible with the millions of Windows desktop applications that users of “real” PCs can download or buy, and it doesn’t work efficiently—or in many cases, at all—with much of the existing hardware peripherals on the market. That’s because Surface RT (like Windows RT) is focused on the future: a new mobile app model once called Metro that, if successful, will eventually push out the old desktop environment and position Windows to better take on mainstream iPad and Android devices.

That story has yet to be written, however. In today’s world, 1.3 billion users really use desktop software and all of those hardware peripherals that are incompatible with Surface RT (and Windows RT generally). And because Windows RT is a new platform, it still doesn’t have anything close to the supporting ecosystem—apps and games, primarily, but also other content like ebooks and audio books, music, TV shows and movies, educational materials, podcasts, and more—that users of iPads and Android tablets enjoy regularly.

Since Surface RT launched into this world with meaningful disadvantages, one might have assumed that Microsoft would price the device accordingly, giving potential customers an incentive to become early adopters. But that’s not what happened.

When Microsoft launched Surface RT in October 2012, it did so backed by a premium pricing model that mimicked that of Apple’s iPad. Surface RT started at $499 for a model with 32GB of storage and no keyboard and went up from there. At the top end, you could purchase a 64GB version of the device with a Type Keyboard for $699. Worse, Surface RT was only made available in the United States and Canada initially, frustrating potential customers in other markets.

Apple sold a record 22.9 million iPads in the quarter in which Surface RT launched. In March 2013, it emerged that Microsoft might have sold just 400,000 Surface RT tablets over its first four months in the market.

Queue panic mode in Redmond.

Microsoft responded throughout early 2013 with a series of moves, first bringing Surface RT to more markets. It offered temporary promotions for a free Type Cover or Touch Cover to Surface RT buyers here and abroad. And then it began selling the devices at Crazy Eddie prices—$99 for a Surface RT with Touch Cover—at Microsoft trade shows around the world. Charges of inventory dumping were, of course, only natural.

Amazingly, Microsoft has huge plans for Surface—the entire lineup, meaning Surface RT, Surface Pro and an as-yet-unannounced Surface Mini that will ship in late 2013—going forward. As I first revealed in March, Microsoft plans to ship 25 million Surfaces in fiscal year 2014, which runs from this month through June 2014. And as part of its recent reorg, former Windows chief Julie Larson Green has been given control of Microsoft’s new hardware engineering group, which includes Surface.

This week’s price cuts come ahead of some new product releases, of course. In addition to that 8" Surface Mini, the firm will update both its Surface RT and Surface Pro devices, the former to utilize a more powerful Tegra 4 chipset, in time for the holiday season. But the question is whether the price cuts are temporary or permanent. They had better be permanent.

Under the new pricing scheme, Surface RT is “a great tablet, now at an even better price.” Indeed, each model is a full $150 cheaper than it was last week. The 32GB model (without a Type or Touch Cover) is just $349, down from $499, and the 64GB version (again without a cover) is $449. (This version wasn’t offered at launch, but when it did hit the market, it sold for $599.) A 32GB Surface RT with Touch Cover can be had for $449, down from $599. And a 64GB version with Type Cover is $549, down from $699.

These prices would have made the Surface RT far more palatable at launch and would have presented a compelling argument for early adopters worried about the system’s ecosystem disadvantages. Today, however, Surface RT is on the cusp of being replaced by an improved version of the product. And even if that Surface RT 2 does fix the performance issues with today’s system, it will not overcome the platform’s compatibility problems, nor has the passage of time done much, so far, to alleviate the ecosystem deficiencies. As I argue in "Surface RT at $350: Time to Buy?," Surface RT still isn’t a viable option for most users. It was obsolete the moment it arrived.

And that’s a tough spot to be in if you’re supposedly selling the future. If Microsoft is serious about Surface RT (and Windows RT more generally), $350 is a far more realistic starting price for such devices than was $499. But it might still not be low enough for such a hobbled product.

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