At $500 and up, Microsoft's Surface isn't a dirt-cheap tablet, but an estimate of build costs shows that it could have been.
The bill for the materials for the Surface with Windows RT, provided by IHS to All Things Digital, claims that the 32GB version of Microsoft's tablet, without the Touch Cover, costs $271 to build. The display, memory chips, and Nvidia's Tegra 3 processor are among the most expensive components.
IHS analyst Andrew Rassweiler estimates that the Touch Cover, which sells alone for $120, or $100 when bundled with a 32GB Surface, cost about $16 in parts. Between the tablet and the covers, Microsoft will easily make hundreds of dollars on every Surface with Windows RT sold.
All Things D's report doesn't provide a breakdown for all components, but IHS's estimates line up closely with an earlier build cost estimate by Sameer Singh at Tech-Thoughts. Singh, whose estimate came out before the Surface was available, guessed that the materials would add up to $298.82. The most expensive individual components would be the display ($66.95), touchscreen ($43.71) and 32GB of flash memory ($33.60), Singh guessed.
Profit over market share?
Assuming both estimates are in the ballpark, they show that Microsoft is interested in making a healthy profit on hardware sales, rather than racing to the bottom in an attempt to grab market share and build up the audience for modern-style Windows apps.
That wasn't always the assumption by some tech pundits—myself included. Before the Surface with Windows RT launched, rumors abound that Microsoft would sell the tablet for as low as $200, possibly by subsidizing it with subscriptions to Office 365 and/or Xbox Music. The unreliable DigiTimes reported that the price would fall between $300 and $400. Even Microsoft CEO Steve Ballmer hinted at a lower prices, saying that $300 to $800 was the “sweet spot” for the PC market.
Instead, Microsoft set a starting price on par with Apple's iPad (but with double the storage). Although the higher price may scare off some potential buyers, it avoids angering other PC makers by undercutting them, and stays out of the budget tablet market, which can be difficult to escape.
The $499 starting price also sends a message that the Surface is a premium tablet, worth at least as much money as an iPad. And for Microsoft, each one is just as profitable.