TrendForce: Surface to Enter the Tablet PC Market, Pricing Strategy Challenging, Ultrabook Cannibalization Likely

When the PC industry is putting efforts into developing Win 8 tablets, Microsoft chose to take the lead by releasing its branded Surface tablet PC, showing a purpose in supporting its new OS (operating system) and further increasing prominence of Windows 8 tablet PCs. WitsView, a research division of TrendForce, indicates that the introduction of Surface has made a stir to the tablet PC market and is projected to dominate the market outlook with its veiled pricing.

WitsView’s research director, Eric Chiou, notes that Surface adopts a 10.6” HD (1366 x 768) and Full HD (1920 x 1080) panel, while the built-in storage capacity of its entry-level model is directly upgraded from mainstream 16GB to 32GB, posting a higher specification in both size and hardware compared to a mainstream 10.1” Android tablet PC, making the reasonable pricing of Surface to start at $599 at least in response to the higher cost. Inevitably, the higher price may not only hold back some interested buyers, but also overlap with the price of ultrabook, Microsoft and Intel’s hit of this year. Surface is designed to mirror notebook functions, stressing the convenience of an ultra-thin keyboard; thus, once its price is set, Surface is expected to inevitably cannibalize ultrabook sales. Microsoft may not be pleased to see a competition between its own products. 

On the other hand, low-pricing strategy could be also practical. Eric Chiou points out that Microsoft’s significant capital is indisputable; in the past, Microsoft decreased product prices through subsidy programs and successfully secured the dominance of Xbox360 in the home entertainment market in a short time. By duplicating the marketing strategy and applying it on Surface, a pricing drop to $499, close to mainstream tablet PC price such as iPad and Android is possible. Along with the prominent specification and modest price, Surface is expected to trigger consumer spending, shortening the time to popularize Windows 8 tablet and further leading its brand partners to have better performance in selling and promoting Windows 8 tablet PCs.

On the downside, WitsView believes that a strong subsidy program may simultaneously shorten the time required to expand the market share while bringing about the risk of misleading consumers to incorrect price. Due to higher authorization fees for the operating system, cost gap between Windows 8 and Android tablet PC exists to a certain extent. Surface may stand out in the market by sacrificing profits or getting subsidies from Microsoft, while the remaining brands are unlikely to possess the ability and will to do so. Undoubtedly, customers are expected to take the price of Surface as a benchmark for every single prospective Windows 8 tablets; that is, Microsoft’s Surface with an intentionally lowered price may decrease the price flexibility that affects its brand partners’ earning capacity, and even further impact their desire to launch new products. Thus, Microsoft may be facing more obstacles when duplicating its successful experience in the PC market to the tablet PC market once it loses support from its powerful partners.

In terms of the impact of Surface on 2012 tablet PC market, WitsView concludes that while Windows 8 models’ joining the tablet market was well expected, the introduction of a single model is temporarily unlikely to change the estimated market size before Surface pricing is determined. WitsView restates that tablet PC market is expected to reach 94 million units in 2012, among which Windows 8 OS is projected to achieve 4.3% penetration rate, equal to shipments of 4 million units.