Earlier today, news began circulating that Walmart.com had sold out of Microsoft Surface RT tablets following a 30 percent price cut to $349. On the surface (see what I did there?) this seems positive, but actually it’s not.
Microsoft must recognize that it missed the boat by separating its tablet ecosystem into a full-featured Windows 8-powered Surface Pro and a crippled Windows RT version. CEO Steve Ballmer admitted as much when he said the company had overestimated demand for the RT device, resulting in a $900 million write down and leading to the recent price drop. Unless Microsoft thinks it can keep selling the Surface RT at sub $350 — I’m betting it can’t, given its lack of content and commerce ecosystem to make up the lost profit — the last thing the company needs is to misinterpret this as sustainable demand.
We’ve seen other manufacturers of similarly handicapped tablets like HP and Blackberry face this same quandary. HP announced the Touchpad in February 2011 and made it available to the US market four months later. Despite webOS having been widely celebrated when it first launched for smartphones in 2009, the app ecosystem failed to materialize over the ensuing two years, making it an unattractive competitor to the iPad and leading Android tablets. Just 49 days later, on August 18, 2011 HP announced that it would discontinue all webOS devices. TouchPad inventory was heavily discounted and quickly sold out.
Meg Whitman was named HP CEO on September 22 of that year and, seduced by the phantom-demand demonstrated by the closeout sales, declared that HP would resume developing webOS and making tablets and other devices that use the OS. Fortunately for HP shareholders, Whitman quickly came to her senses and sold the webOS source code and team to LG on February 13, 2012 (for pennies on the $1.2 billion it paid to acquire webOS creator, Palm).
The Blackberry Playbook, which was first released on April 19, 2011, tells a similar story. Despite promises that Blackberry was working on its next generation Blackberry 10 operating system, the Playbook was released with a legacy operating system that lacked basic productivity features like a native email client. Blackberry shipped just 700,000 units over its first two quarters, the majority of which remained on store shelves. Blackberry dropped the price for the base playbook from $499 to $199 (sometimes lower) and, like HP, saw an uptick in demand and managed to ship a total of 2.5 million total units through June 1, 2013.
We have yet to see how the Playbook saga ends, but a recent announcement that the company would go back on its promise to update the devices to the next generation Blackberry 10 OS doesn’t bode well. Like Microsoft, Blackberry is a company dependent on hardware profits, which are hard to come by on $200 devices. If Blackberry releases a new tablet with the updated OS, it’s almost certain to seek a return to the $500 price range, and with this, evaporative demand.
If Microsoft learns anything from HP and Blackberry it’s that a bump in demand for a device that’s only popular once its price is slashed beyond the point of profitability does not indicate a device with real demand. The Surface RT may be somewhat compelling at the $349 price point, but it’s not likely to be one that Microsoft can maintain. Unlike Amazon, with its budget Kindle Fire tablets, Microsoft, HP, and Blackberry each need to make profits on their hardware sales. Microsoft would ultimately like to sell software to owners of Surface tablets, but ironically, unlike the $899 Surface Pro, the Surface RT doesn’t support the company’s flagship Office productivity suite. Selling hardware at a loss is one way to gather market share, but it hardly makes sense without a clear endgame of how the economics improve.
So what should Microsoft do? Ignore this phantom cut-rate demand and stay the course in sunsetting the Surface RT. The tablet market does not look kindly on on limited functionality operating systems or hobbled app ecosystems. Yes, consumers have shown themselves willing to buy hardware devices at varying price points and specifications. But operating systems is not the place to be frugal.
The Surface RT was a bad idea before it ever hit store shelves. The fact that it sold out a few units at closeout prices changes nothing.
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