Can Microsoft Buy Its Way Into the iPad Market?

Apple (NAS: AAPL) sells a ton of Macs and iPhones, but there's only one growing market that it actually dominates. The world's most valuable tech company is the undisputed top dog when it comes to tablets, but that may change if reports of Microsoft's (NAS: MSFT) aggressive pricing on its upcoming Surface gadgets hold up.

Tech blog Engadget posted a report claiming that Microsoft's entry-level Surface -- the ARM Holdings-based model running Microsoft's scaled-back Windows RT -- will hit the market at a bold $199 in two months. An inside source at a tech conference doesn't make this chatter real, of course, but it would be a daring if not desperate move by Microsoft if true.

The audacity of hope
The market has warmed up to the $199 price point over the past year. (NAS: AMZN) has sold millions of Kindle Fires at that price point, and Google's (NAS: GOOG) Nexus 7 is off to a strong start from that same diving board.

The difference here is that Microsoft's Surface isn't some entry-level, 7-inch munchkin. It packs the same NVIDIA (NAS: NVDA) -fueled quad-core processing power as the Nexus 7, but we're also talking about a device with four times the storage of the $199 Nexus 7 or Kindle Fire. We're also looking at a 10.6-inch tablet that's even larger than Apple's 9.7-inch iPad.

Some analysts have wondered whether the company could crank the Surface out at a lower price than the iPad. But there's just no way Microsoft can sell it for $199 and turn a profit. It might as well give them away and grant buyers a lifetime supply of Charms Blow Pops.

The game is limbo, and it's merely up to the software behemoth to decide how low it wants to go.

There is a precedent here, though. It's widely believed that Microsoft sells its Xbox 360 at a loss, though the company would make up the difference in software royalties, Xbox Live subscriptions, and digital marketplace transactions. There could be an equally promising ecosystem here, but there's also the risk that customers will buy nothing after the initial purchase.

The bigger risk, for now, is that Microsoft will also anger its hardware partners. ASUS, Samsung, and Windows PC makers won't be happy if the company is subsidizing a tablet at prices that they can't match since they don't have the keys to the ecosystem. There's also the probability that the higher-end Windows 8 Pro version of Surface will cannibalize traditional laptop sales, so pricing there is going to be an even more sensitive topic.

Then again, it's not as if Microsoft can afford to approach the Surface as a profit center on the hardware. Early tablet makers got scorched by getting greedy on pricing, figuring the spec sheets would win out.

They became bigger suckers than the Surface buyers getting the lifetime supply of lollipops.

Getting the balance right
Research firm Strategy Analytics issued a report last month, indicating that Apple's share of the tablet market was a rich 68.3% as of the end of June. If Microsoft wants a piece of that action -- and Google's Nexus 7 has probably already been gnawing away there this quarter -- it has to hit the market priced to sell.

It can't hit the market at iPad-like prices and expect to move the needle. An integrated keyboard and larger screen can only take you so far when the ecosystem isn't proven. Microsoft's only going to get one shot to prove that it belongs in this space, and it's more important that it gets it right with consumers than with its hardware partners.

Yes, $199 is crazy -- but it may be the only way Microsoft forces Apple to break a sweat.

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