Microsoft Is Letting NVIDIA Down

Microsoft (NAS: MSFT) , you acted like you wanted to change, and then you do this?

The Redmond giant took the wraps off its Surface tablet's pricing today. After (NAS: AMZN) hit the $299 price point with its 8.9-inch Kindle Fire HD, rumors swirled that Microsoft would attempt to make its own splashy entry-level price. After all, the only way competitors have really managed to take market share away from Apple's (NAS: AAPL) iPad is through more aggressive pricing.

So, on the day Apple sends out invites to an event on Oct. 23 where it's expected to announce an iPad in the sub-$300 price level, what price point did Microsoft hit?

$499. Oh, and that's the price without the tablet's most talked about feature-its Touch Cover. If you want the Touch Cover, the price ratchets up to the $599 price level.

Really, Microsoft?
I understand why Microsoft's bureaucratic layers brought the Surface in at the price point they did. First, the company doesn't want to step on the toes of its OEM partners by offering a device at a price level they have difficulty competing with. Second, at $499, users get an entry-level model with twice the storage of a comparable entry level iPad at the same price. It all works on paper!

Here's the problem: most users don't care. With the ARM-based model, there are only currently about 2,000 apps available in the Windows Store. Sure, there will be heavy-hitter apps certain users want on a tablet, such as Excel, but that alone can't carry the sales load Microsoft needs to make Windows a legitimate tablet player. We've seen Android models attack the iPad at price levels above $400 and not make a market share dent time and time again. The iPad has a huge amount of cachet among consumers as the best tablet; going head-to-head on price is a losing proposition.

If Microsoft wanted the Surface to build buzz for Windows tablets, it needed to do something far more remarkable with the tablet's pricing.

Compromise by committee, made in Redmond
Instead, the company took a measured approach that makes all the right compromises to land the tablet in sales mediocrity. Who cares if Microsoft steps on the toes of its partners with very aggressive pricing? Google (NAS: GOOG) saw Android not gaining traction in the tablet space and made a decisive move: it launched the Nexus 7 at $199. Tablet partners aren't jumping off the bandwagon either; if anything, Google's efforts proved the viability of low-priced Android tablets to partners. Who cares if Microsoft loses money with this venture? Look how much it has already poured into mobile efforts. Jump starting Windows as a tablet platform would be worth the gamble.

However, in the end, the Surface's uninspired pricing structure won't hurt Microsoft the most. Microsoft itself is priced for less than 10 times cash flow; little dominance over tablets or smartphones is priced into its share price.

The biggest Surface loser?
Instead, NVIDIA (NAS: NVDA) , the company which is providing the processor to the Windows RT Surface model, is the one suffering at Microsoft's hands. With Apple dominating the tablet space and using an in-house processor, NVIDIA has been in need of another platform.

Microsoft looked like a decent bet, especially after Amazon went with Texas Instruments' (NAS: TXN) processor again in the recent Kindle Fires. Moreover, the reliable Wall Street Journal is reporting Microsoft is producing 3 million to 5 million Surfaces in the holiday quarter. That's a good-sized production run.

However, the problem is that even with a large initial test run, the bigger spoils come from a platform with continuing success. Maybe Microsoft's partners will find Windows tablets to be better sellers than expected. Perhaps creating Surface will be enough to drive manufacturers to innovate with their Touch-Cover-like innovations that appeal to consumers who want a tablet, but one that still retains more links to the PCs they're used to.

Yet, as of right now, I think Microsoft is fumbling Surface's launch from the get-go. That's bad news for Microsoft, and worse news for a supplier like NVIDIA.

But, hey, at least NVIDIA has the processor slot in Google's Nexus 7. That's a decisive company who's willing to take a real shot at getting up off the mat.

More Microsoft advice
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Eric Bleeker owns shares of NVIDIA. The Motley Fool owns shares of Apple,, Google, and Microsoft. Motley Fool newsletter services recommend, Apple, Google, and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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