The Problem With the Surface 2 Isn't Pricing -- It's Demand

There's been a lot of talk about Microsoft's  new Surface 2 tablet being overpriced. But a quick look at the specs show that the pricing isn't out of line for what it offers -- but what it's offering, consumers don't want.

iPad vs. Surface 2
Microsoft will begin shipping the Surface 2 and the Surface Pro 2 on Oct. 22, but for simplicity's sake, let's focus on the base Surface 2 version that sells for $449.

Surface 2. Source: Microsoft.

The tablet comes with 32 GB of storage, the new NVIDIA Tegra 4 processor, Windows 8.1 RT operating system, 2 GB RAM, front and back 1080p video cameras, and an improved kickstand thingy. By contrast, the 32GB iPad comes with Apple's A6x processor, iOS 7, 1 GB RAM, a rear 1080p camera, front 720p camera, and (unsurprisingly) no kickstand, all for $599. The Surface is slightly heavier, but it's also thinner and has a bigger display -- not a bad trade-off for a half an ounce more.

At $449, the Surface 2 is 25% less expensive than a comparable iPad, and 10% cheaper than the original Surface RT's initial price.

So what's the problem? Hardly anyone bought the first Surface.

The company was forced to write down a $900 million inventory adjustment on the original Surface RTs because of lack of sales.

Surface 2 side profile. Source: Microsoft.

The Redmond-based company showed up late to the tablet party -- and it didn't dress appropriately. Apple and Android devices already dominated the market by the time Surface RT launched last year, and its Windows RT operating system confused users and offered little compared to Apple's and Google's massive ecosystems.

With the tablet boom well under way, the demand is starting to shift toward lower-priced devices. IDC research analyst Megha Saini said in a recent report, "At a time when the smartphone and tablet markets are showing early signs of saturation, the emergence of lower-priced devices will be a game-changer."

So if there is a reason why the Surface 2 is overpriced, it's because Microsoft didn't create the right product with lower specs to make a dent in a growing low-end tablet market. Microsoft had a chance with the Surface 2 to offer a low-spec tablet that could compete with Android devices, but instead it chose to offer mid- to high-end specs.

IDC told Redmond magazine last month that it doesn't see Windows RT gaining any traction because hardware companies don't see demand for the operating system. Surprisingly, Microsoft is trying to rebut that trend and is keeping the RT operating system around for the Surface. That strategy didn't work for the Surface RT and I doubt it will pay off this time, either. 

Microsoft investors should be concerned that the company is rehashing the same Surface approach as last year. As of right now, there's little in the Surface 2 that would lure potential tablet owners away from Android devices or the iPad. Microsoft has had a rough time getting users to like Windows 8, and offering any version of that system on its tablet is going to be a hard sell.

Die-hard Windows users may like what the Surface 2 has to offer, but I think it's another big miss for the vast majority of average tablet users. 

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Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and NVIDIA. The Motley Fool owns shares of Apple, Google, and Microsoft. 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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