Microsoft’s post-PC trouble: capturing the profits of bygone days

Before PC demand dwindled, software giant Microsoft was happy with licensing its Windows software to computer makers. Now that we are taking the first steps into the post-PC era, the Redmond firm still wants its profit. But how do you charge a $50 per-tablet royalty fee when the device itself costs $199?

Enter the $499 Surface, says one independent analyst. While Google’s Nexus 7 and Amazon’s Kindle Fire both sell for $199, the Surface carries the much higher price tag because Microsoft stubbornly refuses to give up the 30 percent profit margin it’s accustomed to receiving for Windows and Office software licenses…

While the company blames inadequate retailing for its single-digit market share, well-known Apple watcher Horace Dediu says it’s all about capturing the profits of bygone days.

Dediu explains:

The price isn’t significantly below what Apple charges because Microsoft wants to capture a comparable (30%+) margin. On a $500 product that amounts to $150. After subtracting hardware operating and distribution costs, we can get pretty close to the $120 [Microsoft] currently obtains from a PC.

As CNET notes, the effort to transfer profit from flagging PCs to the rise of tablets also explains why a software firm like Microsoft wants to sell hardware.

“It’s all about the margins and how hardware makers might be tempted to cut corners”, the publication writes.

A PC manufacturer that tried to recoup money spent paying the ‘Microsoft tax?’


iPad mini keynote (iPad vs PC sales)

No matter how much Microsoft wants to retain the past, that era is gone.

Windows is quickly giving way to the freely-available Android. Expensive Office suites are overshadowed by Google’s free Internet-based alternatives and inexpensive iOS apps.

Instead, in the post-PC era, tablet shoppers aren’t going to pay $500 for a tablet and then hundreds more for the software. As well, tablets are becoming more complex, driven by components such as in-cell displays and other technology permitting lighter, smaller devices.

By demanding the same level of profit it once gained via the PC from tablets, Microsoft is its own worst enemy. Nonetheless, the Windows maker put the Surface on its own list of 2012 milestones.

Apple should be able to relax and let the Surface join a growing list of “iPad killers” which shot themselves in the foot.

Must Microsoft lower the Surface price in order to challenge Apple?