How to Trade a $200 Microsoft Surface Tablet
Microsoft (NASDAQ: MSFT) shocked the world earlier in 2012 when it unveiled the "Surface" tablet. The 10-inch tablet will come loaded with Microsoft's new Windows 8 operating system and is likely to compete directly with Apple's (NASDAQ: AAPL) iPad. While it is yet unknown how much Microsoft will charge for the device, it was thought to be comparable to the $500 Apple charges for its newest iPad -- that is, until last week.
What is most interesting is that the Surface will be manufactured directly by Microsoft. This is unusual for the company, which built its business around creating operating systems and having a variety of partners like Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ) manufacture the actual PCs.
Engadget ran a story Tuesday suggesting that the Surface could come in as low as $200. At that price, the Surface would be competing directly with cheaper competitors in the tablet world like Google's (NASDAQ: GOOG) Nexus 7 and Amazon's (NASDAQ: AMZN) Kindle Fire. However, the Surface would have a much larger screen than either one of those devices and may sport better internal hardware.
The biggest hurdle to the $200 price point is the manufacturing cost: if Microsoft were to sell Surface at $200, it is likely that the company would be selling the tablet at a loss.
Of course, Microsoft has engaged in such a strategy before.
When Microsoft entered the video game industry just after the turn of the millenium, it sold every Xbox gaming console at a loss. While Microsoft initially took a large cash hit, the strategy ultimately paid off: Microsoft was able to reap billions in profits when its follow-up Xbox 360 became a staple consumer entertainment device.
Although Apple and Google have dominated the mobile OS business, Microsoft could springboard back into the discussion by following an aggressive pricing strategy.
With billions sitting on its balance sheet, Microsoft certainly has the cash hoard to do it.
However, unlike the video game industry, an aggressive entrance into the tablet manufacturing business may have disastrous consequences for Microsoft's partners. Acer's CEO has already expressed his displeasure with Microsoft entering the space.
Microsoft's OEM partners simply don't have the cash reserves Microsoft has, and so they would likely be unable to compete with a $200 surface.
Thus, traders who anticipate a cheap Surface may wish to take short bets against some of the PC manufacturers. Recently, famed short seller Jim Chanos revealed that he had bet against Hewlett-Packard based on the rising popularity of tablets. Hewlett-Packard may have been able to produce a decent Windows 8 tablet of its own, but if Microsoft completely squeezes them out of the space, Chanos' thesis may prove deadly accurate.
Of course, such an aggressive strategy would be likely to cause a variety of shifts in the tech sector. Companies as diverse as Barnes & Noble (NYSE: BKS), Research in Motion (NASDAQ: RIMM) and Advanced Micro Devices (NYSE: AMD) could be affected.
In recent years, Barnes & Noble has shifted into the technical realm by introducing its own lineup of digital e-readers under the Nook brand. Barnes & Noble's Nooks are fairly cheap devices, and an inexpensive Surface would likely pressure the low-priced Nooks.
However, Microsoft recently invested $300 million into Barnes & Noble's Nook division, thereby creating a tremendous internal conflict: by destroying the Nook, Microsoft would only be weakening the value of its investment. Still, the full details of Microsoft's intentions with regards to the Nook investment remain unknown -- Microsoft may have simply made the move in an effort to gain exposure to Barnes & Noble's digital content business rather than its hardware base.
RIM could also see some action, although not as directly as Barnes & Noble.
Most investors have long written off RIM as a doomed business, tied to a BlackBerry device that has been surpassed by Apple's iPhone and Google's Android. However, despite its precarious situation, RIM's management has pushed on and promised to deliver a powerful BlackBerry 10 OS that the company would be open to leasing out.
This may beg the question from investors: who would want to lease out such an OS? If Microsoft sells a $200 surface, the answer might be surprising.
Companies like Dell may have been banking on Windows 8 as the cornerstone of their tablet strategy. With a $200 surface potentially burning that bridge, they may want to look elsewhere: enter BlackBerry 10.
Admittedly with Google's Android still freely available, it is a long shot. But if Windows 8 declines in popularity among the OEMs, there may room for BlackBerry 10 after all.
AMD, as a chip manufacturer, would also likely be affected.
The Surface is interesting is that it will come with a unique cover that doubles as a keyboard and a kickstand -- thus giving it sort of a natural use as a laptop/tablet hybrid. Thus, if the cheap Surface entices some to opt for a Surface over a laptop, it could be disastrous for AMD's chip demand.
Ultimately, a $200 price target for the Surface remains nothing but hersey. However, if it were to happen, it would send powerful shockwaves through nearly the entire tech industry. Ambitious traders may want to consider the ramifications of such a price point ahead of any announcement.
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