Is Microsoft (MSFT) Making Fatal Mistake with Surface Tablet Price?

Microsoft (Nasdaq: MSFT) recently announced the pricing on its critical new piece of hardware, the Surface Tablet. With PC sales slowing, many investors believe that the new tablet will be key to Microsoft’s future. Microsoft priced the Surface tablet starting at $499 and $599 with the cover-keyboard.

"Our view on this is mixed. On one hand, this should give breathing room for its hardware partners to price more aggressively. But we believe a key risk is that Surface's high pricing could prove to be a fatal mistake and relegate it to be a niche No. 4 or No. 5 player," said analyst Shaw Wu of Sterne Agee.

At $499, the entry-level model does not include a cover-keyboard, the Surface Tablet’s key differentiator. Customers who like this feature will have to buy the $599 model or pay $120 to purchase it separately. This compares to Apple’s (Nasdaq: AAPL) tablet with a starting price of $399, and Google’s (Nasdaq: GOOG) Nexus 7 8GB for $199, and Amazon’s (Nasdaq: AMZN) New Kindle Fire 16GB for $199.

"So far, non-iPad tablets buyers have proven to be ultra price sensitive as seen with the $199 price points and HPQ's (NYSE: HPQ) aggressive TouchPad pricing as the company depleted remaining inventory. In addition, recent press reports indicate that GOOG may unveil an even lower $99 price point," said Wu.

To have fighting chance in the tablet market, Wu thinks Microsoft should price the Surface Tablet at $299.

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