Saturday, October 20, 2012

Microsoft Surface Tablet: Take an Aspirin or Not?

Someone sent me a link to a presentation by Microsoft engineers, showing off the research and design work that went into the new Surface RT.  I was very impressed by, among others, an engineer who walked through what went into designing the display, both technically (screen aspect ratio, lighting and ppm) and from the point of view of user demographics.  Another engineer talked about her work designing the keyboard, based on her research of how users input data and their digital dexterity.

Articles in the press have talked about the pressure Microsoft is putting on its component manufacturers to meet the $499 introductory model price point.  Grousing has been constant about the continuing need for Microsoft to receive a fee for the installation of Office and the OS on the Surface.  All true, but probably not  critical issues.

Finally, Wall Street tech industry analysts like Shaw Wu of Sterne Agee feel that Microsoft has blown the pricing of the Surface, which may be undercut by the upcoming introduction of an "iPad Mini" and the lower end products of Amazon and Google.  The Apple blogosphere seems to dismiss Surface on its price positioning.

I think that Microsoft had no choice but to position the product price where they did. It's perfectly rational.  Racing to the bottom by competing with Amazon or Google Nexus would be to completely deny the value-added of Microsoft's technical research and engineering.  Once a price point is set, it is extremely difficult to then turn around and raise prices.  It's always easier to come down, either through discounting or combining with other offers.

A medical device company where I was the CFO faced a similar quandary.  Our engineering and technical literature droned on endlessly about the high tech engineering and design that went into our product's profile, deliverability, and performance. Specs and data were everywhere.  The spending to support the research and development weighed on the income statement.  However, when it came time to set a price, we always kept the price flat with the earlier generation product.

When I asked our marketing people "What gives?" the answer was "The customer just won't accept a price increase."  My message to them was "Either we believe what we're saying about we've put into the product and the value, or we should stop talking about it.  If we believe it, then the customer has to pay for that innovation, so we can stay in business.  It's a sales and marketing task to convince the customer about our value proposition."  Bottom line is that we raised prices on the improved product, gained the industry leading share and profits at the expense of the low end and continued to make incremental innovations.  The low end  was left to feed on scraps.

Innovation in computing products has a tremendous advantage compared to medical devices in that component pricing is always under pressure due to the commodity nature of the parts. Manufacturing is also relatively simple component assembly.  Those processor, drive, screen, and flash memory makers have to figure out a business model that works for them.  Microsoft isn't alone in putting pressure on them.  Look at what Apple does at FoxConn.

Microsoft appears to have engineered a credible, innovative, feature-laden tablet at an appropriate price point. A reasonable customer objection is "Microsoft is an unproven and unreliable vendor of consumer products.  Look at Zune. If  I am taking a risk, why should I pay an Apple price?" Answer that question for them, but not by taking an arbitrary, low end price.

The question now becomes, can they act like a consumer products company and tell their story to the customer?  Mistakes will be made. What Microsoft has to do is to fix everything right away for every customer, whatever the cost   This is a critical launch, and success won't be determined early.  Failure is not an option.

The cost of making every buyer happy is a better investment that buying back shares.  That cost is just another form of advertising and brand rehabilitation.  The lessons of Amazon's early days, and the lessons of Lands' End in its heyday were: take care of customer problems right away; give them a good, friendly experience; make them feel good about Microsoft and their decision to buy the product, and you've got a customer for life.

Apple are masters at this, especially through their stores.  Let's see if Microsoft has prepared for this battle.

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