Microsoft Surface major components

Teardown: Microsoft Surface

We delve below the surface of Microsoft’s offering to the tablet market, the Surface RT.

The Microsoft Surface RT tablet with the minimum 32 gigabytes of NAND flash memory and an optional black Touch Cover carries a bill of materials (BOM) of $271, according to a preliminary estimate from the IHS iSuppli Teardown Analysis Service. When a $13 manufacturing expense is added, the figure before software and marketing rises to $284.“The Surface represents a key element in Microsoft’s strategy to transform itself from a software maker into a devices and services provider,” says Andrew Rassweiler, senior principal analyst, teardown services, for IHS.

“Key to this strategy is offering hardware products that generate high profits on their own, similar to what Apple has achieved with its iPad line.”

Given the estimated BOM/manufacturing cost and a US retail price of $599, the Surface RT/Touch Cover combo generates hardware and manufacturing profits that are higher in percentage terms than those for the low-end iPad. Even at $499 without the Touch Cover, Microsoft will see a higher profit margin than its Apple rival.

Of course, Microsoft is not exactly a slouch in the consumer electronics hardware market. It has already learned much about the channel, marketing and functionality consumers want with the Xbox family and add-ons there such as the Kinect.

The Touch Cover is important in defining the Surface RT apart from rival tablets. It also shows Microsoft displaying more commitment to hardware peripheral-supported upsales than Apple (the Surface has the USB port that the iPad lacks).

“The Touch Cover acts like a full-function keyboard, but uses only capacitive touch-sensing to operate,” says Rassweiler. “The keyboard works very well and even has a touchpad at the bottom, making the device feel and operate very much like a notebook PC.

“This feature differentiates the Surface from the iPad. The end result for Microsoft is a very compelling product.

“It’s also clearly more Microsoft friendly – so enterprises and major users of Microsoft Office likely will gravitate to this very competent product as a possible substitute to conventional notebook PCs when used for travel.”

IHS estimates preliminarily that the Touch Cover costs Microsoft $16 to $18 per unit. It integrates a printed circuit board (PCB) assembly with numerous chips, including a Freescale microcontroller and an Atmel touchscreen controller.

However, the biggest winner in the overall Surface RT is Samsung, certainly for the unit that the IHS team had for this teardown.

The Korean giant supplies components or complete subsystems for many of the most expensive portions of the product: the display, the NAND flash and the battery pack. However, IHS does note most of these parts are available from multiple sources, and other suppliers are likely used in other individual Surface tablets.

The Surface RT is also an important multi-purpose design win for Nvidia, still better known for its graphics chips. The Surface RT is based on an Nvidia quad-core Tegra 3 processor, which uses the ARM architecture. The Tegra 3 costs an estimated $21.50, accounting for 8 per cent of the Surface RT’s BOM.

However, it is again important to note here that a higher-end Surface Pro, expected to reach the market in early 2013, will be based around an Intel processor.

Finally, Atmel has also secured significant business by supplying multiple touch controllers in both the tablet and the Touch Cover.

The Surface RT could therefore have a bright future, although one analyst, Boston broker Detwiler Fenton, recently suggested that quarterly sales were trending in the 500,000-600,000 range against expectations of one to two million. Microsoft’s Steve Ballmer also acknowledged in November that sales were “starting modestly”.

It is hard to draw firm conclusions here. The Surface did have a massive global marketing launch, but Microsoft initially opted (in the US, at least) to confine sales to online channels and its own still relatively young bricks-and-mortar retail chain.

In December, Surface general manager Panos Panay said that the product will now be opened up to traditional Internet and real-world retailers such as Amazon, Best Buy, Dixons Retail, MediaMarkt and Darty.

Similarly, enterprise customers may be waiting on the Intel version to use the tablet as more of a lightweight but powerful productivity device, a use-case about which Apple has long been ambivalent. *

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