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Gigabytes

From a Virtual Pants post refuting my experiences with the Surface:

It is expensive
The Surface is cheaper than an iPad. The base model Surface has 32GB of storage and is $499. The 32GB iPad Wi-Fi is $599. But, what about the Touch Cover? A 32GB Surface with Touch Cover is $599. A 32GB iPad with Smart Cover is $638. And that doesn’t include a keyboard.

Mr. Pants reminded me of a pricing trick I’ve wanted to point out for a while.

Flash-memory upgrades on tablets are much cheaper for the manufacturers than the $100 increments that Apple established with the original iPad pricing. The nonlinear pricing gives it away: why does the first $100 buy 16 GB more than the preceding size, while the second $100 buys another 32 GB?

Obviously, the $100 increments are arbitrary, because it’s mostly profit: the flash memory used in most iPad-like tablets costs about $1 per GB or less, not the $6.25 per GB that Apple charges us to upgrade from 16 to 32 GB. Since the other components are all identical between different-capacity models, we can surmise that a 32 GB iPad is about $84 more profitable than the 16 GB model.

Microsoft’s price of $499 for a 32 GB Surface is clever and aggressive: by adding only about $16 to its component costs, it makes people compare its price to Apple’s cash-cow $599 model, and the Surface seems like a better buy.

Why, then, isn’t there a 16 GB Surface? Presumably, it’s a combination of two factors. Windows RT needs 7–8 GB for itself, so a 16 GB model would leave relatively little room for the customer’s apps and files.

But the bigger reason is that the storage-price upgrade trick works against them in the other direction. Customers would expect a 16 GB Surface to cost $100 less, and Microsoft might only save $16 on the component costs. A 16 GB Surface would be about $84 less profitable. In this business, especially for a new, low-volume player, that can easily push the device far into the red.

It’s far easier for the Surface to appear to be cheaper than the iPad by starting at 32 GB than by starting at $399.

This is also why the iPad Mini starts at $329 for 16 GB, rather than a cheaper 8 GB model: people said it was only $80 more than the Nexus 7, because they were comparing its price to the $249 16 GB Nexus 7 instead of the $199 8 GB model. A few days ago, Google played the game in the other direction, widening the gap considerably, by doubling the capacities at the same price points. Now, the 16 GB Nexus 7 is $199, making the $329 iPad Mini seem considerably more expensive.

This game works, especially in the downward-price-pressure direction, because consumers and the press overemphasize specs when comparing tech devices. In practical use, though, most people don’t need more than the entry-level capacities. The gigabyte-matching tricks cloud these comparisons, but in reality, the entry-level price is what matters most: it will be advertised most, it will get people into the store, it’s the best value, and it’s the hardest price for the manufacturer to drop because it’s the least profitable.

A Kindle Fire is $159. A Nexus 7 is $199. An iPad is $329. A Microsoft Surface is $499.

Apple’s been selling midrange and high-end products at midrange and high-end prices for years, trying to get people to compare (sorry) apples-to-apples, but it just doesn’t sink in: Apple still has an “expensive” reputation, mostly because they don’t address the unprofitable low end of any market.

The Surface is a decent deal, but it is also expensive: not compared to the iPad at the same storage level, but relative to the market. That’s what customers see, and that’s how the Surface will be compared.

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