But if Microsoft were to compete with the iPad on price, it would "collapse the PC OEM profit pool," he said.
Microsoft will supposedly ask those PC OEMs to pay $85 per copy of Windows RT. That would collapse the PC OEM profit pool all by itself.
The expensive-software-on-cheap-hardware business model won't work in the post-PC era.
As for Surface "Pro" tablets running the full Windows 8 operating system, Microsoft has said those devices featuring traditional Intel processors will be priced comparable to Ultrabook notebooks, which usually cost around $1,000.
But Ultrabooks, priced at $1000, aren't even moving the needle. Neither did 10 years of UMPCs and Tablets and Slates running various Windows Tablet PC releases. So now Microsoft is doing what the usually do after a product completely fails in the market. They re-brand it. They're re-branding Slate and calling it Surface. The Surface Pro is really just a jumbo magnesium HP Slate 500: http://www.appleinsider.com/articles/10/10/22/hp_releasing_799_slate_500_to_take_on_ipad_in_tablet_market.html
I think this is how it will all play out:
Surface for Windows RT will probably be initially priced from $499, just like the low-end 3rd-gen iPad. To drop the price any lower at launch would imply that it isn't as good as iPad. From what little exposure the press was actually given to Surface, it's glaringly obvious that neither Surface is as good as the low-end 3rd-gen iPad, but Microsoft will try hard to avoid admitting that fact in any way. And the few, proud, early adopters will gladly pay that $499. Might as well make hay while the sun shines, no?
Surface Pro will probably be initially priced from $999 on the open market, because that's what the 11" MacBook Air starts at. That's the Surface Pro's real target, isn't it? The target that nobody in the Ultrabook consortium could hit. And, just like RIM tried with the PlayBook, Microsoft will give free evaluation copies to high-profile potential customers. They'll gladly do full turnkey installations, from Surface Pros all the way down to Windows Server 2012 at the back end. All in the hopes that just one Fortune 500 company will actually use them and like them. And just like RIM, Microsoft will fail. (Meanwhile, 92% of Fortune 500 companies are testing or deploying iPad, thanks to the "consumerization" of corporate IT.)
The Surface honeymoon will end quickly. Consumer sales of the Surface for Windows RT will plummet after the die-hards and hobbyists get theirs. Corporate sales will simply never happen. Prices will then drop, inevitably, as Microsoft attempts to use the PC Industy's traditional last resort against Apple: low, low pricing. But, also inevitably, low prices won't boost sales much if any. All it will do is cut Microsoft's margins on Surface hardware. The whole Surface business plan will become unsustainable without massive cash infusions from Microsoft's bread-and-butter Windows + Office businesses. And Microsoft will gladly dump that money into the Surface project because they can't afford to let Surface get thrown down the KIN staircase. It's serious this time.
The blame game will then start in earnest. Maybe even as soon as next summer. Microsoft will point their finger at Intel and say "If you had designed a better faster more energy efficient x86 chip, Surface Pro would have been a smash hit." Intel will point their finger right back and say "Yeah, well then why didn't the Surface for Windows RT sell at all, with its ARM chip?" Microsoft will reply "Because we were forced to maintain backward compatibility with desktop Windows 8 and its apps." To which Intel will reply "Then you shouldn't have built yet another lame iPad clone and tried to jam Windows into it, all over again, in the first place."
And Intel will win the argument with that statement. Microsoft will continue building and selling discounted Surfaces, at a huge loss, funding the project with Windows + Office profits. Ballmer will stay on as Microsoft CEO for two reasons: because he wants to and because nobody else wants to.