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In shift to Apple-like business model, Microsoft is off to a great start

Published Nov 6th, 2012 9:30AM EST
Microsoft Surface Analysis BOM

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Microsoft (MSFT) and Apple (AAPL) have a rivalry that dates back several decades and the technology giants are constantly chasing each other in different areas of their businesses. In the latest major shift, Microsoft is toying with the adoption of a business model that bears more than just a slight resemblance to Apple’s. The Redmond, Washington-based company has historically relied on vendor partners to build computers and smartphones that carry its software, but the new Microsoft Surface tablet removes vendors from the equation and gives Microsoft control over the user experience from beginning to end. And according to a recent analysis, Microsoft’s shift into the Windows hardware business is off to a great start.

One of several key ingredients in Apple’s recipe for success is big margins. The iPhone, which is largely responsible for Apple’s meteoric rise to the top of the consumer electronics industry, is the most profitable smartphone line in history and all of Apple’s various other products carry big margins as well.

The base Wi-Fi only third-generation iPad, for example, has a profit margin estimated by IHS iSuppli to be 37%. While that figure is certainly impressive, Microsoft may have beat Apple at its own game according to a recent IHS analysis.

According to the firm’s estimates, the 32GB Surface tablet costs $284 in parts and labor to produce. With a retail price of $499, Microsoft’s margin on the entry-level Surface sits at 43%. While Apple’s 32GB fourth-generation model carries an impressive 49% margin, the entry-level iPad’s profit margin is estimated to be 41%.

“The Surface represents a key element in Microsoft’s strategy to transform itself from a software maker into a devices and services provider,” said IHS analyst Andrew Rassweiler. “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. From a hardware perspective Microsoft has succeeded with the Surface, offering an impressive tablet that is more profitable, on a percentage basis, than even the lucrative iPad based on current retail pricing.”

Microsoft is also considering launching its own smartphone, as BGR revealed last month, and Microsoft will have its work cut out for it if the company hopes to achieve Apple-like margins in the smartphone market. According to earlier estimates from IHS, Apple’s profit on the iPhone 5 ranges from $442 per handset on the entry-level model to $611 on the 64GB version.

Zach Epstein
Zach Epstein Executive Editor

Zach Epstein has been the Executive Editor at BGR for more than 10 years. He manages BGR’s editorial team and ensures that best practices are adhered to. He also oversees the Ecommerce team and directs the daily flow of all content. Zach first joined BGR in 2007 as a Staff Writer covering business, technology, and entertainment.

His work has been quoted by countless top news organizations, and he was recently named one of the world's top 10 “power mobile influencers” by Forbes. Prior to BGR, Zach worked as an executive in marketing and business development with two private telcos.