IHS SAYS MICROSOFT SURFACE RT CARRIES BOM OF $271

(The following is a reformatted version of a press release
issued by IHS and received via e-mail. The release was confirmed
by the sender.) 
IHS iSuppli News Flash: Microsoft Surface RT More Profitable
than iPad, Teardown Analysis Reveals 
This is an IHS iSuppli News Flash from information and analytics
provider IHS (NYSE: IHS) covering the IHS iSuppli Teardown
Analysis Service’s physical teardown of Microsoft Corp.’s
Surface RT media tablet. 
The Surface RT model with the minimum 32 gigabytes of NAND flash
memory and an optional black Touch Cover carries a bill of
materials (BOM) of $271.00, according to a preliminary estimate
from the IHS iSuppli Teardown Analysis Service. When the $13.00
manufacturing expense is added in, the total cost to manufacture
the Surface rises to $284.00. 
Please note that these teardown assessments are preliminary in
nature, account only for hardware and manufacturing costs and do
not include additional expenses such as software, licensing,
royalties or other expenditures. 
In terms of its size, feature set and pricing threshold, the
Surface RT is clearly designed to compete with the full-sized
iPad. 
“The Surface represents a key element in Microsoft’s strategy to
transform itself from a software maker into a devices and
services provider,” said 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. 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.” 
At an estimated total BOM and manufacturing cost of $284 and a
retail price of $599, the Surface RT generates hardware and
manufacturing profits that are, in percentage terms, higher than
the low-end iPad. Even at a price of $499 without the Touch
Cover, Microsoft will generate a profit margin that is greater
than the low-end iPad, in percentage terms and on a per-unit
basis. 
One key differentiating hardware feature of the Surface hardware
is the optional Touch Cover, which is essentially a cover that
also acts like a full-function keyboard, but uses only
capacitive touch sensing to operate. 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 when the Surface
sits on its kickstand and the Touch Cover is laid flat. 
“The Touch Cover represents a best-of-both-worlds approach for
the Surface, giving it the most attractive features of both
notebook PCs and media tablets,” Rassweiler said. “This feature
differentiates the Surface from the iPad. The end result for
Microsoft is a very compelling product that is impressive. 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.” 
The Touch Cover serves as an example of a feature that can
encourage users to upgrade to a higher-end model that generates
more profits for a company--similar to premium-priced tablets
that feature larger quantities of memory. With options like the
Touch Cover or extra flash, a manufacturer can offer a low-end
model at a base price that meets a psychological threshold--$499
in this case--with the hope that consumers will impulsively opt
for extra features or memory upgrades that generate major
profits. 
IHS estimates preliminarily that the Touch Cover costs Microsoft
$16 to $18 per unit. The Touch Cover accessory integrates a
printed circuit board (PCB) assembly with numerous chips,
including a Freescale microcontroller and an Atmel touchscreen
controller. 
Samsung Electronics Co. Ltd. is the biggest design winner in the
Surface, based on our teardown sample. Various divisions of
Samsung supply components or complete subsystems for many of the
most expensive portions of the individual tablet dissected by
the IHS iSuppli Teardown Analysis Service: the display, the NAND
flash and the battery pack. However, most of these parts are
available from multiple sources, and other suppliers are likely
utilized in other individual Surface tablets. 
Another major winner is Nvidia Corp., which supplies the
Surface’s processor. 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 percent of
the Surface RT’s BOM. 
Also scoring some major wins in the Surface RT is Atmel, which
supplies multiple touch controllers in the Surface itself as
well as in the Touch Cover. 
For more information, please contact: 
Jonathan Cassell
Senior Manager, Editorial
jonathan.cassell@ihs.com
Direct: + 1 408 654 1714
Mobile: +1 408 921 3754 
Or 
IHS Media Relations
press@ihs.com
+1 303 305 8021 
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