Windows 8 Tablets: Will The Price Be Right?Windows 8 Tablets: Will The Price Be Right?

I saw a trove of impressive Windows 8 hardware at Microsoft's TechEd conference earlier this week. Win8's Metro interface is a new desktop metaphor that will resonate with younger users who believe a computer is first and foremost an onramp to the social Web. But that alone won't guarantee sales.

Metro puts social networking and communications front and center through Live Tiles, onscreen blocks that alert users when an app has a new message or information. It's the right metaphor for these connected times. Until now, the standard GUI, whether on Mac or Windows, hadn't changed much since the 80s, when PCs were standalone devices used mostly for word processing, manipulating spreadsheets, and playing simple games.

Metro recognizes that the personal computer (whether in the form of laptop, tablet, or phone) has become a digital proxy for our entire lives, in all its facets. With a quick glance, Windows 8 users can know about any new events related to their work, family, or social circles. "The new era is one of connected devices and continuous services," said Microsoft server & tools president Satya Nadella, at his TechEd keynote in Orlando, Fla.

Metro shows that Microsoft clearly gets that. But there's still one big problem that the company and its partners will have to overcome to make Windows 8 a hit.

Unlike Google and Apple, Microsoft needs its operating systems to generate cash. Windows accounts for about a quarter of the company's total revenue. That means Redmond has to charge OEMs like Samsung, Lenovo, Dell, and others a relatively hefty fee for each instance of Win8 they preinstall. Reports out of Asia this week indicate that the fee may be as much as $85 per tablet for Windows 8 RT.

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That's $85 more than OEMs need to pay to produce an open source Android tablet. Apple has its own, internally developed OS. And content providers like Amazon and Barnes & Noble can sell their tablets at a loss, confident they'll make up for it through increased e-sales. Microsoft doesn't have such luxuries--software is its end product.

That means Windows 8 tablets could be at a big price disadvantage when they hit the market later this year as hardware makers pass the Microsoft tax on to consumers. It's hard to imagine HP, for instance, producing a tablet that can compete with Amazon's $199 Kindle Fire, when its costs include $85 for the OS alone. It might even be tough for OEMs to match the $399 starting price for the iPad 2.

The upshot: Microsoft needs to rethink its pricing strategy when it comes to Windows 8 tablets. One option would be to adopt the cellphone model, where devices are sold to end users by carriers at steep discounts in exchange for long-term contracts. Microsoft could opt for a piece of that action instead of a per-device license fee.

It could also offer up Windows 8 as the foundation for a retail tablet, like the Nook from Barnes & Noble, in which Microsoft recently agreed to invest $300 million.

From what I saw at TechEd, Windows 8 is a technical and aesthetic marvel. But that alone won't shield it from the realities of the cutthroat, low-margin hardware market. With the OS basically done, Microsoft and its partners now need to get creative about pricing and marketing. The old model, just like the old "sea of icons" desktop metaphor, no longer works.

Microsoft’s ambitious new OS tackles servers, PCs, and mobile devices. On the server side, we dig into the latest offering: Microsoft has boosted the capabilities of Hyper-V, streamlined management, and made other changes that IT will appreciate. Download the Windows 8 Vs. The World report now. (Free registration required.)