There is no way they can make any money selling it at $199. At least Google and Amazon can go with the Razor vs Blades theory...sell the tablet around cost simply to get people tied into to Amazon or Google selling the content for the device.
But Microsoft doesn’t have that.
Microsoft now has about 150,000 apps, so they aren’t found wanting. Yes, Android and Ipad have a lot more apps, but most of the other 350,000 apps that each have are fairly obscure that nobody really uses or looks at.
Microsoft is willing to take a big hit to get into the game and get that vital third position. They will lose a lot of money on the tablet, but make it up by selling Office and a few other programs that are proprietory Microsoft. They will also make up a lot of lost ground by selling accessories.
I think they are also betting that the optimal price point for tablets is under $200 and that tablets will eventually settle into that price range, as they are not supposed to really be as capable as laptops are.