I think the point of a $199 price point is to get their foot in the door. If MS can't get into the tablet market, they are going to be hurting in a few years on the desktop side of things. If they can handle a loss and get people comfortable with their OS in tablet form, they can keep their share of desktop users.

I polled my three coworkers today (of the four, two of us have tablets- one iPad and one android). I think all four of us would pick up the $199 model if that's really the price point. I don't know about the other iPad users in the office, but I can see MS getting their new OS/approach to apps out there very publicly if they can pull off $199.