I would say that MS has undercut Apple by $100, a safe amount, but noticeable. They have also made enough space to drop the price, although they don't often do this. Good placement vs the leader. I'd say they are ignoring Android completely with this pricing. It's actually pretty obvious. And downright MS-like. (or Apple-like, if you prefer)Two years old is a lifetime. Apple has 60% of the tablet market. Android the other 40%. People have $100s and more invested in iOS and Android apps. Not to mention time spent learning and getting comfortable with those OSes. People are not going to be so quick to switch without a compelling reason, and Surface offers none. It's not bad, it's just too late.
Also, see single word below. I think there are many chomping at the bit to have a real access to Office docs on a tablet. We'll see.
You leave out a couple of important facts. First, the tablet market is still growing by leaps and bounds, while the PC market is stagnant. Microsoft may not have been in the initial wave, but then neither was Google. It is not a settled market. Second, if Microsoft's Windows 8 strategy works (remains to be seen), the market for Surface apps will be legitimate. In fact the availability of Office alone will be enough for some people to consider a Surface.