Photo: Steve Kovach, Business Insider
This note is from BI Research, a new tech-industry intelligence service. The service is currently in beta and free. To learn more and sign up, please click here. In our opinion, the only way to Android tablet makers can compete with Apple in tablets is on price.
This has been hard for Apple’s competitors to do because Apple’s economies of scale and retail distribution allow it to sell tablets at both (relatively) low prices and high margins.
Amazon has the tools to respond, because it also has economies of scale and great retail distribution, and because it has a strong media offering to rival Apple’s. Amazon can not only produce competitive tablets with economies of scale, but it can take a loss on the tablets and hopefully recoup it from media sales.
And this is exactly what Amazon has done—offering a $199 tablet that will compete with the $499 low-end iPad. As this excellent chart from Ken Sena of Evercore Partners shows, the Kindle Fire price radically undercuts the rest of the market:
Photo: Evercore Partners Research
THE GAME-CHANGER: Amazon Has Made Tablets A Loss-Leader… And Google Is Likely To Do Exactly The Same Thing
Importantly, selling the Kindle Fire at this price-point is likely to be very expensive for Amazon, at least for the next couple of years.
Piper Jaffray technology analyst Gene Munster speculates that Amazon loses $50 per Kindle Fire tablet. The company is presumably doing this to gain share in the tablet platform game, which will be critical to long-term domination. Eventually, as hardware costs come down, Amazon’s cost-per-unit will decrease. But based on its past behaviour, the company will probably pass these savings through to customers with lower prices.
Here’s Ken Sena’s projection for what the Kindle Fire’s price is likely to do:
Photo: Evercore Partners Research
By offering a good-quality tablet for $199, Amazon has changed the game. And there’s another company with the resources and incentive to soon do the same thing: Google.
And Google happens to be buying a maker of consumer electronics devices, Motorola Mobility.
Like Amazon, Google has an incentive to come out with a cheap tablet because it wants to turn its Android mobile operating system into a platform. Platforms have network effects, which can turn an early lead into enduring market dominance, as DOS and Windows did for Microsoft on the PC.
Right now Google’s Android platform is overtaking Apple’s iOS platform in smartphones, but it is nowhere in the tablet market. Google needs to grab marketshare in tablets, an incredibly fast-growing segment which will likely become an important part of the future of computing.
The question, therefore, seems to be not if, but when and how Google will release a cheap tablet like the Kindle Fire.
First, How: Will Google come out with another $199 tablet, or an even cheaper one? Potentially even “free” and ad-supported? (Evercore Partners projects that the Kindle Fire will be even cheaper next year.)
When: Google’s acquisition of Motorola has yet to close, and is under antitrust review. It is going to be many months before it does, at which point the market will have evolved a lot. It would be theoretically possible, but potentially tricky, for Motorola to release a cheap tablet as an “independent” company and have Google subsidise it. Google may have to wait.
THE BOTTOM LINE: With Amazon’s move, Google’s only chance at this point to compete in the tablet market is to offer heavily subsidized (read: loss per unit) tablets running Android. If Google itself decides to do this, which we bet it will, this will be an expensive proposition. And with two huge, major players already in the market—Apple and Amazon—this proposition will likely remain expensive for a long while. Lastly, unlike Amazon and Apple, Google does not yet have a media-sales engine to ultimately pay for the losses on the tablet units. Google’s tablet efforts, therefore, may ultimately serve only as expensive distribution for Google’s core business: search and advertising.
This note was published as part of BI Research, a new industry intelligence service from Business Insider. The service is currently in beta and is free. To learn more and sign up, please click here.
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