How Internet / Software Companies Survive the Zero Profit Tablet Business ?

Tablets Sold at Zero Profit by VendorsFor the Holiday Season of 2007, online retailer Amazon released the first version of their eReader Kindle and it was sold-out in under 6 hours. Once the leader sets the trend, everybody [Google, Barnes & Nobel, Baidu, etc] jumps into the new business model of selling high end hardware specs and extremely low price.

These companies do not attempt to make money on hardware. Their goal is to achieve breakeven on hardware and generate profit through services, subscriptions, advertisements, Consumer & Business Apps (applications) and on-line sales of books, music and even groceries.

Given zero brand margin and lower retail margin, these tablets are sold at about 20% below those of traditional branded companies. Given the strong brand awareness of Google and Amazon, consumers generally are not worried about their hardware quality and see these low priced tablets as bargains. Google and Amazon have small Operating Losses on lowest priced product (like the 8GB Nexus 7) and small operating profit from higher priced product (the higher NAND density and bigger screen product such as 16GB Nexus 7 and Kind Fire 8.9 HD). To illustrate, Google sells 8GB Nexus 7 for US$199 but 16GB model at US$249. 8GB of additional NAND flash adds to the cost by less than US$10 but Google charges an extra US$50.

The combination of high end hardware specs and extremely low price points not only helped Google and Amazon erode Apple’s iPad market share but will gradually force traditional branded PC companies to exit the Tablet market. In the next article we’ll see how these companies place their SmartPhone strategy.

Leave a Reply

Your email address will not be published. Required fields are marked *