You Can't Beat The iPad Just By Losing Money

The most remarkable thing about Google's Nexus 7 tablet can't be found on its spec sheet. It won't show up in any benchmark, and it has nothing to do with that zippy new operating system. If you want to know the true significance of the Nexus 7, all you need to look at is the price tag.

How, you wonder, can Google make any money selling this for $US200 ($249 in Australia)? The answer's simple: it doesn't. Like the Kindle Fire before it, the Nexus 7 proves that the only way to take on the iPad is not just to undercut Apple; you have to undercut yourself. It's an incredibly aggressive strategy. And one that's going to have massive repercussions.

Too Cheap to Be True

You might have suspected there was something fishy about that $US200 price point; the Nexus 7's guts may be more Toyota than Lexus, but Tegra 3 chipsets and 1280x800 displays still don't come cheap. More specifically, the Nexus 7 outclasses the previous budget champ — Amazon's Kindle Fire — in every conceivable way, for the same price. That goes beyond economies of scale and supply chain optimisation. That's a kamikazi run.

Surprise! You were right. Google's Android guru Andy Rubin confirmed to All Things D yesterday that even when the Nexus 7 gets sold through the company's own Google Play distribution channel, it "basically gets (sold) through", meaning it doesn't make or lose money. That means, at best, Google's tablet is breaking even when you buy it directly from them. When you find it in a retail store? Google's basically throwing dollar bills out of the window of a moving car.

Oh, and keep in mind that Rubin explicitly wasn't including the marketing costs in that estimate of which there will be many; how many of your friends know what Google Play is? How many of your parents?

So Google's taking a hit with every Nexus 7 it sells, presumably even more than the $US2.70 Amazon loses on each of the millions of Kindle Fires it ships. Sounds crazy, right? It is — but not for the reasons you think.

How They Do It

Don't worry; Google is still a company, and companies still like making money. Ditto Amazon. But more importantly, Google and Amazon are ecosystems. The more people that are using their products, the more money they make off search and content, respectively. Think of their hardware efforts like cinemas running Cheap Tuesday prices: get people in, make your money at the snack bar.

That's worked for Amazon to a point; the Kindle Fire was a go-to holiday gift last year, although recent reports have indicated that its sales have taken a tumble. But more importantly, the Kindle Fire became the exemplar of how to successfully take on Apple. You don't.

There has not yet been a 10-inch tablet that's come anywhere close to rivalling the iPad. There just hasn't. The iPad is Jaws; if you want to survive, get the hell out of the ocean and hop in the kiddie pool. And that's the model Google's working from. Make something so much smaller and cheaper that it's almost an entirely different category of device.

Will it work for the Nexus 7? Probably. But it could take away Android's greatest strength in the process.

Playing Favourites

You know who's not an ecosystem? HP. Asus. Acer. Dell. Toshiba. Not even Samsung, no matter how badly it wants to be. This means that if you're any hardware company that doesn't have the benefit of a Nexus name tag and the massive subsidy that goes with it, there is absolutely no reason to make an Android tablet.

Why would you? You can only sell at a loss if you can make the money back on app sales or a premium membership or movie downloads or all of the other 30 per cent cuts Google and Amazon take off the top of every sale. If you don't have that, you're just selling at a loss.

The Nexus 7's price advantage takes away any incentive to make a 7-inch Android tablet. Apple dominates the 10-inchers like a 1960s Muhammed Ali. So what do you, hardware maker? You give up. Or back another horse.

LG quit tablets. Dell took a time-out. Lenovo and others are embracing Windows 8 in a major way. And so on.

Android's always been about choice; anyone can build a tablet that runs it, so you've always had your pick of form and functionality. But Google and Amazon making desperation plays also means that there's very little room left for anyone else to join the party. It's setting up an Android future of two cheap, small, forgettable machines.

But Will It Even Work?

It's understandable that Google and Amazon don't want to go slate-a-slate with the iPad yet. But while being a loss leader in the welterweight division may just be the best plan, that doesn't mean it's going to be a successful one. The competition's still just too tough.

Want an ecosystem? iTunes has the most — and best — app and content offerings by far. That's not debatable. Price advantage? A 16GB Wi-Fi iPad costs Apple $US316 to manufacture. It sells for $US500 ($539 in Australia). This means that by the same metric in which Amazon and Google lose money, Apple makes nearly $US200 of profit, times millions and millions of iPads.

That doesn't just mean that Apple's getting filthy rich (although it is). It means that the second it feels even a hint of pressure from Android or Microsoft, it can cut the price of every iPad by a hundred bucks without breaking a sweat. Hell, it could sell iPads at a loss and still make more money off iTunes than Google ever will off of Google Play sales.

There's hope though. Microsoft, at least, isn't backing down; its Surface tablets may still just be prototypes, but they're a clear shot across Apple's bow, with features the iPad's never even dreamed of — assuming they work. Amazon too might be ready to throw down a 10-inch, spec-filled Kindle Fire of its own in just a few short weeks. Let's hope so. Real competition now is even better than the promise of it later in the year.

So, sure, yes, get a foothold if you're Google and Amazon. Build your user base. But remember that if you really want to compete to put the brakes on Apple's runaway success, don't just make something cheaper. Make something better. Because if you won't, there are plenty of people who will. In fact, they may already have.


Comments

    "You know who’s not an ecosystem? HP. Asus. Acer. Dell. Toshiba. Not even Samsung, no matter how badly it wants to be."

    Spot on. If there's one thing that the Microsoft branded Surface and Google branded Nexus 7 tells, it's that these guys are screwed long term.

      I don't think this is the same as the surface. Microsoft is pricing the surface in line with their partners, and pretty well only releasing it to push their lazy partners to design a nice device that consumers want. They haven't yet for the last 10 years, so Microsoft had to do something.

    Is "eco-system" the new term for "walled garden"?

      Not really. I can use the music I buy through the Zune Marketplace on any device I like, for example. "Ecosystem" is really more synonymous with "catalogue". e.g. If you have Whitworths catalogue, you are much more likely to buy from them than from BIAS Boating Warehouse of BCF.

      Of course, it surprises me how many iPod users truly believe they won't be able to transfer their music to any other device. It is something I would be shouting from the rooftops about if I was any of iTunes competitors.

      While many use it that way, the difference is exclusivity.
      If you have a walled garden, you have a series of products that only work with each other.
      If you have an ecosystem, you have a series of products that work well together, but can also work with other devices.

      I'd refer to it as a platform, which is what it is.
      Hardware manufacturers are just pushing scrap metal across the globe.

    So technically what Google is doing with selling a dirt cheap tablet is similar to the printer companies selling printers... Sell a dirt cheap printer and make its money back from ink cartridges. In Googles case, sell a dirt cheap tablet and make its money back through its apps and services.

      Get real. "Dirt cheap" does not mean it of low quality. Apple controls virtually all of its ecosystem:
      - developers need a Mac to create iOS apps
      - you have to pay Apple to be a developer
      - Apple takes a third of whatever your app sells for.
      - Apple takes a cut of all advertising revenues your app might generate

      Apple's the one who will suffer in the medium to long term. Jobs is gone and everyone else is catching up and/or passing them.

        This is what make me think Apple is a walled-garden whereas Microsoft and Google are eco-systems. The difference being level of control. [In answer to the question above.]

        You get what you pay for cheap means CHEAP if you look the stats of Android apps vs IOS apps I have my bet on IOS friends of mine did IOS and Android apps their money came to 80% from IOS

        did i say its a low quality product? NO, its not kogan tablet FFS

          What I am meant to say sell something that is at the manufacturing price and make its revenue from its services.

      Trouble is rarely ever buy an app. In fact I've only bought 5 and they when they had the 10c app sale. I'm not buying ebooks and it;'s only magazine subscriptions I would want to read on a tablet and guess what 7" is just to small. As far as I see a 7" tablet is targeting ereaders. For web browsing, editing photos, reading I'd prefer 10".

      This doesn't really interest me and I rarely think of Google when I want to buy something, not like I would for Amazon.

        I don't get this. If you have to cart around a 10" tablet, why not just buy an Ultrabook? At least a 7" tablet will fit in your pocket. It is the only tablet I would consider, at least until I can run all my PC software on one.

          So until the Surface pro comes out?

            Core i5 will not cut it for me. If they get around to Core i7, I will reconsider but at this time my next computer will probably be an 11.6" Asus Taichi (to replace my 11.6" Zenbook).

          This is personal preference, but when I am relaxing and surfing the web I now prefer my iPad.

            Prefer it to what? Obviously it would be better than a desktop or tower machine but when I'm "relaxing and surfing the web" I use my phone, which is more than adequate. I also use it instead of my Kindle when I'm out and about. That's what I don't get, what does a 10" tablet offer than a phone doesn't? i.e. I don't see how this middle ground exists - either I use my computer or my phone and in each case they seem to be perfectly suited to the task. There is never a time I think that something in-between would be useful and my eyes are as old and tired as anyone here, I'm sure.

          You make this argument in every thread.

          Yet tablets are still bought. I think you need to come to terms with the idea that not everyone wants an ultrabook.

            Yes and still I get no useful answers, so I keep asking.

              You get no answers because everyone wants you to shut up.

        Free apps have ads, and Google gets a cut of that.

    This comment has been deemed inappropriate and has been deleted.

    It's all about Windows for tablet now.

      Are you deliberately asking for the trolls to go nuts here?

      I do like Windows 8 though

    Oh what a lot of dramatic blather!
    The reality is that it's just another tablet, no company will live or due over it if it succeeds or fails.
    It seems like a good price for decent hardware and it's not bound up with silly Apple restrictions, so it's probably worth getting if you need a new tablet, or not if you don't.

    No one wants to go 10 inch becayse Apple will claim it is too much like their product and people will get confused.

    Its an interesting development. I think Google are just attempting to mark their territory before things get too crowded once WIn8 hits the shelves. Yes, I'm sure it will stop everyone else from bothering with a 7" tablet from here on in, expect maybe for Sony. But between Amazon, Google and Sony there will still be plenty of choice. I think a lot of sheeple will take a serious look at a device like this as a replacement for their e-reader more than as an alternative to an iPad. Personally, my Kindle will likely do me for many years yet.

      I think you need to seriously reconsider your use of the term 'sheeple'. Probably the most irrating and misused term (that never should have arisen in the first place anyway).

    Ipad was not the target here - this is attacking the same eco system as playstation psps, nintendo ds, kindle fire...

    Google is trying to get an android device in as many hands as it can it is the money generated from the apps, movie downloads, books and of course advertising that is driving Google to use the tablet as a loss lead product.

    Sony has been doing the same with the PS3 in an attempt to make sure blue ray is the preferred high def format. They loose on each one they sell but the income from blue ray sales and technology they hope will more than cover the cost

    So they're basically doing what video game console makers have done for the last 20 years?

    I work in IT sales. I find most people walk into the store to buy a tablet. Even if I recommend them to buy the Andriod tablet as it would suit there needs better, they simply play with all the tablets and end up leaving with an iPad. Apple have done something right with iOS and the price of the iPad that people find it enjoyable and easy to use and will rather it over anything else. And for information I am an Andriod user. Also note most of these people came into the store looking for a tablet but didn't know the difference between Apple, Android, etc. It was the initial experience with the tablet that got them.

    If you think MS burned their OEM partners with the Surface, this move by Google is 10 times worse. Samsung and LG and Sony must be panicking right about now. They really have absolutely no choice but to go all in with Windows, because at least with them they have a chance to compete on price.

    They've simultaneously assigned Android as 'cheap' and iOS as 'premium'. Windows also with Surface will get the 'premium' association. Why is this important? Premium means fat margins. And Apple's been seeling HUGE volume of 'premium' devices. That's why their iOS business is the most lucrative in business history. With Android itself not making any money, I wonder how Google thinks they can survive in the short term, with everything riding on their browser search engine ads, their bread and butter.

    I do have this to say though. Google is being badass, and making a run for it. There wasn't much else they could really do anyway.

    Firstly, while the nexus is 199 in the us it is 249 in Australia even though the dollar is on parity. This means that whilst they may lose money in the us they will recoup it in other countries, so I doubt they will make a loss.
    Secondly, the major problem with non apple tablets is that they lack apps. This is a key problem because the devs don't make apps because no one is buying android tabs and no one is buys android tabs because there are no apps; this is the classic chicken and the egg scenario. Nexus7 is the best way to break this pattern as because it is so cheap millions will get sold and suddenly devs will have an incentive to make android tablet apps. This will be beneficial for all android tabs, no matter the size.
    Thirdly, apple would never just slash its prices by a 100 dollars. Just imagine what it would do for its share price. Apple thrives off its large margins and as macbooks have shown, apple is more than happy to compete and charge more for it.
    Fourthly, it seems obvious that next year google will introduce a nexus10. The os is finally getting to the point where it is smooth to use (project butter) so unlike honeycomb, the os is finally getting attractive to use and will have a real shot competing with the iPad, as there will also be lots of apps.
    Fifthly, the whole point of Android is for google to be able to control the experience to some extent so that they can make sure people always use google. If left up to apple, siri I may takeover search so it is in Google's best interest to get lots of market share so that they are able to have people use google now, google assistent and google search. Google doesn't actually need to make money out of tabs.
    Lastly, at least with android l, hardware partners can customise and can make money by providing services. Samsung has music hub and media hub and Sony has music and video unlimited. There is no reason to think they won't be able to customise android to bring these services to the fore and make money out if them. In this respect android is ahead of windows 8. Also PC's have shown that hardware companies are prepared to slash margins in order to compete on volume.
    I don't claim to know what will happen but at the least it will be very interesting so see which is the biggest and most successful ecosystem in three years time. I wouldn't, however bet against android and google, who knows we may have moved on to google glass and won't even need tablets.

    Blah blah blah. The ONLY point this article is based on - without even realising it - is that the iPad came first. If you remove that SIMPLE fact, this article and its rantings would not exist. Nobody would be arguing about hardware losses because they would simply say "google will make it back on content sales".

    So, because Apple has already done this, somehow it's impossible for anyone else to? I find those arguments utterly naive. Please, if you're going to say a product will fail, base it on a real reason not this doom-saying. It's cheap and poorly researched.

      I think I get what you're saying...so because Apple did it first and makes (at least initially) more money why should Google do it. Like saying well you only make $100 and I made $200...so don't bother. My d*** is bigger then yours... get over it. Hate Apple as a company...but I would still recommend most to buy and iPad over a 10" android tablet at this stage

      It's saying the iPad is entrenched. It's pretty hard to take something like that head on.

    this it better than the new ipad.. admit it people

    The title of the article is "You can't beat the iPad just by losing money". The N7 is not even the same size or league as the iPad. Its like saying the VW Polo cannot possibly be better than a BMW 5 series.

    ...Although the VW Polo was voted World car of the year.

    ... another anit-google post? Are you guys getting paid for therse aticles or something?

    so what if google losing money on its tab?
    cheaper gadgets for me to play with

    score!!!

    Really disappointed that the Nexus tablet is only 7 inches. Here's hoping Google man up and throw a 10 incher in the ring to compete head to head with the iPad. If they did, I'd definitely get one straight away. Pure Android with none of the carrier or manufacturer crap, and easy updates.

    Also a big +1 to the comment by Chise (Saturday, June 30, 2012 at 8:11 AM). Well said and couldnt agree with it more. I'd rather support the underdog rather than the established players who are in it for profits rather than innovation.

    You need to see it like an investment... Companies spend billions of dollars on investments for the future. Look at facebook and instagram.... Google obviously aren't going to lose billions as they plan to be breaking even on the sales, but it's setting them up for $$$ later on down the track... It's comparable to in-app purchases when you get a good free app, it makes money off the child nodes of the root product... Good move Google... If anything the success of apple has shown us, it's that mass users pay off.

    The word, my friend, is kamikaze, not kamikazi.
    Want proof? http://en.wiktionary.org/wiki/kamikaze
    Just saying...

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