You Can’t Beat The iPad Just By Losing Money

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 1280×800 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.