New Tablets Forego Profit to Compete with IPad on Sales

Yahoo Contributor Network

In the world of retail, dominated by Wal-Mart, the biggest company is usually the one that gives up the most profits; lower prices in exchange for more sales, wider reach, and more customers buying from them instead of from pricier competitors.

Apple breaks the rules for retail, pulling in vastly better profits per square feet than even luxury retailers like Tiffany & Co. And its iPad tablet, which pulls in phenomenal profits, is nonetheless so aggressively priced that so far there's been only one way for tablet manufacturers to compete: By giving up all hope of turning a profit.

A "net loss per unit sold"

That could very well be the effect of Google's not only pricing its Nexus 7 tablet so low it does not make a profit, but also "absorbing all marketing costs" for the device, as Google's Android head Andy Rubin confirmed to All Things D. Google's not alone; last year IHS iSuppli estimated the cost of producing Amazon.com's Kindle Fire tablet at a couple of dollars over its $199 sale price, while Barnes and Noble -- the first company to offer a name-brand 7-inch tablet in that price range -- had been selling the $249 Nook Color for about a year before that.

(Barnes and Noble has since cut the Nook Color's price tag to below the Kindle Fire's, and introduced an improved Nook Tablet which costs the same as the Fire.)

Making it up in volume?

What all three budget, name-brand tablet makers have in common is that they hope to make up the costs by selling digital content. In other words, the apps, books, music and movies their stores (or most of their stores) sell. Barnes and Noble pioneered this model with kiosks in its brick-and-mortar bookstores, aggressively promoting the Nook Color as a way to buy digital books from its catalog. Now Google is getting in on the act, selling the Nexus 7 through its Google Play store, which is Google's counterpart to Apple's iTunes and App Store.

Apple's own digital store, however, only runs at "a bit over break-even," per an earnings call that the company made in 2010. Apple makes most of its profits through hardware sales.

Not much choice

Apple's supply chain monopsony allows it to buy the world's entire stock of certain hardware components, according to Philip Elmer-DeWitt of CNN Money. It's given priority over its competitors in purchasing them, and can obtain them for lower prices. Partly because of that, and partly because of its government-granted patent and copyright monopolies to the iOS operating system, no one else can make a competing tablet that does the same things as the iPad and makes as much profit for the same price.

Apple's deals with music and movie studios, though, as well as its catalog of hundreds of thousands of apps designed to work on iOS, also give it a huge advantage in the "digital content" market ... even if the iPad costs more than twice as much as a Nexus 7 or other 7-inch name-brand tablet.

Jared Spurbeck is an open-source software enthusiast, who uses an Android phone and an Ubuntu laptop PC. He has been writing about technology and electronics since 2008.

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