Saturday, February 19, 2011

What Should a Tablet Really Cost?

I remember early 2010 before the iPad turned into something more than a longstanding rumor. A lot of people were interested to see what Apple could do to jumpstart a tablet PC industry that to date had only drawn interest from a handful of tech enthusiasts. Sleek design, intuitive features and mass market appeal went a long way, but what blew away a lot of people was the $499 price point.

Of course, there are more expensive iPads. The top end model with 64GB of storage and a 3G antenna costs $829, on par with the projected sale price of the new Motorola Xoom, but if you ask someone how much an iPad costs, most would say “$500”.

What about the New Guys?

With that in mind, can new devices compete with Apple when their starting price points are so much higher? A lot of the excitement surrounding the Xoom was tempered when we found out it would ship at $799 with a WiFi only model available for $600. The Galaxy Tab only gets under that magic $500 price point with a contract through a mobile carrier.

And it’s not as if Apple takes a hit on profits. I believe Apple likely makes the same amount of profit on their devices, regardless of a $500 price point, as Motorola, Samsung, RIM, HP and LG are likely to make with their new tablets. The difference is in the economics of scale. Apple produces significantly more devices when they launch a new product – they have a worldwide brand they can mobilize to sell those products. And now that Apple has taken such a commanding lead in the early tablet market, they can afford to keep their price points low going forward.

The cost of components are such that, unless a manufacturer plans well in advance, shoring up stockpiles of key components (especially those screen materials), they cannot afford to compete on certain levels. Apple’s moves in January to invest $3.9 billion in long term contracts for certain components show what a company with so much cash and an existing market so large can afford to do in shoring up its competitive advantage.

Remaining Profitable

The cost of components is always shifting and so too will profit margins for these companies. I’m hopeful that pricing will not harm companies that aim for innovation in the tablet market. Companies like Motorola and Samsung need to make a profit to stay in business. They cannot afford to cut their margins too thin just to compete with lower priced devices.

And as consumers, we need to remain supportive of higher priced devices with advanced technologies, especially if we ever want their prices to drop. Because unless they develop a stronger following, these other companies will never have the leverage needed to make the same investments as Apple.

How much should a tablet cost? I feel that functionality dictates a lot of the cost. An entertainment focused device like the iPad or Galaxy Tab should cost what a reasonable consumer can afford to pay - $500 seems to be the magic number. But, larger, more powerful tablets can and should be able to sell for slightly higher price points. What that number ends up being remains to be seen, but as long as consumer interest is there, hopefully it will remain low enough to be affordable. And for those companies that can afford it, WiFi only models and smaller screen sizes will be effective ways to provide a reduced cost lineup for entry level tablet users.z 

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