Let the Tablet Wars Begin
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The release and initial great sales of Google’s (NASDAQ: GOOG) Nexus 7 tablet has created a bit of a stir in the technology market. Apple (NASDAQ: AAPL) is rumored to be building a 7” iPad. We’ll know in the next five weeks what the truth is.
The move by Google was a good one. They had to take control of the miserable user experience that is Android. The lack of both hardware and software control that is nominally housed under the Android umbrella is a farce. By combining obvious form factor appeal of the 7” tablet with their branding at the same price point, with better specs, than the Kindle Fire, Google would have had to intentionally botch the Nexus 7 for it to fail. Apple had to respond to the obvious hole in the mobile computing marketplace.
Amazon (NASDAQ: AMZN) blazed a trail of loss leader technology in the tablet market seeing the opportunity to sell more e-books as well as creating the more functional replacement for all of our widgets and gadgets. The 7” tablet is a more complete replacement for our wallets than our phones are. It is the right size for those on the wrong side of 40 where our eyes begin to change and reading fine print becomes more of a chore.
Even the monstrous 4+” phones are not big enough for all-day use, or not functional enough due to having to power the larger screen and the faster processor to fill it. This is part of the problem that companies like HTC have had implementing Android. Poorly optimized code, bandwidth and power-sucking applications coupled with under-sized batteries create a great user experience for about two hours.
The reason the iPad has such a huge portion of the tablet market is that it all works as it’s supposed to and people are willing to pay for the security in knowing that Apple will deliver that for them when they plunk down their money. But even Apple is affected by price. In the latest earnings call the ASPs for the iPad dropped year over year due mainly to hitting the $399 price point where the best Android tablets were. The market has clearly spoken and they would rather an iPad than an Asus for $399 even if the iPad has fewer features.
This is the challenge that Microsoft (NASDAQ: MSFT) will have to rise to with Surface and with their OEMs for Windows 8 tablets. It all has to work and work well. If one looks at the excellent user satisfaction statistics for Windows Phone 7 as beta testing for Windows 8 and Metro, then it would be fair to say that Microsoft is on the right track.
But as Amazon, Google and Barnes & Noble (NYSE: BN), have proven the $199 price point is a powerful draw. At that level people are willing to forgive a lot because of the low up-front investment. This fall is where the Androids can make gains against the iPad as Amazon and Barnes & Noble are both preparing refreshes for their 7” tablets. There has been no word on a potential 7” Windows RT tablet.
The fear for some is the rush to the bottom of the price ladder. Certainly Amazon’s razor thin margins point in this direction. But nobody here is Dell or Gateway, trying to push out the competition by undercutting them on price and lean manufacturing of hardware. The hardware is the razor and e-content are the blades in this model for the main players. The OEMs will have to differentiate on form factor and features. It’s the same for everyone in this space in the long run.
Apple enjoys obscene gross margins now but they are beginning to shrink, guiding for 38.5% in Q3 the first time below 40% in over two years. So the commoditization of the hardware has begun. All of these hardware vendors have business that the hardware is the portal to accessing so even if the margins on hardware degrade it will be the revenue generated by user that drives the bottom line and keeps the reinvestment in technology strong. Apple didn’t intend for iTunes to become a cash cow, but it did and it’s changed everything.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
