The Below-Cost Tablet Strategy

Mike Elgan, Cult of Mac:

Here’s the under-appreciated reality of all this: HP, RIM and Amazon have all moved millions of touch tablets into the market at below cost. This has caused two problems for the market. First, it’s created a domino effect. HP’s fire sale on the TouchPad cut demand for the BlackBerry PlayBook, reducing unit sales. That contributed to RIM’s need for a fire sale of its own. (Plus, Amazon has probably long intended to sell below cost.)

All this crazy, unexpected discounting has both artificially taken market share away from the various Android tablets, and re-set consumer expectations about how much a touch tablet is supposed to cost.

Now, the only way to sell a non-iPad tablet in any significant quantity is to sell it below cost.

One important point has been left out. The only way to hit price points significantly lower than US$499 is to build tablets that are much smaller than 9.7 inches. 8.9-inch tablets are 0.8 inches smaller, but cost $400; these tablets are in a dead zone. To get the price way down and completely away from competing against the iPad the display size needs to come all the way down to 7 inches. And at that size the price has been set at $199 by Amazon and Barnes & Noble. Both companies are probably losing money selling at that price, but both plan to recuperate the losses by selling content via their tablets. Brands like LG or Samsung have enough financial wherewithal to compete in the money losing 7-inch tablet market, but they don’t have a content store the likes of Amazon and Barnes & Noble, and it will be almost impossible to make money in the long run.