It's not a race to the bottom for tablets, it's strictly an iPad market

It's not a race to the bottom for tablets, it's strictly an iPad market

Summary: Some pundits believe the low prices of the Kindle Fire and the Nexus 7 have killed the tablet market. That view mistakenly overlooks the lack of a proven tablet market to begin with.

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TOPICS: Tablets, Amazon, Google, iPad
38
JK Tablets

Apple started an avalanche of activity with the introduction of the iPad. Companies shifted gears to go after this undiscovered new tablet market. In spite of the number of players in tablets, no company has discovered the magic bullet to knock the iPad off the top of the tablet heap.

Colleague Adrian Kingsley-Hughes has a thoughtful piece blaming Amazon and Google for killing the tablet market. His reasoning is that by releasing the Kindle Fire and the Nexus 7 at $199, Amazon and Google have started a "race to the bottom" of the tablet market that will ensure no profitability for anyone.

Adrian's reasoning is solid, but it overlooks one thing I have said for a long time. There is no proven tablet market. Even after all the activity in the tablet space, there is still only a proven iPad market. 

The only company with any tablet sales to speak (besides Apple) is Samsung, and the company has not been quick to claim a lot of profits. Even Samsung had to release a whole slew of tablets in every size and shape to try to steal iPad sales, seemingly to no avail.

Historically, when a race to the bottom (reducing pricing so low prifitability is not a given) is dictated by the market, it's more a sign of a lack of a market in general. If enough buyers aren't willing to pay enough for a product to make producers a profit, the market is just not sufficient.

That's what we are seeing in the tablet space. Apple has struck a balance with the iPad to create sufficient demand that buyers are willing to pay profitable prices for, but no one else has even come close. There's an iPad market, but not a conventional tablet market.

That doesn't mean that Google and Amazon won't make money on the Nexus 7 and Kindle Fire respectively, just not in the conventional sense. What the situation is indicating is that the real (and only) market for tablets without an Apple logo is from auxiliary sales created by having the products in buyers' hands.

For Amazon those sales are content and other product sales the Kindle Fire is stimulating through customer usage. The company is not specifying what those sales might be but odds are they are significant.

The Nexus 7 is too new to the market to make definitive claims, but odds are Google will get good mileage selling mobile ads and Android good will from the tablet. The end result will likely be a net positive for Google, even if the Nexus 7 is selling at a break-even price or a slight loss.

The company with a big exposure so far is Asus, the maker of the Nexus 7. Unless Google is paying Asus a lot of cash to make production of the tablet profitable, it might not be able to make them for long. Asus doesn't have any auxiliary sales from the Nexus 7, so the exposure to the race to the bottom is very real.

Don't get me wrong, I believe there is sufficient demand for non-iPad tablets. I just haven't seen any proof that consumers are willing to pay enough for them to make companies any money. 

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Topics: Tablets, Amazon, Google, iPad

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  • Just curious where you got your PhD in Econ?

    "Historically, when a race to the bottom (reducing pricing so low prifitability is not a given) is dictated by the market, it's more a sign of a lack of a market in general."

    No, this is actually the sign of a competitive market.

    Note that competitive markets are not always best for consumers, especially where economies of scale can result in drastically lower prices but in those cases, you typically have government supported (and heavily regulated) monopolies in place.

    So should the government start regulating Apple? I think it might actually be a good idea. Allow Apple to keep their monopoly but force them to sell the iPad at 25% less than they currently do. Apple would still rake in the profits and consumers would benefit from lower prices. I like it.
    toddbottom3
    • You mean like a smaller cheaper iPad?

      "Allow Apple to keep their monopoly but force them to sell the iPad at 25% less than they currently do."

      Release a smaller iPad at 25% - 40% cheaper than the current iPad - There. problem solved without government intervention. :-)
      dave95.
      • Convince Tim Cook of that.

        Since everyone else who makes tablets already do compete by putting out smaller size models.

        And Apple sets Apple's prices. Who are you to say Apple should sell a slightly smaller ipad at 25~40% less, the government? :-)
        HypnoToad72
    • I aggree

      "Historically, when a race to the bottom (reducing pricing so low profitability is not a given) is dictated by the market, it's more a sign of a lack of a market in general."

      Really? PC margins have been are what - 5%? Laptops are under 10% as well - see any lack of market there, James?
      vgrig
      • Then why have all the PC company's consolidated into a handful?

        Because profits are so low they can only hope to make money with volume. Oh, and by the way none of them are doing very well financially, except Apple.
        GoPower
        • Totally agree with you

          "none of them are doing very well financially, except Apple"

          Classic sign of an extremely sick market. You can say all the competition sucks (you might even be right). You can say only Apple profits (of this you are certainly right). You don't understand though that all you do is make my point for me. These are classic signs of a sick, uncompetitive market.

          I get why you get your knickers in a knot when I mention the word "monopoly". You have to defend the hive. It's cool. What I don't understand is why you actually cheer for a market where there is only 1 good product available and where, as you put it, all the others suck. Wouldn't you prefer a market with a choice of multiple good products? Isn't that a direction we should all want the market to go? This "happiness" you show at this sick market simply doesn't make sense. This market isn't good for you.

          Hopefully things change for the better in October 2012. Anyone who is hoping for failure in this market is cheering for something that is doing them great harm in the long term.
          toddbottom3
          • Only one good product...

            Yes, as you and others here have clearly shown, Apple is running away with this markets - at least the profit from this market.

            The problem isn't Apple. The problem is that the laggards refuse to spend the money, time and management attention to create something OF THEIR OWN that is BETTER than the iPad. your entire argument is much like arguing that the kids who didn't do their homework should all be given A's simply because they showed up for class.

            Samsung, HTC, HP, Acer and the rest of these folks deserve to make a profit when and only when they actually make the effort to create their own insanely great stuff.
            z2217
          • Competitors have been clueless

            Acer's ceo called the tablet market a fad a year ago.

            Google's Eric Schmidt said in 2010 that there was no "difference between a large phone and a tablet."

            In 2010 Bill Gates said this about the iPad: It's a nice reader, but there's nothing on the iPad I look at and say, 'Oh, I wish Microsoft had done it.

            HP released the Slate as a serious competitor (crazy) and then killed WebOS chances. DELL released the Streak and Inspiron Duo as their iPad competitors (equally crazy), and then disappeared.

            RIM released their PlayBook tablet without an email client, requiring you to tether to a BlackBerry (tsk tsk).
            dave95.
          • Can't refute anything you said

            But I don't cheer it. It seems to make some people absolutely giddy that they don't have a choice of good competing products. I just don't get it.
            toddbottom3
          • Giddy?

            The reason we don't have a choice of other products superior to the iPad is not the fault of Apple. It is the fault of companies like Samsung, HTC, HP, Acer and their ilk that are run by pointy headed MBAs with their green eyeshades, rather than by visionaries committed to making the very best of anything other than next quarter's numbers.

            Bill Gates once said that he wished he had Steve Jobs' taste. So do I.
            z2217
        • GoPower, isn't it obvious?

          Apple has no competition in the OS X based OS market except for...Apple!

          Now you know why Apple never licensed their OS out to anyone else? Can you imagine having the choice between a $2000 Mac, and an identical Mac clone for $999? Apple would be out of business.


          And why have they consolidated into a handfull? That's an odd question - Like any other market that ever existed, not everyone in that market will survive.

          Now, If Dell, Acer, and HP merged under the new name of Dacerhp, can you imagine the money they would make? They could raise the price of all their PC's by $100 and make alot of money, enough to do very well financially, without the need to worry about underpricing each other.

          You like the sound of that, don't you. Do you think it'll ever be allowed?
          William Farrel
          • Read your history

            @William Farrel: "Now you know why Apple never licensed their OS out to anyone else? Can you imagine having the choice between a $2000 Mac, and an identical Mac clone for $999? Apple would be out of business."

            In fact, this is exactly what Apple did in the 1990's when John Scully was running the show. The Mac clones never took off, in part because they were never really identical, and the price differential was more like 10-20%.
            S_Deemer
    • government regulation is evil!

      Government regulation is evil!

      Another "they got I want" taker vs. maker.

      If you think the price of the iPad is too high don't buy one! Based on the sales, the iPad seems successful enough and its "market" price seems fine, no competitor has come close to matching it.

      So now you are calling for Government intervention to bail out foreign competitors failures and punish Apple for being successful.

      A "race to the bottom" is total BS! The purpose of a free market is not to insure any company a profit, or any worker a job; its to insure that goods and services are provided in the most efficient manner possible. Any Government distortion of this process is inefficient and counter-productive in the long run.
      wally_333
      • The same thing can be said for college,

        before the corporations and politicians then whine about the state of education...

        And it is a race to the bottom, and with government giving out subsidy and bailouts, don't try to convince us we're a "free market" because we're anything but. A free market wouldn't see companies, especially big ones, get a penny of taxpayer money - especially in return for offshoring jobs to other countries.

        Your one-liners defy the deeper nuances of reality (that you also choose to ignore when it becomes inconvenient), and are just as counterproductive in the long run.
        HypnoToad72
      • Sure Wally ... in theory!

        However Government's around the world constantly are involved in regulating markets. I highly doubt you'd like to live in a truly capitalistic market.
        GoPower
      • Would have thought the sarcasm was evident

        Clearly not.

        Regardless, I take exception to this:
        "The purpose of a free market ... (is) to insure that goods and services are provided in the most efficient manner possible."

        "Any Government distortion of this process is inefficient and counter-productive in the long run."

        Not at all. As I stated above, there are markets where a monopoly with 100% of the market can provide goods and services at a lower price than 10 competitors with 10% of the market each because that 1 monopoly can take advantage of economies of scale. In those cases, the government steps in to ensure that the advantages gained from economies of scale are not wiped out from the disadvantages of having 1 company control 100% of a market.

        The purpose of a free market is to allow everyone to make selfish decisions under the theory that 300 million people making individual, selfish decisions can react quicker and more accurately to supply and demand changes than 1 central authority can.

        You also have to be careful when you talk about efficiencies. The free market encourages companies to be internally efficient. There is no incentive for a free market company to reduce external costs like pollution. If a free market solution results in "savings" of $1 billion in the amount paid for the product directly, but costs society $2 billion in environmental cleanup costs, the free market is NOT delivering an efficient solution to society as a whole.

        "So now you are calling for Government intervention to bail out foreign competitors failures and punish Apple for being successful."

        Hey, it worked for Apple when they convinced the DoJ to punish MS for being successful. Apple wouldn't be here today if MS didn't have incentive to keep it alive with a bailout.
        toddbottom3
    • Agreed. Think of it this way -

      Why aren't all cars priced the same as a Cadillac, Lexus, or BMW?

      or Why didn't Apple allow Mac clones?

      The difference - Quantity over Quality. better to sell a 1000 computers at $499 with a 20 dollar profit, then 250 computers at a $60 profit. It's simple math - how many computers would Dell sell at a $1500 entry point, when Acer or HP offer you the exact same thing for $700?
      William Farrel
    • So why should they be regulated?

      Price?

      If so, then what are other 10" tablets going for?

      Curious, should Google be regulated given their monopoly on web advertising?
      TroyMcClure
    • Where did you get your High School education in Econ?

      Must have been public school. Apple doesn't have a monopoly in tablets, you're free to buy an Android one, there are dozens out there. They just all suck.
      GoPower
      • But that can't be true

        James just convinced us that there is no tablet market, only an iPad market. Since Apple is the only company making an iPad, James has just proven that Apple has a monopoly.

        PS Microsoft didn't have a monopoly in OSs. You were always free to buy a Mac or use Linux. They just sucked.
        toddbottom3