Nexus 7 leaves Google with razor-thin profit margin

Nexus 7 leaves Google with razor-thin profit margin

Summary: Analysts estimate that Google's first branded tablet will generate very little income per device. What will make the tablet a profitable venture?

TOPICS: Google, Android, iPad

Google's first branded tablet was bound to rouse the interest of analysts across the globe, as well as appeal to consumers. Combine that with a bargain-rate price of $199 and curiosity becomes surprise.  

Can Google make a fair profit margin on the device, which was announced last week for preorder? Or is the price tag on the Internet giant's first tablet model, the Nexus 7, based on gaining a customer base rather than profit margin?

This is where hardware specialists come in. Research firm UBM TechInsights recently came up with a preliminary cost estimate of $184 per device, which covers components and assembly of the Google tablet.

If we compare this to an estimate of $153 for the identically priced Kindle Fire, the story becomes more intriguing. $199 for a tablet, which would make the company a measly $15 in profit; and the Kindle Fire, which makes $46 a head.

So why do it? It's possible that the Nexus 7 has been designed to either snatch away the consumers who are buying Kindle Fires or Barnes & Noble's Nook tablets, or lure enough of a market share that constructing additional revenue streams based on the use of the tablet becomes worthwhile.

Google is paying more for the hardware, which correlates reasonably with the list of features that are more advanced than either the Amazon or Barnes & Noble's devices. More expensive components, potentially a better customer experience, and you pave the way for stealing a decent share in the tablet market.

Combine this with a name like Google, and you may be betting on the winning horse.

So, how does Google's Nexus 7 compare to Amazon's Kindle Fire tablet? The higher resolution display of 1,280 x 800 in comparison to the Kindle Fire's 1,024 x 600 is a plus. However, increase the resolution, increase the price. UBM placed this figure at $49, in comparison to $35 for the rival tablet.

It also includes a front-facing 1.2 megapixel camera for video chat, through Skype or Google+, which the Kindle Fire lacks. Not great for snapshots, but still a step up on the identically priced Kindle, which has no such capabilities. The tablet will also include Bluetooth and GPS features; seemingly emphasizing near-field communications.

Once you begin bolting on advanced features, it stands to reason you would need a boost in power and processing. Google chose a quad-core Nvidia Tegra 3 chip that includes four central processor cores -- and an additional fifth for basic housekeeping chores. The dual processor used in the Kindle Fire stands at $18 -- Google's multichip set costing an additional $7 per tablet.

If the estimated cost of construction proves sound, then the Nexus 7 must be intended for use in other ways to claw back some of the potential lost profit margin Google has established for itself. What has the company chosen? According to reports, online advertising revenues will make up the shortfall. In comparison, Amazon relies on downloaded, purchased content -- and does well by it.

Both of these lower-end tablets will generate revenue through additional content and services, whether through advertising or downloadable content.

In comparison, Apple has the high-end tablet market in the bag -- through intense hardware development, UBM pegs Apple's estimated cost of production at $278, generating profit of $171 per device on a $499 iPad.

This post was first posted on CNET.

Topics: Google, Android, iPad

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  • It will be interesting to see if hey timed this right.

    The Fire was perfectly a timed introduction with the traditional holiday season. The Nexus 7 introduction is timed at the traditional tech slump in the summer. Given the immense popularity of the Fire as a gift item, I wonder if Google/Asus jumped the gun by 3 months or so.

    Time will tell.
    • True but...

      Maybe they were aiming for the back to school crowed.
      • They need to bring back editing.

        crowed = crowd
        • Editing? True. Would help if...

          My first comment under this new system showed my username as well. Avatar is ok, but says "Username not displayed."
      • Or the travel crowd, or the ......

        Knowing the quality of ASUS (I own a few of their products) and Google's general attention to detail around Nexus, add in the price and I am buying one strictly out of curiosity.
  • It is a good launch

    The problem with the launch is that it will never get enough exposure to challenge anyone until Google gets the product on store shelves. Just selling through their website is a limited market and will not make it a huge seller.
    • Bricks & Mortar

      Apparently, the Nexus 7 will be available at Gamestop stores, possibly as early as July 20.
      • GameStop?

        They'll need a more aggressive retail strategy than just GameStop, a struggling company in itself.
      • Oh

        Put it in Best Buy and you will likely have the market they need!
  • "which would make the company a measly $15 in profit"

    As long as the user collects it from the factory and it isn't boxed and Asus and Google didn't invest any money in research and design for the thing...

    That said, I just tried to order one, it looks like I might have to go to the factory, the Nexus 7 won't be available here, in mainland Europe... :-(
  • measly?

    I'd be thrilled to buy $20,000 dollars worth of Nexus7's for $184 each and sell them for $199 each which would be an 8.1% return. Seeing how my CDs are doing, maybe 1.5%, that would be great!

    Where else can Google invest their cash and get 8% return? Let me know too.

    The purpose of free markets is not to insure any company a profit, or any worker a job, its to insure that goods and services are available as efficiently as possible.
    • That's not even counting the ad revenue

      Google has always made its money primarily through ad revenue. They're not taking a loss on these and they're basically selling devices to print them money.
    • That's the bill-of-materials

      The cost of bringing the device to your grubby little hands is considerably more (how much more depends on information that will never be made public). This is almost certainly a loss-leader, with an expectation to profit down the road by selling other services, particularly through bundled apps.
    • On the 8% profit..

      How much would be the profit if Google produced 10 million of these things and sold only 7 million? Will they get a refund for the remaining 3 million that will sit on shelves when the next great piece of junk hits the market?

      As is the typical fate of the gadgets that contribute to the pile of electronic junk on Earth.
  • FIRE owner, NEXUS 7 on order

    Camera is big deal, as is the superior screen resolution.

    Looking forward to testing it in the real world.
    Peter Sabin
  • Google will make oodles

    If the only Nexus were the 8gb model, this argument might carry weight, but has a poll that suggests that about 3 times as many buyers are ordering the 16gb version. Assume that the manufacturing cost is identical for the two devices, and that the extra 8gb adds $5 to the component cost, Google would be making about $60 per device; split that difference between the two models and (if my math is correct) you end up with an average profit of $45. Reportedly, the first production run is 600,000 units, which works out to $27 million profit. Granted, that's little more than a rounding error in Google's overall financial picture, but that's just to start.
    • Expect a second device and a third .....

      It will be a surprise if Google isn't already looking at a next round Nexus tablet and beyond. Personally I think it is a great idea.
  • Americans are funny

    They are thinking it's a bad thing if company was selling software with just thin margin. Do they really love companies and hate consumers?
    • flawed ideology

      I grant you that. Obviously Google is primarily after market penetration vs. per product margins. But, god forbid an obscenely profitable company choosing to make a little less money but gain customers.
      • This is why OEMs stand no chance

        And why Microsoft wasn't "throwing OEMs under the bus" as ZDNet is fond of saying. With Apple, Amazon, B&N, now Google and shortly Microsoft all competing with device+service ecosystems, they can afford to be generous on pricing the devices if it ensures a steady (and likely growing) stream of revenue. An OEM with no additional, future revenue stream needs to account for all costs plus a reasonable profit; there is just no way they can be price-competitive and still deliver a device of equivalent quality.

        It'll be interesting to see how many such ecosystems the market will sustain. I can think of one of other company (Netflix) who could enter the fray if they so desire...any others would likely have to create something from whole cloth, and it's a little late in the game for that.