Very interesting article on Engadget regarding pricing model for the google and amazon tablets. How skipping profit on devices for profit in content sales may work well for them (google & amazon), but for third party manufactuers it creates a problem in that it installs a false value in consumers, and makes it near impossible or third party's to compete in the market.
http://www.engadget.com/2012/11/03/editorial-amazon-and-google-are-undermining-mobile-pricing/
http://www.engadget.com/2012/11/03/editorial-amazon-and-google-are-undermining-mobile-pricing/
Editorial: Amazon and Google are undermining mobile pricing, and that may hurt everyone
By Jon Fingas posted Nov 3rd 2012 1:00PM
Editorial
When Google unveiled the Nexus 4, Nexus 10 and a refreshed Nexus 7 in October, the moment was arguably the crescendo of a change in the Android ecosystem that had been building ever since Amazon's Kindle Fire first braved the marketplace in 2011. Along with a widely expanded Amazon lineup that includes multiple Kindle Fire HD models and a price-cut tweak to the original Fire, two of the largest players in the mobile world now have top-to-bottom device businesses built around selling at break-even prices and recouping their money through content. That might sound good on the surface, but it's a bad omen for competitors that genuinely can't respond in kind -- and it could erode some of the values of diversity and innovation that we're supposed to hold dear as technology fans.
Customers have no reason to complain on some levels. How do you beat a $199 Nexus 7 that has a healthy amount of storage, a high-resolution screen and a recent OS? A $299 unlocked Nexus 4 that costs just over half as much as anything comparable, or a $159 Kindle Fire? If price is a vital factor, you don't. Parents who want to give each of their kids a tablet, or smartphone newcomers to whom the Nexus 4's price means avoiding two-year-old hardware and software, may not have much choice. Amazon and Google may well be doing us a favor by democratizing mobile technology.
That bargain-basement pricing is setting some decidedly unrealistic expectations, however. We're now to the point where there is a vocal contingent of tablet buyers who think that any 7-inch WiFi tablet costing above $249 is "overpriced," even when few if any hardware-centric companies could match that price-to-performance ratio and expect to stay above water. Acer got flak over its $230 Iconia Tab A110 not matching Amazon or Google's features, despite it being virtually self-evident from the design that the producer couldn't go much lower without taking a loss. And the iPad mini is virtually a persona tabula non grata among that crowd -- regardless of possible differences in build quality, camera quality, screen size or the absence of ads. Even Apple's lowered profit margin on the $329 price is considered an unforgivable sin for this group, in part because there's a profit margin in the first place.
The strategy... trains a legion of customers to think that such a jump in value is completely normal and sustainable by most of the industry.
You can see what problems this might create in the long term. The strategy effectively skips a whole cycle of traditional price drops as manufacturing gets more efficient, but trains a legion of customers to think that such a jump in value is completely normal and sustainable by most of the industry. It's not, and you can see the arbitrariness through the pricing for devices that were launched just a few months ago. Imagine how Samsung feels when the Nexus 10 it makes is superior to the Galaxy Note 10.1 in some ways, but has to cost $100 less. If it weren't for the Nexus 10's currently non-existent retail presence, Samsung would have trouble justifying the Note 10.1's otherwise very competitive $499 price. Yes, ASUS is making a tidy income alongside its Google deal, but the fact that it's shipping a million Nexus 7 tablets a month leaves little doubt that higher-end (and higher-margin) tablets like the Transformer Pad Infinity are being overshadowed. Competition in mobile is difficult enough when most top-tier buyers automatically pick a Galaxy S III or iPad. It's tougher still when many of the remaining people demand that companies sell at prices they can't realistically offer.
A year of following this strategy of pursuing price above all else may well have had a withering effect on competition. At least until this summer, Amazon became the de facto leader of the Android tablet market while electronics heavyweights like Samsung couldn't break much ground. HTC and LG quit the category mostly due to their lackluster offerings, but it's hard to see the two of them finding a safe zone between the high-end and a cutthroat low-end. RIM barely had any time to discount the BlackBerry PlayBook to near-fire sale prices before the Kindle Fire arrived (originally made in the PlayBook's own factory) and demand stalled once again. Most of those who are left exist at the extremes, such as Barnes & Noble's Nook line in the budget realm or Samsung's Galaxy Note 10.1 at the top. In smartphones, the Nexus 4 is admittedly less likely to rock the boat when carriers like T-Mobile can dictate pricing and access. Still, we haven't seen sustained sales of a cutting-edge Nexus phone at a low-end price, and it may be harder to say that LTE and extra storage are worth more on an Optimus G or its immediate competition.
Those exits and strategy shifts, in turn, impact innovation over the long run. It's not just the effects of fewer companies remaining involved; it's the amount of resources the survivors can pour back into future development. If profits thin out as the only real success comes from extra-cheap devices like the Nexus 7, there's fewer opportunities to gamble on technology research that might not pan out. Samsung safely developed a tablet with a 2,560 x 1,600 display and a cutting-edge processor under present conditions. Could it weather the risks as easily with lower profits? Not necessarily. To some extent, we've seen this effect in the traditional PC world, too. Before tablets and Ultrabooks took hold, many PC vendors were engaged in a race to the bottom where competition was only possible through ever cheaper parts, not breakthrough design. Prioritizing low prices above all else cost Acer both market share and money until it turned around and focused more on quality. We don't want Amazon, ASUS, LG or Samsung facing a similar dilemma in mobile.
Concepts like choice and quality, which we're supposed to love as gadget junkies, only survive if we let them.
Asking Amazon and Google to just stop making Kindle Fire and Nexus devices to "rescue" the industry would be more than a little naive, not to mention a disservice to those who really need the prices or software. But there's a sense that both the companies and we, as customers, need to back away from the edge. Tablet makers selling a complete range at that break-even level could ultimately whittle down the market to those who either produced a winning formula at the right time (Apple) or have deep enough content stores and bank accounts to willingly give up large parts of their potential hardware profit (Amazon and Google). The subsidized approach may even be volatile -- it's only successful as long as overall business is successful, which isn't very reassuring when Amazon has lately faced a few rough quarters. As for us shoppers? We need to have fewer knee-jerk reactions to certain price points. A $50 or even $100 premium isn't the end of the world if it's what any normal company would charge to stay in business, particularly when there are more features included at the same time.
That's not to excuse prices that are genuinely too high, and devices like the iPad mini might still fall into that camp. But when even budget-focused companies like Acer can't participate without being roasted by critics, it's time to reevaluate our priorities. Concepts like choice and quality, which we're supposed to love as gadget junkies, only survive if we let them. Rather than foster a culture that only allows for either the very cheap or very expensive, we ought to relax and buy what's genuinely good as long as we can afford it, even if it's not in the bargain bin. If phone and tablet makers can expect to compete on a truly level playing field, we're all better off.
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