Amazon & Google pricing models = dangerous territory for manufacturers

[MacRumorUser]

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/e...obile-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.

[VulchR]

Not sure if it was really necessary to quote the entire article. In any case I read this and I am not convinced that there is much of a threat. However, it would be interesting to see how much Google makes of each Android device by selling information about the user to businesses that use it for targeting advertisements.

[MacRumorUser]

I quoted the entire article so that people viewing on apps like tapatalk don't have to leave the thread to read the article.

[Rodster]

That's why Amazon prefers to sell their tablets at cost. The hook is they think you'll buy Amazon Prime and other stuff from them once you buy a Kindle Fire. It worked for me. I'm now hooked on Prime.

[Oletros]

Originally Posted by VulchR

by selling information about the user to businesses that use it for targeting advertisements.

Google does not sell user information

[ugahairydawgs]

Originally Posted by Oletros

Google does not sell user information

Not directly, but they sell you (the anonymous you) to advertisers based on your data and usage patterns.

[Oletros]

Originally Posted by ugahairydawgs

Not directly, but they sell you (the anonymous you) to advertisers based on your data and usage patterns.

False, they don't sell you, anonymous or not.

----------

And regarding the Engadget editorial, I don't think that it is a real threat to other manufacturers

[VulchR]

Originally Posted by Oletros

False, they don't sell you, anonymous or not.

I am not sure whether you do not understand how Google makes profits off of Android, or whether have some lawyerly definition of 'selling' that no other reasonable human being would accept, or whether you're just trolling. Frankly, I don't care which. Read this link and then try to justify what you wrote.

[linkgx1]

So basically only Mercedes Benz should make cars?

[Oletros]

Originally Posted by VulchR

I am not sure whether you do not understand how Google makes profits off of Android, or whether have some lawyerly definition of 'selling' that no other reasonable human being would accept, or whether you're just trolling. Frankly, I don't care which. Read this link and then try to justify what you wrote.

Perhaps the one trolling is you because your link doesn't say nothing about selling you or your information.

Perhaps the one that doesn't understand how Google makes profit off of Android and has to is you because Google doesn't make money selling you or your information.

Perhaps the one that has to read that link and the justify what you wrote is you.

[onthecouchagain]

Read the comments in that article. A lot of people have very good reasons to disagree with the article.

Google has struck a very fine balance of affordability with good hardware and specs, and obviously great software.

When that happens, the consumer wins.

[Apollo 13]

The ppl in the comment section are freaking idiots. This has nothing to do with Apple. I think the guy just through Apple name in the article to make fanboys happy but it backfired. This is hurting companies like ASUS, Toshiba and the other tablet makers on android. These companies can't go that low in price because they don't sell software. If they go low they will lose money on their hardware. People need to stop looking at this as a Apple vs Android thing. I see the only choice for these manufactures is to start making Windows 8 devices, cuz I sure don't see MS making hardware and selling it cheap.

[MacRumorUser]

Originally Posted by Apollo 13

The ppl in the comment section are freaking idiots. This has nothing to do with Apple. I think the guy just through Apple name in the article to make fanboys happy but it backfired. This is hurting companies like ASUS, Toshiba and the other tablet makers on android. These companies can't go that low in price because they don't sell software. If they go low they will lose money on their hardware. People need to stop looking at this as a Apple vs Android thing. I see the only choice for these manufactures is to start making Windows 8 devices, cuz I sure don't see MS making hardware and selling it cheap.

Exactly my take on the article. Why does everything have to be apple v android, when its not. It's clearly just economics. Lets face it Samsung were the only ones who could feasibly make the Nexus 10 (they manufactured the screen, memory, chipset) and even then it looks like its being sold very close to the bottom line in order to get Android nexus device its foot firmly in the door and make its mark.

I imagine it will be the top selling Android 10" device without doubt.

So with the bottom filled with high spec device, then you have to question why should Toshiba, Phillips or LG even try to compete because they can not offer the same machine / hardware for $399 as the profit margin would be too close to the bottom line to make the research and development, marketing and justify the advertising costs, making it worth while.

It likewise seems to have caused an expectation of very high specs and bottom end pricing within consumers.

It's a fallous reality one that may not be sustainable to third party manufacturers who can not subsidise bottom end pricing by selling content on the device.

[Evoken]

Originally Posted by VulchR

how much Google makes of each Android device by selling information about the user to businesses that use it for targeting advertisements.

This is a common misconception which is sadly repeated too often, but in truth Google does not sells your personal data to anyone.

[ChrisTX]

A lot of people that don't grasp the general idea of business don't understand why it's not feasible for a majority of the tech companies out there to sell at a loss. People see Amazon, and Google selling at a loss, and think everyone else is ripping them off because they're trying to make a profit. Amazons primary business isn't tablets, and e-readers so they can probably keep it up longer, so long as people buy content from them. Google makes money off of advertising through their search engine so they probably don't care as much either. However companies like Asus, Apple, Samsung, and others rely on hardware sales. Granted Apple makes a ton of money off of software sold through the various iTunes stores. People eventually will start to think $200 tablets are the norm.

[Night Spring]

Originally Posted by Evoken

This is a common misconception which is sadly repeated too often, but in truth Google does not sells your personal data to anyone.

Google may not sell your personal data, but they do use larger patterns from your usage habits to target ads. For instance, if you visit MacRumors regularly, you might see more ads related to Apple products and accessories. It's not a direct sale of user data, but nonetheless, they are leveraging user data to (hopefully) gain more revenue.

[Evoken]

Originally Posted by Night Spring

Google may not sell your personal data, but they do use larger patterns from your usage habits to target ads. For instance, if you visit MacRumors regularly, you might see more ads related to Apple products and accessories. It's not a direct sale of user data, but nonetheless, they are leveraging user data to (hopefully) gain more revenue.

Yes, this would be a fair description of what Google actually does and is a far cry from the "Google sells your personal data to advertisers" line that is so often repeated. They don't pass along your personal data to anyone, they keep it to themselves and leverage this data to improve their products and services and to also offer better placements for ads. If Google actually sold your personal data or gave it to someone else, it would actually be harmful to their business.

This is a good short article on the subject:

http://www.pcmech.com/article/does-g...l-information/

It gives an accurate description of what Google does with the data they collect.

[onthecouchagain]

EDIT:
Ah, I see some answers are already provided. Thanks.

Originally Posted by Oletros

False, they don't sell you, anonymous or not.

What does Google do, exactly? I'm not sure.

----------

Originally Posted by Evoken

This is a common misconception which is sadly repeated too often, but in truth Google does not sells your personal data to anyone.

Pardon my ignorance as I was under this impression too. What does Google actually do?

[onthecouchagain]

More rumblings that Microsoft may start producing their own smartphone: http://www.theverge.com/2012/11/2/35...dows-phone-wsj

I honestly don't see why they wouldn't. And if MS should price them competitively too, especially if Windows 8 doesn't take off and they have to entice people with lower price points? For better or worse, the model may be changing...

[F123D]

Without competition, we just end up with companies like Verizon and AT&T where the consumer loses.

[Tarzanman]

Originally Posted by MacRumorUser

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.

BS argument is BS.

ipad ruled the roost even when competitors brought out cheaper tablets that weren't as powerful. Compare the original Galaxy Tab to the Ipad 1 or the Xoom to the Ipad 2. No one was complaining then about cheaper alternatives creating a 'false sense of value'.

But then someone figures out how to turn a profit by selling a still-not-quite-equal-but-pretty-darn-good product at an even lower price and all of a sudden the sky is falling and oh-my-gosh-some-of-these-companies-might-lose-money if they can't maintain their price point.

There isn't anything keeping these cash-rich, profit-margin-leading manufacturers from competing (except for inertia perhaps). Are you trying to tell me that Apple's vaunted hardware pipeline and legendary negotiation tactics with suppliers are just not up to the task?

Well, then maybe they should do what their competitors have done.... taken a good hard look at the market and figured out their where they can make money, and changed their business model/strategy accordingly.

[SlCKB0Y]

Originally Posted by VulchR

by selling information about the user to businesses that use it for targeting advertisements.

What information about users do you think Google discloses to third parties?

[roxxette]

Originally Posted by SlCKB0Y

What information do you think Google disclose to third parties?

Dont bother with those comments, most do it because they dont know better or saw some idiot saying that google blah blah and the heard followed.

[KentuckyHouse]

What this feels like to me is fear. Fear that people might be losing the allusion that you need to spend $500+ on a tablet or $700+ on a phone to get the very best. And yes, I'm talking about Apple.

The worst case scenario for Apple is the public-at-large realizing they can get just as much phone or tablet for HALF the price.

IMO, Google has done a very smart thing here. Pull back the curtain and show consumers that you don't have to take out a second mortgage to afford a top of the line phone or tablet.

I'd love to see Apple take note and drop their prices some, but I doubt we'll ever see that happen.

[sarcosis]

Originally Posted by KentuckyHouse

What this feels like to me is fear. Fear that people might be losing the allusion that you need to spend $500+ on a tablet or $700+ on a phone to get the very best. And yes, I'm talking about Apple.

The worst case scenario for Apple is the public-at-large realizing they can get just as much phone or tablet for HALF the price.

IMO, Google has done a very smart thing here. Pull back the curtain and show consumers that you don't have to take out a second mortgage to afford a top of the line phone or tablet.

I'd love to see Apple take note and drop their prices some, but I doubt we'll ever see that happen.

I have to say, I would love to see cheaper new tablets and smartphones from Apple, but it's not going to happen. You will see, however, the model that was last years sell for cheaper. That's the model that they have chosen to use. This way, it keeps manufacturing costs down and profits high. Apple is a premium company which sells a premium product that provides a premium service. It's kind of like Lexus, you buy a reliable car, but will get great service along with it. But enough about Apple, the much more interesting thing is about Android Tablets.

From what I could tell from the article, i did read all of it, but started to glaze over from all of the whining, is that Google and Amazon are using a different business model than Samsung, Acer, Toshiba, etc. They make money off of ads and content they sell. Samsung and the other device manufacturers make their money off of the hardware they sell. The problem is that they overpriced the tablet for what you get. Google and Amazon brought in that hardware and software and sold it at a more reasonable price for them and for the consumer. It's what you call the beauty of capitalism and great for the consumer. The Nexus partners get paid by Google and Google makes their money back by the amount they serve you ads and the money from the store. Imagine what the wireless industry would look like if we could have this kind of competition...