Could the Amazon Tablet Help to Reduce the Cost of the iPad 3?

September 7th, 2011 by

A bargain-basement Amazon tablet could force Apple to follow suit and lower prices for its upcoming iPad 3. The end result would be good for Android and iOS fans alike.

Back in March, Amazon announced its AppStore for Android. Now we’re starting to understand why.

People don’t want to pay $500 for a non-Apple tablet. Sales of the $600 Motorola Xoom and $500 Blackberry Playbook prove that. The only ways to get meaningfully far below that price point are to either make a clearly inferior product, or to take a large loss on each unit sold, as HP are doing now with their TouchPad. Neither option is financially viable – the first won’t sell and the second won’t turn a profit.

According to an article on Business Insider, Apple only barely profits from its entry-level $500 iPad 2, only avoiding losses because it sells through its own retail channels, without sacrificing profit to stores like Best Buy and Walmart. Though all other models produce healthy profit margins, they are a healthy distance from that $500 price point.

Enter Amazon. With its immensely popular Kindle bookstore and steadily growing Amazon AppStore, the ecommerce giant is in prime position to introduce an Android tablet. Adopting a razor-razorblade strategy and taking a loss on each unit sold would prompt a spending frenzy, allowing Amazon to recoup its losses through selling books and apps. Amazon already practices something similar – subsidizing free 3G for all its Kindle customers with money earned from their book purchases.

The rabid purchasing delirium sparked by HP’s discontinuation and subsequent price drop of its TouchPad proves Amazon can succeed; almost no one wanted a TouchPad at $500, but at $149 Best Buy stores around the country sold out the same day the price was cut. An Amazon tablet at $200, or even $300 would turn many a head, providing that it use components on par with that of the iPad 2. In addition, Amazon has a huge online retail channel with which to distribute and advertise it – just look how affective that strategy proved with the Kindle.

The success of an Amazon tablet would hinge entirely on whether increased book and app sales would be enough to eventually generate a profit. If the model works, it will change the industry forever.

In the face of such fierce competition, Apple would be forced to follow suit and adopt a similar model – one that would quickly become a prerequisite for anyone looking to introduce a tablet. Because only Apple, Amazon and Google currently have effective digital markets through which to recoup their initial loss, the tablet market would shrink quickly. The short-term affects of such a paradigm shift would be great for anyone looking to buy a tablet, though such high barriers to entry may eventually stifle innovation from smaller companies wishing to stem the tide of the Amazon.

Guest Blogger: Written By Sam Feinburg, from Fecundmusings.com

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