Last week, as HP slashed prices on its touchpad, consumers went nuts. Best Buys and other retailers sold out in a frenzied rush. As I speculated at the time, the news of this ravenous market for second-tier tablets would probably be of particular interest to Amazon, particularly if it could afford to price its tablet remotely near the $99 price point that so motivated consumers last week. A New York Post source “with knowledge of the plans” now says that that’s exactly what we can expect to see–maybe not quite a $99 tablet (which, after all, is less than an entry-level Kindle), but at least one that’s “hundreds less” than the cheapest iPad, currently priced at $499.
Why is Amazon the leading contender to dominate the second-tier tablet market? Because it’s the one player in the space that can sell tablets at a loss, and still wind up making money hand over fist in the long run. Apple makes the bulk of its revenue, still, from hardware. It definitely turns a profit from iTunes sales, but only the merest fraction when compared to hardware sales, as evidenced dramatically by this chart via BusinessInsider. About 80% or more of its revenue comes from hardware, while a tiny sliver–a few percentage points at most–comes from iTunes. In a recent quarter, over two-thirds of the company’s entire revenue came from iOS device sales alone. Of course, it’s important not to conflate revenue with profits–but Apple’s costs on its most popular items remain well below their sales price. The iPhone gross profit margin was pegged at about 60% last year; that figure’s a bit lower for the iPad 2, but still strong–roughly 25%, per one analyst. Apple, for now at least, is a hardware company.
That’s not true of Amazon, whose hardware mainly exists to push consumers content in its various forms. In fact, analysts suspect that Amazon already sells the Kindle at a loss, according to MarketWatch and the Wall Street Journal. (Market research firm iSuppli tore down the Kindle 3G and estimated the cost of its components as a mere $33 less than its sales price–and that’s before manufacturing, software, licensing, and others costs.) Said Rotman Epps, a Forrester Research analyst, “There is no way manufacturers can get there [to the number-two tablet spot] without subsidizing the cost…. And Amazon is one company that can do that.”
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