23 Comments

Summary:

Motorola’s $799 price tag for the Xoom may be too much for the market to bear, so how much are consumers willing to pay for a tablet? A recent IMMR survey shows the magic number along with more data on the Wi-Fi vs 3G debate.

motorola-xoom-5-550x363

Updated: When the Motorola Xoom tablet arrived to market at $799, a collective grumble was heard, with many saying the price was simply too high. That makes sense when compared to Apple’s iPad, which starts out at $499. Apple also enjoys a competitive pricing advantage due to multi-billion deals that pre-pay for device components. But the closest comparison of a Xoom to an iPad is really the $729 model, which includes a 3G radio and 32 GB of memory just like Motorola’s Xoom. Clearly, a $499 option gives Apple customers a foot in the tablet door, but what’s the price that consumers are really looking to pay for a tablet?

Based on a survey by the Institute for Mobile Markets Research, that figure ranges between $351 and $524. The former figure represents the mean amount representing such a good value that a consumer would definitely purchase one. The latter price of $524 is the mean response from survey participants who say they’d never pay that much or more for a tablet. The survey reflects a total of 814 participants, 38 percent of which were already “very or extremely interested” in a tablet device, which makes sense. Folks who aren’t even interested are likely to skew the prices even lower. There’s even a price point that’s “too low” as survey respondents feel that a mean tablet price of $202 is likely a device of “questionable quality.”

Obviously, only one of the current iPad models — there are six — fall into the desirable price range, and yet the company has sold more than 15 million of its first iPad and is expected to move up to 40 million more this year as iPad 2 arrives later this week. How then, are the sales quickly rising if the models cost more?

I suspect many mainstream customers consider the base model with 16 GB and Wi-Fi only as a starting point. And for some, that particular unit is more than good enough to experience the “post-PC” era. It works at home with no monthly data plan and still has plenty of room for hundreds of apps. After that, these consumers essentially consider a self-upsell for additional storage, since you can’t add capacity later, or justify the 3G radio with the lack of a contract. There’s no such current choice with the Xoom: It’s either $799 for a month-to-month 3G deal or $599 with a 2-year data commitment, and that’s an obstacle for tight budgets.

How much negative impact does a data-plan contract have? The IMMR survey will be updated with this data in the coming days, but I got an early peek at results showing that only 25 percent of would-be tablet consumers are interested by a hardware subsidy in return for a data plan commitment. Just like our own poll last week, the majority of survey participants would rather purchase a lower-cost, Wi-Fi only tablet. Surprisingly, however, of those who preferred a 3G device in the IMMR survey, more consumers said they’d go with a contract data plan than on a month-to-month basis. Clearly, our hardware subsidy addiction is still in full force.

I should also note that the survey question assumed a 3G tablet would add $100 to the price of a Wi-Fi model. That seems low to me, as the 3G option for iPad adds $130 and a Xoom with Wi-Fi only is expected to show a $200 cost difference. If the question were phrased to reflect these cost increments, I think more would prefer a Wi-Fi model as indicated by the 75 percent result in our poll last week.

I expect these results to change over time to further favor Wi-Fi tablets over 3G units as more consumers purchase handsets that can double as mobile broadband hotspots. Once they better understand that this feature is a monthly service, and not a separate data plan that requires a 24-month commitment, the appeal of a 3G tablet diminishes. Some will always want a dedicated connection for their tablet, but by the end of this year, I wouldn’t be surprised to see far more Wi-Fi tablets sold as compared to those with a 3G radio.

So what does this mean for Motorola and the other Android tablet makers lined up behind them, ready to launch new tablets? Tablets consumers want a range of choices, want them to be cheap, and don’t find the prospect of carrier commitment appealing. It may actually make more sense for LG, HTC, Samsung and others who haven’t yet launched a Honeycomb tablet to start first with a lower-cost Wi-Fi model. Adding a more expensive 3G version can always come later, once the buzz builds around a less-expensive Wi-Fi unit.

But that sheds light on Apple’s other advantage, because few of its peers in the tablet space have a distribution channel outside of the carrier stores. You might find a Samsung tablet in the local Best Buy, for example, but there’s no Samsung store to compete with Apple’s retail chain. That adds an entirely new layer of complexity and cost risk for non-Apple tablets. These companies have to negotiate with retail stores and possibly give up a cut of profits to get shelf space if they want to forgo the carriers as the primary distribution channel.

Update: Not all of the 814 survey participants were “very or extremely” interested in purchasing a tablet, so the post now reflects that 38 percent fit this category.

Related content from GigaOM Pro (subscription req’d):

You’re subscribed! If you like, you can update your settings

  1. Which is why Archos can’t manufacture their $275 (msrp) Archos 70 and $299 (msrp) Archos 101 Internet Tablets, as soon as any reseller gets any of these in stock they get instantly sold out. In France, for November-December 2010, Archos has 22% market share behind Apple 67% and in front of Samsung 4%.

    1. Interesting stat. Do you have a link for it so I can see what other tablet sales data there is? Thanks!

      1. Archos mentionned the GfK market analysis report in their latest earnings report, on Archos having 22% of the tablet market share for November-December 2010 sales in France, far in front of Samsung at 4% http://armdevices.net/2011/02/08/france-archos-has-22-tablet-marketshare/

        Consider Archos is a French company, so they have a home field advantage especially in tablet sales in France. But Archos has also been doing nearly just as good in Germany, UK markets as well in those same two months, although those countries have a few more competitors there.

        The main thing is, Archos sells these as fast as they can make them. When consumers are offered the choice of an Archos 70 Internet Tablet at $275 or a Samsung Galaxy Tab at $599, they nearly always choose the Archos if it is available in stock at the store. And it’s nearly the same thing that happens if the $299 Archos 101 Internet Tablet is in the store next to the $499 iPad.

        The critics saying the experience on the Archos isn’t as good as the higher cost tablets, just mostly isn’t true. The experience is even better, with thinner lighter form factor, HDMI output, USB host, built-in kick-stand, those factor in the decision as well and most consumers can’t justify paying more for nothing very substantial.

        The fact is all those tablets cost little more than Smartphones to manufacture, as mainly it’s just the screen that differs compared to a Smartphone. And we all know, that Smartphone Bill of Material and manufacturing cost in China is LESS than $150. Sure enough, a super highest class 10″ touch screen with widest viewing angles might add let’s say $50 BoM for a tablet, that sure as hell doesn’t justify $500 or more retail prices.

        But companies like Apple have shown they can screw the consumer by selling $150 iphones at $600 average, making 400% profit margins per iphone, so it’s just like that that many manufacturers, also Android ones, see the opportunity to maximize profit margins instead of aiming at more reasonable price points. But thanks to the competition you see with Android, with companies like Archos, you’ll soon see much more reasonably priced tablets dominate the market and even Apple will have to significantly lower the price of iPad and iPhone if they even want to have a chance to hang onto any significant market share.

  2. formergphoneuser Monday, March 7, 2011

    um, what does immr stand for? The search provides a stock symbol for the company, Immersion.

    When one listens to Steve Jobs, one is inclined to believe that only 100 apps are written for the nearest trailing competitor of the iPad. All that 3G radio bull is … well, bull.

    1. Good question. immr is the Institute for Mobile Markets Research. Site is here: http://www.immr.org/1/

    2. My bad: I spelled out what IMMR was in the second paragraph, but didn’t indicate that I’d be using the initials going forward. Sorry for the confusion!

  3. “since you can’t add capacity later, or justify the 3G radio with the lack of a contract.”

    I’m not sure what you mean there.

    I bought my iPad-1 as a 3G model, even though I had no plan at all to activate it’s 3G service. Why? That’s the only way you can get GPS functionality. So, yeah, I can “justify the 3G radio with the lack of a contract”. :-}

  4. I think that reality is beginning to sink in with some of Apple’s competitors on the price point. Although the tablet market is rife with opportunities, Apple set the bar pretty high by offering the iPad at such varied price points, especially with an entry price of $499. Apple has an advantage that Android does not, in that the general public perceives Apple products to be high-end devices even it is only because of their more expensive computers. But Apple has now been able to penetrate the general consumer market with less expensive products such as the iPod, iPhone, and now the iPad. More people have access to Apple products than ever before and any Android tablet will have to offer significant value and performance in order to overcome the iPads perceived value and mystique. Honeycomb looks like an awesome tablet OS and offers functionalities that iOS devices do not but it may have an uphill battle with folks outside of the tech realm as Apple has a very powerful marketing engine running at full steam. The virtues of Android tablets will be more or less spread by word of mouth. Consumers will be the winners of the tablet competition but the manufacturers may not be making the big profit per device they were planning on.

    1. I mostly agree. I’m not from the US, so I still think that the iPhone is way too expensive. The iPad though, is priced well, and thanks to the 1st gen model, already proven. Android just doesn’t have the high-class status and apps to compete with the Apple at the same, let alone higher, price point. I do think that the onslaught of Chinese tablets will be merciless – they seem to bring the quality and price at the same time. We will have to see it though, but they seem very promising.

    2. yeah, look how much it hurt Windows not being “high class” with their terrible 90% marketshare

      look how much it’s hurt phone-based Android devices not being “high class” bypassing Apple & RIM in just a year after the OG Droid release to take 2nd place overall worldwide.

      before anyone says high marketshare only helps Google & not device makers, wrong. high marketshare can only be accomplished by high hardware sales, which absolutely helps device makers.

  5. While Apple’s retail chain is a bit of an advantage, I don’t see it as being that huge. As of this time, they only have a little over 300 stores (in the US), pretty much all in major urban areas. It also seems pretty likely that anyone going into one of those stores already has a pretty high liklihood of knowing exactly what they want.

    By comparison, Best Buy has more than 3x as many stores and attract a lot of customers that are either looking to comparison shop or who may stop to look at tablets while shopping for other items. Certainly some of Apple’s competitors, such as HP, Dell, Samsung, etc., already have strong relationships with chains like Best Buy and considerable skill at getting prime store placement.

    Of course, once tablets regularly start showing up at stores like Wal-Mart and Target, then Apple’s retail advantage is going to erode almost entirely.

    1. Not sure I agree with the first point of: “seems pretty likely that anyone going into one of those stores already has a pretty high liklihood of knowing exactly what they want.”

      It’s arguable opinion, of course, but I hit an Apple store about once every 3 weeks; and not always the same store, it varies between 4 in the area. I see folks playing with devices and asking tons of questions because they’re *not* sure what they want. I think if they were, a number of those would simply buy online, get free shipping and be done with it.

  6. there is absolutely no way i would buy a tablet from a carrier store. i do want a nice android tablet though. so for th eonly real viable option for now a a good quality second hand one from craigs list, ebay or a pawn. i am pretty sure the only ones i can find at an acceptable price will be verizon or sprint device with ‘bad ESN’ that are not eligible to be activated again, most likely due to a defaulted bill. so it will be anyways a wifi only device.

    please manufactures sell wifi only tablets or ones with unlocked GSM radios direct to consumers.

    p.s. i would actually really like a 3G option that could be activated by adding a SIM but I am not willing to pay extra compared to the super low price of a bad ESN verizon or sprint unit that would be WIFI only.

  7. Interesting numbers and good analysis. One question I have regarding pricing, do the 3g/4g chipset and antenna assemblies really cost $130 or $200? I realize there has to be some markup for R/D and profit, but it seems like those customers going the built in cellular data route are getting raked over the coals. They may want to consider lowering the price of the cellular up-sell if possible. Personally I’d pay $75 more for cell connectivity but not $130 or more but I’m sure the manufacturers have done their market research.

    1. I’m digging through some teardown data to get the exact cost difference but my gut says that adding 3G / GPS to the iPad is probably around a $25 cost to Apple. If that’s true (and I’m still looking to confirm), then I completely agree with you on the price differential. From Apple’s perspective: they’re not selling you an iPad with a different radio; they’re selling you an iPad with a coveted feature. ;)

    2. Dr. Phil Hendrix, immr Travis Tuesday, March 8, 2011

      Travis – good question. In the Tablet study we also collected data (using Choice Modeling) on consumers’ willingness to pay for some 15 key Tablet features, including 3G connectivity (with and without Operator subsidies). We will share findings re: feature-price elasticity over the next couple of weeks. We will also be discussing findings at the Tablet Conference at CTIA (Orlando, March 22).

  8. Interesting comments about 3g radio costs versus retail price and price-elasticity. I suspect that the Android tablet makers are more interested in producing the higher equipped and priced models at this point due to the relative immaturity of the non-ipad market and supply side constraints. They would rather sell smaller numbers of more profitable units before trying to go one on one with the ipad (and others). All of which shows just how huge Apple’s lead really is at this point in time.

  9. Don’t forget the certification costs for having the radio.

    And as always, the price has more to do with marketing and the market, than it does with component costs.

    1. As both you and Kevin have stated, its all about the marketing and getting the customer to desire the extra feature and converting that desire into an up-sell.

      The two points I was getting at with trying to understand the cost of the radios are these:
      1. If the goal of the Android table manufacturers is to gain mind-share and market-share of the tablet market, don’t charge an extra $200 for the model equipped with the cellular radio (I’m looking at you Motorola).
      2. If push comes to shove, and I believe Steve Jobs has already alluded to this, Apple can drop the price of their 3G iPads by $100 (given Kevin’s estimate of the radio costing $25).

      Dr. Hendrix, I look forward to seeing the additional information you’ve gather. Hopefully Kevin can do another writeup after your discussion at CTIA.

  10. This is all very amusing because data reported by Apple in their two most recent earnings calls indicates that the average price people actually paid for an iPad in Q4 2010 and Q1 2011 was $645 and $600 respectively.

Comments have been disabled for this post