11 Comments

Summary:

That $199 Nexus 7 tablet Google sells directly to consumers costs $151.75 in materials, suggesting that Google is earning a profit on the hardware, supplementing sales of software, ads and services. With a low-cost tablet platform making a profit, others are sure to follow; even Apple.

nexus-7

That $199 Nexus 7 tablet Google sells directly to consumers costs $151.75 in parts, according to an IHS iSuppli teardown and reported by AllThingsD. The bill of materials figure implies that Google could be making a small amount of profit on the 8 GB Nexus 7 tablet and even more on the 16 GB model which sells for $50 more than the base model. With high performing parts and a lower cost of materials, this could signal lower priced tablets in the future or similar pricing for better tablets while still maintaining reasonable profit margins.

IHS iSuppli’s estimate comes after another research firm, UBM Techinsights, suggested the Nexus 7 bill of materials was around $180. However, that figure was solely estimated on paper; the company didn’t have a unit to tear down and examine. I’m more inclined to believe the IHS iSupply figure as a result. The company says the doubling of memory in the 16 GB Nexus 7 only adds $7.50 in material costs, so at a $249 selling price, Google is turning a profit on it. When factoring in production costs and limited marketing / distribution costs, I suspect Google earns around $30 to $50 on the higher-end model, although Asus is sure to get a cut here as it builds the device for Google.

That’s interesting to me because early in Android’s life, Google suggested it could earn around $10 per user solely through advertising and data. By selling hardware directly, Google still has the potential to make money from its software services, advertising, app store and digital content offerings, but even if it doesn’t do so, Google can now turn a profit on hardware.

I suspect much of the cost savings here over older small tablets is helped by Google using Nvidia’s Kai platform: A Tegra 3 system-on-a-chip solution that Nvidia announced early this year as a low cost all-in-one solution to build $199 tablets. With Google and Asus leading the way — this is the first tablet to use Kai — others will surely follow because the platform offers superb value in terms of price and performance. I’ve been using a Nexus 7 for nearly two weeks and it easily handles everything I can throw at it.

Amazon is rumored to offer a more powerful follow up to the Kindle Fire — a rumor that makes sense to me — and I wouldn’t be surprised to see Kai used to power the device. If so, we’re likely to see the original Kindle Fire price decrease and the new model to hold at $199; possibly even less as Amazon’s ecosystem can drive profit through the device. Samsung may stick with its own chips for tablets, but other device makers with no chips of their own have to give Nvidia’s platform a look. Think LG, Acer, Toshiba and of course, Asus, for example.

How does this fit in with Apple and the stories of a smaller iPad? Apple designs its own chips, so it’s not going to use a Tegra 3. But it could be reworking the A5X or other silicon to improve performance, even as costs are lowered. Why would it do that? Because as Google has shown, it’s possible to sell a $199 to $249 tablet that works well and still turn a profit. Given its history, if Apple does create a smaller iPad, it’s sure to have a healthy profit margin. It can be done as the recipe for Google’s Nexus 7 proves.

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  1. I don’t think Google gets the profit or books the revenue, it’s ASUS. It’s the same with the Nexus phones that HTC or Samsung made.

    1. I hear you, Bernard, but that doesn’t make sense to me. Google, not Asus, is selling the devices and therefore collecting the full revenue at point of sale. Google has likely committed funding to produce the tablets, which is the payment made to Asus and where Asus’s profits would be built in. That’s likely how the Nexus One, Nexus S and Galaxy Nexus deals are as well.

      1. Not trying to sound rude, but what you’re saying doesn’t make sense to me. It would make sense if it wasn’t stated as an Asus or Samsung device (for Nexus phones) and it was a positioned as 100% Google, but it’s not. Google, as an Internet company, wouldn’t commit to such funding nor take the manufacturing/inventory risk on its balance sheet. The Nexus phones are sold through numerous retail outlets where Samsung takes the manufacturing risks and spends the marketing dollars. Same will be for the Nexus 7.

        1. Bernard, you’re not being rude at all by having a reasonable conversation! :) It’s possible that Asus is taking all of the risk and therefore getting all of the profit reward on the hardware as you suggest. And the examples you give of the prior Nexus devices are good ones. What’s different here (at least to me) is that this time around, Google is directly selling these devices through their website and retail partners. There’s no carrier involved, which would typically commit funds and pre-order numbers. Hopefully that helps explain a little where I was coming from and perhaps Google will share some numbers on their investor call to help us figure out their approach. Thanks for the comment!

      2. (sorry I couldn’t reply to your last comment below)

        I will clarify and say that I assume Google is getting some cut on devices they sell directly. So it’s like a standard retailer relationship with Asus. As for Nexus phones, unless they sold it directly like the Nexus7 I’m pretty certain they didn’t see anything in the bank.

  2. I never understand how writers like yourself make a profit conclusion looking just at the price of the parts.

    What about cost of assembly?
    marketing & sales?
    shipping?
    support?
    returns?
    G&A?

    Lets assume that all of that is less than $40 per unit, which is possible but maybe not so likely.

    Is whatever’s left profit, or simply paying for the sunk costs to build the thing and hopefully pay for the follow-on model?

    It seems this is a loss-leader product where the profits are made elsewhere like with a Gillette Razor & Razorblades?

  3. Jason Baudendistel Wednesday, July 11, 2012

    In my opinion it is likely more a small profit that is piggybacked into customer acquisition. Google is merely using there tablet to gain market share for their OS and Advertising revenue as well as grow their brand.

  4. its just a small piece of cake that google would be getting by selling these tablets.ASUS would be profiting with it

  5. google would be getting a samll bite..its asus

  6. The Google Nexus 7 is a beast inside, cant wait to get my hands on the quad core performance and the gaming.

  7. How long will the price stay this low?

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