A $799 Xoom Shows Why Apple’s Component Hedging Works
Among the many advertisements during last night’s Super Bowl, Motorola’s spot for its new Xoom tablet gave me pause. The video, shown below, evoked memories of Apple’s iconic “1984″ video, which introduced the Macintosh computer 27 Super Bowls ago. How ironic then that given the conceptual similarity between the ads, the Xoom’s reported $799 pricing shows how Apple’s component hedging is going to increase pressure on Motorola and many others in the mobile device market.
During the big game last night, Engadget found the $799 Xoom price tag in a Best Buy ad. The 10.1-inch tablet was the talk of the town at last week’s Google Android Honeycomb event and made a splash at last month’s Consumer Electronics Show as well. When the Xoom launches it will be a Verizon Wireless exclusive, immediately capable of using the carrier’s 3G network and, after an upgrade, it can surf using Verizon’s fast, new LTE service as well. From a point of comparison then, the device will compete directly against Apple’s 3G iPad model, which start at $629, or $170 less.
One could argue that the specifications and features of the more expensive Xoom tablet are favorable compared to the iPad. After all, the Xoom’s 1280×800 resolution screen offers more pixels per inch than the 1024×768 iPad display. Xoom also uses Nvidia’s dual-core processor, can play 1080p video, record in 720p and provides a full GB of memory, which is four times that of Apple’s iPad. But to compare the Xoom to the current iPad would be a mistake if, as expected, Apple refreshes its tablet with cameras and better hardware this April. And if history is a predictor, the new and improved Apple tablets will hold the same price points as the current models.
Unlike most competitors, Apple manages to maintain both the price and availability of components by entering into long-term strategic partnerships for parts of flash memory, processors and other bits of hardware. The company finances such deals through the hoards of cash it has on hand: using funds to “pre-pay” for components and likely gaining a discount as a result. Such a strategy helps in two ways. Apple can more easily manage inventory than its competitors and it enjoys cheaper component pricing to help manage device costs. Samsung is in a similar advantageous position because it relies on fewer companies for the components it needs to build smartphones and tablets: the company builds its own processors, displays and flash memory parts. More than half of Samsung Galaxy Tab’s component price is made up of Samsung products, for example.
Motorola on the other hand, is completely dependent upon other companies for nearly all of the components in its devices, and in particular, the Xoom tablet. We’ll know for sure if there’s any Motorola hardware inside after the Xoom launches and is torn down for examination, but few, if any, of the components will be made by Motorola. A tear down of the Droid X, for example, doesn’t list any Motorola parts. Instead, the company has to coordinate the price and availability of components from various vendors — and if any of those parts are also used in similar Apple products, it’s a safe bet that they’ll either be scarce or will cost more. Indeed, the supply of tablet display panels and other components could crash the growing wave for tablet computers for companies that don’t invest in long-term deals for parts.
For the sake of fairness, a truer comparison between the Xoom and iPad prices should use Apple’s 32 GB model with 3G, which is $729, or only $70 less expensive than the Xoom. And as mentioned above, the Xoom adds cameras, a better display and other features. But again, that comparison is against a 10 month old iPad. Come April, we’ll have to see how well the two devices compete both in terms of specs and pricing. My money is on the Apple product being seen as a better deal by most: even though the company is considered a premium brand, smart investments in high demand components will help keep prices at or below products from competitors.
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The Xoom is DOOMED.
I don’t get it.
It’s got a real tablet OS with true multitasking, Flash, unlimited file sharing, printing and management etc.
It’s much faster with a dual core processor.
It’s a better tablet in every way.
Yet, you complain that it’s some negligible $70 more than the far inferior iPad?
Tom, I’m not making a product comparison here, nor telling anyone to buy an iPad because it’s better. In fact, I recently dumped my iPad for an Android tablet: http://gigaom.com/mobile/why-i-just-dumped-the-ipad-hint-size-matters/
The point has to do with components and pricing. And while the $70 difference does get you better hardware, it may not matter in two months if Apple outs the next iPad as expected.
Uh, it’s $170 more than the “inferior”(?) iPad. Then you got to get a two-year contract? Heck, to each it’s own. Me myself, I wouldn’t buy it at that price.
That’s the full price. A 2 yr contract is optional.
$799 is the full price. You are not required to get a 2 year contract. You are however, required to subscribe for atleast one month to make wi-fi available. It comes with wi-fi locked.
Seriously, Tom, read the entire article. Kevin’s argument about superiority involves the next iPad..
Feature/Function is not why people buy the iPad. They buy it because they like the melding of Apple Hardware/Software. It just works and they keep it simple. Most people who buy it could care less about gigaflops yadda yadda.
Personally I think this price is inflated because of Motorola’s dependency on carriers more so than hardware. The Asus transformer is said to start at something like $400 and gives you a great dock for a netbook. Hardware wise it’s very similar to the Xoom. I don’t see where the extra $400 for the Xoom is when you look at the hardware between the two devices.
So, at this moment I think the Xoom is attempting to be sold as a luxury device similar to the iPad and therefore charging in that same price range. Until we see HP, Asus, Acer, and MSI all hitting the market with high-end Honeycomb tablets to “flood the market” with tablets to increase adoption similar to what happened with netbooks we really don’t know what price advantage Apple really has.
Personally, I don’t think Apple will ever have a price advantage because that isn’t their game. They want to keep their product priced high otherwise it will look like all the others–they want that boutique price point on all their products. However, they will make a much larger profit on their hardware than others. . . so, yes, by hedging they keep that lofty profit margin high.
If you are an Android fan you likely have an Android phone and are pretty familiar with using Tethering which is FREE to an unlocked handset. With that in mind, such a user would likely NOT pay $800 for a Tablet that requires a Data plan considering they are already paying for a Mobile Data plan that they can easily Tether.
This is the big problem with A Class Android Tablets. They are all introduced as “Data Plan Only” devices. Higher prices with redundant Data Plan requirements make them less likely to be a contender of the ever popular Apple iPad.
I myself started with iOS, made the switch to Android but will NOT give up my iPad until a Tablet with iPad comparable features and price is available.
NOTE: #1 feature lacking on Android found on iOS is A Class Video Streaming
I tether my iPad to my Android Phone when necessary but mostly only use it at home or in the office where WiFi is readily available. Considering I pay for an Internet Connection for my Home, one for my Cell Phone and one for my Wife’s Cell Phone, I do NOT see a logical reason for paying for yet another Data Line.
1) Data Plan for Home
2) Data Plan for Cell Phone
3) Data Plan for Spouse/Family Cell Phones
4) Data Plan for Tablet(s)
This is NOT a good idea for anyone but the carriers.
That just doesn’t make sense any way you look at it.
Until Android Tablet manufactures figure this out, they are just pissing in the wind.
Is the Motorola Zoom an amazing Tablet. Yes indeed it is but at this price point with required Data Plan it is DOA (all but for those people that have deep pockets and the need to own everything).
Somebody needs to do it right.
Learn from the people you are trying to compete with.
Tethering: Tethering is also *free* to a unlocked iphone, I don’t think either are legal on the AT&T network but that’s besides the point.
The main issue I see is that you can get an iPad starting at $499, of course it’s not a feature rich as the Xoom but not everybody needs all of those features.
I wonder if everyone would have compared this to the Apple 1984 add if: a: the 1984 book wasn’t on the opening screen and more importantly b: Moto didn’t tell us that this was supposed to be like 1984.
Personally I’m hoping Amazon announces a Nook like device that has enough horsepower to do what the Nook struggles with. That would be my next device.
A color kindle with honeycomb, allowing it to be a full tablet, 7″, with a pixel qi screen option? That just might sell ;)
Anyone else see this:
“Xoom also uses Nvidia’s dual-core processor, can play 1080p video, record in 720p and provides a full GB of memory, which is four times that of Apple’s iPad.”
a full GB of memory is either a very small amount or a type.
Memory isn’t the same as storage, so there’s no typo. The Xoom will offer 1 GB of RAM memory and 32 GB of storage. Apple’s iPad has 256 MB of RAM, which is 25 percent of the Xoom’s memory. The iPad’s storage is available in 16, 32 and 64 GB.
They are talking about the DRAM which is true
In the Xoom article you write, “…A full GB of memory, which is four times that of Apple’s iPad.” This just isn’t true.
Are you confusing memory with storage? See my prior comment on this topic.
This article lacks a basic knowlege of Apple’s Cashflows – they do not pre-pay for anything – Apple is one of the most cash efficient companies in the world, they are more efficient than walmart, and pay vendors after they are paid by customers allowing them to operate on their customer’s cash. This allows them to generate significantly higher profits on the same revenues than their competitors. It is not clear if their costs are lower than others however, as firm’s such as isupply’s numbers have never been confirmed. The author should have based some part of this article in reality – in addition, this type of consumer product pricing has very little to do with the cost of production and more so as to what customers are willing to pay….
This would completely invalidate the entire article. I searched the comments for some shred of how “prepaying” would be advantageous. Put simply, prepaying doesn’t guarantee lower prices because even if they are lower it doesn’t take into account what the value of the cash itself is. It also implies Apple “invests” in its supply chain rather than the supply chain investing in Apple.
The commenter’s version of the story sounds like a much better business proposition.
They started doing this back in the iPod’s heyday. They have been operating this way for years. It permits stable and low prices and shuts out the others trying to compete. It has risk as well since they are on the hook for a technology which could be surpassed by a better one.
Sorry.
You do the work, but you’ll find a very clear explanation from CEO Cook explaining that Apple has advantageously prepaid $3.9B in supplies.
The prepayments even support the building of new factories dedicated to supplying Apple’s needs. Apple prepaid $1.5B about 4 years ago to kickstart the move to flash memory back in the day.
That price point will certainly hurt the Motorola Xoom, regardless of how much better it is than an iPad. You can grab an iPad starting at $499. So you can get a tablet for $300 less by going with Apple. Motorola needs to come out with a $499 alternative that will make people think twice about going with the iPad. At $799 the decision is made for most people, go with Apple.
One thing Xoom’s got going for it that Apple doesn’t is the Android OS. It will be the Android competition, not necessarily from Motorola, that will put pressure on the closed iPad. In the short to medium run my bets are on the Droid ecosystem.
The Droid ecosystem is in danger of slipping into crowd behavior. Too many devices (many cheaply made by noname brands), too many malware exploits, too many fragments, no center of control.
Open and free will turn out to be pretty expensive and unprofitable for most businesses.
And then we’ll look to user loyalty to the brand to drop like a rock.
Android may become 2013′s Yugo, if it doesn’t mend its ways.
In six months the Xoom will be $100 cheaper… the iPad will not.
Why? Can’t understand your logic. I can see other Android tablets being much cheaper but not the XOOM. If they lower their price much lower that quick it means: A) They were cheating their early customers and now have the right price or B) They will be selling at no profit (bad news) or C) Both (Really bad news).
Here’s my bold prediction: All tablets will be cheaper in the coming years and have better specs! Please don’t ask me to explain my logic here. :-)
$100 is not enough in 6 mons — it isn’t even enough NOW. Moto should have made it $300 at start (w/o carrier mandatory involvement) to grab the market leadership and sell a GOOGLEplex (groan) of ‘em. This is a matter of just not enough at too high a price. For goodness sakes, for $800 you can buy a wonderful laptop with all the bells and whistles (yeah I know it isn’t the same, but why would a “pad” cost or priced so much more)
Dave gets it!
Tablets were around for 20 years before the iPad. Consumers did not buy them because they cost MORE than PCs. Along comes the iPad at a price that is less than the price of the cheapest MAC, and the consumers stand in line to buy it.
The problems most competitors will have is that matching the iPad’s price will still leave their products costing MORE than their PCs, and MUCH MORE than their Netbooks! Motorola may catch a break, because they don’t make a PC. NOT! Because they chose Android, they will be lumped in with all the other Androids.
However… There is another possibility. Maybe Moto priced the Xoom in anticipation of another (Droid like) BOGO sale.
Not sure if you aware that Moto makes money from each device vs Apple makes money from each device+itunes store sales. Google would love Moto to price it at $300 but they won’t be willing to subsidize the price given that they are already giving away Android.
@DLL, in 6 months we’ll be talking about iPad 2. That’s the point of the article. So perhaps it is better to hold off any technical comparison for now.