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Among the many advertisements during last night’s Super Bowl, Motorola’s (s mmi) 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 (s bbuy) 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 (s vz) 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 (s aapl), 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 (s nvda) 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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