With Contract, a $599 Xoom Tablet Unlikely to Fly Off Shelves

Verizon Wireless (s vz) announced Tuesday that it will offer Motorola’s Xoom, the first Google Android 3.0 device, later this week for $599 with a new, 2-year contract agreement. Customers can also opt for a no-contract price of $799 when the device launches on Feb. 24. Intended to compete against Apple’s popular tablet — the iPad — the no-contract Xoom is $70 more expensive than a comparable iPad. As with other tablets, Verizon will offer data buckets for the Xoom, with 1 GB of data to cost $20 per month. While consumers can save $200 in up-front costs for a Xoom, will they do so in return for a 24-month commitment? That remains to be seen, but it’s doubtful.

Indeed, Verizon’s contract pricing for the device is almost unexpected based on how it sells the Samsung Galaxy Tab, a 7-inch Android 2.2 tablet. All four major U.S. carriers sell the Tab, but only Verizon offers it solely without a contract; consumers can purchase the Tab from Verizon for the full price of $499 as opposed to subsidized prices with a contract. My Tab runs on T-Mobile’s network, for example, and can be had for $249 with a 2-year data plan contract. I suspect Verizon is subsidizing the Xoom simply because at $799, the tablet is far beyond the $499 starting price for Apple’s iPad (s aapl). Yes, that iPad model is Wi-Fi only and limited to 16 GB of storage, but it attracts consumer interest. And if those consumers have interest, they’ll consider upselling themselves on 3G and more storage. As a single model, the Xoom has no such potential.

High pricing aside, the other challenge facing Motorola’s Xoom (s mmi) on contract is that it’s the first of many new Android 3.0 tablets that are soon arriving. We listed our top 10 to watch from last month’s Consumer Electronics Show, but roughly 100 new tablets were shown off at that time, most of which will be Android devices. And the tablet parade didn’t end there: At the Mobile World Congress event last week, even more Android tablets were introduced, both in 7- and 10-inch sizes. Some consumers may not be aware of the many tablet choices coming soon, but those who are may have reservations committing to a 2-year contract on the first Honeycomb device that comes along.

One open question I have around the Xoom contract pricing is the cost of breaking the contract. In Dec. 2009, Verizon boosted the ETF, or Early Termination Fee, of such contracts to $350 on “advanced devices.” I reached out to Verizon representatives on the ETF for the Xoom contract and am awaiting a response. I’ll update if and when I hear back, but my guess is that the Xoom is considered to be an advanced device and will face the same ETF structure as many of Verizon’s smartphones.

Xoom already appears caught in a catch-22 situation. At $799, it may be too expensive to attract mainstream interest. But the subsidized price only saves $200 up-front, and all owners will pay the same monthly data plan prices. If Verizon wants to get the Xoom in consumer hands and reap monthly data plan revenues before the full Android 3.o tablet onslaught arrives, it might be better off to consider subsidizing the tablet even further: say, $599 for no-contract and $399 for a 2-year commitment. With a growing demand for data, the carrier could make back some of  the extra subsidy, as consumers boost their mobile broadband usage.

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