That $199 Nexus 7 tablet Google(s goog) 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(s nvda) 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(s amzn) 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(s aapl) 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.