Author Archives: TurboFool

Today I saw a status on Facebook that caught my eye. A friend commented in reference to the failing of WebOS that it was time tablet manufacturers learned to go with the game console model of selling their hardware at a loss. I thought about this, and realized the flaw. Here’s my reply, copied-and-pasted:

Those two models can’t be compared for a variety of reasons:

In game consoles the manufacturer designs high-end hardware that’s beyond what’s feasible to sell at the price the market will bear. They take anywhere from a $100-200 loss at launch (unless you’re Nintendo, in which case you take no losses). Licensing fees, per game sold, are somewhere around $5-10 per game, so the manufacturer on games sold alone makes back that loss in 10-40 games sold per launch-priced console over its lifetime, plus profit on extra controllers and other accessories which are a higher profit margin. Meanwhile they don’t continue to take that same loss. Over the course of the first year the volume sold, die shrinks, and manufacturing improvements shave a good half of the loss off the cost of the unit, and typically there are no price drops. Price drops tend not to come until year two, when there’ve been even bigger die shrinks, various chips have been combined, and other components have been shrunk and cheapened. The first price drop typically correlates with the manufacturer being able to finally stop taking a loss on the hardware, now breaking even. The costs continue to decrease, and usually by year three or so they begin to make a small profit on the hardware while continuing to drop its price. By the end of its life they’re making a profit on every unit sold, continuing to sell games with those licensing fees, continuing to sell accessories that haven’t dropped in price at all, and have successfully recouped the lost profits on the launch systems while having more quickly recouped said costs as time went buy with each later system sold. This entire process is allowed for by one simple principle: the specs and capabilities of the system never change over those 5-10 years. Maybe pack-in hard drive increases in size, or hardware gets smaller, but the expensive design and specs never change.

In tablets, first off, unless you’re in a closed OS like iOS or WebOS, you’re not making ANY money off of software sold for it, and the vast majority of accessories are not licensed or made by you, and the vast majority of users don’t want them anyway. But assuming you’re on one of the closed OSes, there are two very notable differences: One is the price and profit of apps. Most of the apps are free, and most users stick as closely to the free apps as humanly possible. Of the apps that aren’t free, most are $.99-$1.99. Assuming a common figure, the cut of the app store is as much as 70 percent of that, so basically $.69-$1.39. Pretending they subsidized by the above-mentioned $100-200, that would be anywhere from 72 to 290 apps sold before they broke even on their initial loss. And unlike game consoles, they don’t get the luxury of continually lowered costs, eventually selling their hardware at a profit. Because they’re expected to release a new, better, faster, smarter, cooler, slimmer, higher-resolution model every six months to a year. So by the time their costs could begin to reduce, they’re forced to re-up with new hardware that costs about the same and the process begins again. And of course for Android and Windows Phone 7 it’s even hardware because the manufacturers have no cut in the app store, so their ONLY profit comes from the hardware, itself.

I’ve personally bought no more than ten apps since I switched to Android two years ago, and I’m on my second Android phone. Pretending either manufacturer could make a profit, they would have lost a ton of money on me with that model. I know we’re talking about tablets and not phones, but the model’s the same and the store is the same. Over the year or two I’d own a tablet before upgrading it–and pretending I’d even consider a closed OS–the odds of the manufacturer making even $50 from me is slim to none, and I doubt I’m anywhere near alone in that. It just makes no sense.

One place we may see this carry out differently: Amazon’s upcoming tablets. Rumors are they’re going to subsidize, and for them there’s more logic to this. Odds are they’ll customize the hell out of the Android OS to make their own Appstore the only one built in, and the easiest-to-use default. So they’ll have all the app sales, definitely. But Amazon also has arguably the best music store available, so they’ll also gain all the profits from people more easily buying music through them. And finally they have Kindle, which has already eclipsed all hardcopy book sales on their site. They’ll have a ton of new Kindle owners with their tablet buying books directly from their store. But it’s only by combining these THREE exclusive revenue streams that they could likely have any real hope of recouping their losses on the hardware. And even so, I doubt the discounts will be as huge as people are claiming. But time will tell.

Any thoughts? Flaws in my logic, or models I’m not thinking of in which a tablet, whether closed or open OS, could manage to earn its manufacturer money while sold at a profit?