(MoneyWatch) COMMENTARY Google (GOOG) is announcing the Nexus 7 tablet at its annual I/O conference today. What was a rumor became inadvertently confirmed by the company when an image of the 7-inch Google Nexus 7 appeared on the Google Play Store. The big deal is a price of $199 to compete with Amazon's (AMZN) Kindle Fire, although with much stronger technical specifications.
The move shows the continuing breakdown of an old tech business model, in which some companies like Google or Microsoft (MSFT) had operating systems that they licensed to hardware vendors. Now, those software companies are competing with their partners by developing their own hardware and software packages. There are two reasons. One is the success of Apple (AAPL) in using a complete platform approach to gaining customers at vastly better profit margins than much of the rest of the industry. The other is the general lack of innovation and competitiveness that the traditional hardware vendors have shown.
Apple's success in mobile has been astounding. Not only does it have a huge market share - although smaller than all Android devices collectively (Google has just announced an activation rate of 1 million Android devices a day, or 365 million a year) - but the profit margins are next to outrageous. Apple has always taken an upscale marketing position to charge a premium (whether you are one of the group that thinks the premium is earned or not). Making money on its products is nothing new.
What is new, though, is the ability to combine high margins with high volume because tablet prices have created a new lower and more accessible pricing tier that can attract a much larger number of consumers. Carrier-subsidized smartphones kick the affordability factor into overdrive.
When Apple reached a smaller number of consumers, the likes of Microsoft were happy to stay on their own paths, as Apple didn't represent a broad market threat. Now that it does, Microsoft and Google both look at the profit they make for their efforts and find them wanting.
But it's the second factor that is the bigger issue. The independent hardware vendors generally have not been as inventive in their products as Apple, Google, or Microsoft. There have been some major wins, typically with Samsung's name attached, but particularly in the tablet world, major vendors such as HP (HPQ) and Dell have been largely disappointing. Interestingly, Asus, which has been one of the more innovative manufacturers in the Android tablet space, will make the Google Nexus 7.
And that's a problem for Microsoft and Google. The more the hardware vendors collectively slip behind, the more space they leave for Apple to gain even more share and to leave everyone else in the dust. That becomes even more of an issue when, on the legal front, Apple pulls off wins like getting the Samsung Galaxy Tab 10.1 banned from U.S. sales, at least through a preliminary injunction.
When innovation comes down to only a few partners at most, the business advantages of selling software to many vendors and betting that they can provide enough diversity on the sales front to keep you in market share begin to disappear.
So both Microsoft and Google have made big moves - more to protect their own business interests than to try icing out their partners.