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Christmas Windows Tablet Prices Will Be a Lump of Coal for Vendors

Apple's (AAPL) iPad has been the fastest growing non-phone consumer electronics product in history. But as Microsoft (MSFT) CEO Steve Ballmer promises Windows 7-based tablets by Christmas, we're about to see another record broken: time from premium product to commodity giveaway.

Apple has remained so insanely profitable because it sells products that a good slice of the public wants and it keeps control over the ecosystem. Both Microsoft and Google (GOOG) have taken the opposite approach: create the operating system and make it available to pretty much any company that wants in. They have significantly different financial models, with Microsoft trusting to licensing fees and Google planning to make money indirectly through ads and e-commerce. However, each depends on leveraging multiple vendors.

It worked for Microsoft on the desktop, because most consumers, motivated by cheaper prices and the relatively high cost of a Mac, went for DOS and then Windows machines. There was a price, and the hardware vendors paid it. Because they could not offer significantly different capabilities and experiences, prices dove to the point they are at today. Moore's Law, the observation that semiconductor power kept increasing while smaller sizes allowed prices to fall, may have enabled the drop, but price-based competition was the reason for it.

Google has already found, as I mentioned in May was likely to happen, that Android devices are already outselling Apple's iOS-based iPhones (and iPads and iPod touches are hardly safe). But then, Google is in a different place than Microsoft because vendors that opt for Android can choose from different versions of the operating system and significantly alter software functions and features. Couple that with exploding demand for smartphones, and prices have remained strong.

Some think that companies will indulge in a tablet price war. I would agree. Tablet prices are unlikely to remain stable or high for a few reasons:

  • Apple, normally the high-priced vendor, has set its entry-level model at $499. That has effectively put a cap on what Windows-based devices can command, particularly when you remember how inexpensive desktops, laptops, and netbooks are.
  • Although Apple CEO Steve Jobs tried to position the iPad as a new category of product that sat between a smartphone and full computer, that hasn't quite worked out. There is evidence that growing sales have coincided with reduced purchases of netbooks and even some indication that Mac notebook sales have felt the sting. That means vendors can't expect tablets to act like an independent category of device, the way smartphones may have. (Although, for all we know, the latter may also have helped slow sales in the smaller notebook factors.)
  • Tablet vendors using Windows 7 are, as always, restricted in making a Microsoft operating system look or work differently. Rather than pile on the hardware goodies and hope for high prices, most, if not all, will use pricing as a tool to sell.
  • If the above wasn't enough, coming out at Christmas, there will be what has become heavy seasonal pressure on retailers to use price to move product. Windows tablets will be no exception, so consumers will come to assume that prices should be very low.
  • Android-based tablets will have more room to discount, because there is no license fee going to Google, and so can be even more aggressive.
The real problem for vendors is a pattern in the consumer electronics industry. New types of products make most of their margin dollars within a month or two. After that, prices decline rapidly. If they start low, as seems clear they will for these products because of their enormously late entry, then they become instant commodities. Heck, HP(HPQ) already effectively gives away an Android media tablet with one of its new printer lines. As I've said before, hardware just wants to be free. That will be a fine lump of coal for hardware vendors.


Image: user enricomaria, site standard license.