Kindle Fire, PlayBook, TouchPad Pricing Creates Conundrum

Amazon's Kindle Fire, RIM's PlayBook, and HP's TouchPad all sold in enormous numbers at a low price point. That might not be good news for tablet manufacturers.

How do you ensure your non-iPad tablet sells out in a matter of days?

Answer: enormous price cuts.

In time for the holiday shopping season, retailer Best Buy decided to cut the price of Research In Motion's PlayBook tablet to $199 and $299, respectively, for the 16GB and 32GB models. That apparently led to a spike in sales, with Best Buy sending a statement to media outlets claiming that the PlayBook was "currently sold out of our inventory" and that "we will have additional units available in the near future."

Meanwhile, Amazon's Kindle Fire-another tablet with a 7-inch screen-became the online retailer's bestselling product at a sticker-price of $199. The device offers a heavily modified Android interface, one that facilitates the purchasing of streaming content and e-books from Amazon's online storefront. That tight integration, along with a "virtual bookshelf" user interface that deviates from other tablets' grid-like screens of individual apps, makes the Kindle Fire an altogether different animal from the PlayBook or Apple's iPad. Nonetheless, consumers are evidently gravitating toward the product.

Hewlett-Packard was the first to demonstrate that a cheap tablet is capable of selling in blockbuster numbers, when it decided to kill its TouchPad in August. The first weekend after HP announced its decision, Best Buy and other retailers slashed the price of the 16GB model from $399 to $99, and the 32GB one from $499 to $149. That sent consumers scrambling for the nearest electronics share, and propelled what had formerly been an anemic-selling device to second on The NPD Group's list of bestselling tablets in the U.S., behind the iPad.

In Amazon's case, the Kindle Fire's low price point is by design. According to research firm IHS, each unit costs $201.70 to manufacture, including materials and labor. If that analysis holds, it means Amazon is racking up a slight but noticeable loss every time someone purchases a Kindle Fire.

"Amazon makes its money not on Kindle hardware, but on the paid content and other products it plans to sell the consumer through the Kindle," Andrew Rassweiler, senior director of IHS' teardown services, wrote in a Nov. 18 research note. "This is a similar business model to wireless companies such as AT&T or Verizon. They sell you a phone that costs them $400 to $600 or more to make for a price of only $200. However, they expect to more than make up for that loss with a two-year service contract."

However, other tablet manufacturers presumably angled to make a profit off their devices. Another IHS teardown found that the TouchPad's material costs totaled $318, with $10 for manufacturing, and the PlayBook's around $271. The latter loses money at its new Best Buy price point, especially when you factor in marketing and other secondary costs.

Neither HP nor RIM boast an Amazon- or Apple-style product storefront. (Even Barnes & Noble, which is positioning its Nook Tablet as a direct competitor to the Kindle Fire, offers Netflix and other third-party apps rather than provide its own streaming content.) That makes it difficult to recoup hardware costs through selling apps and entertainment.

With the TouchPad officially shut down, HP has shifted its focus to tablets running Windows. For those non-Amazon companies pushing their existing tablet franchises, though, the success of devices at a drastically lower price point raises some uncomfortable questions: do you continue to sell and take the loss, in hope of retaining some vague "presence" or "exposure"? Or do you take that as a sign to revamp (or scrap) your tablet plans altogether?

Meanwhile, Apple's iPad continues to hold the lion's share of the tablet market.

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