Margins and More: Who Can Actually Make Money from 7-inch Tablets?

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Jared Newman / TIME.com

Ben Bajarin is a principal at Creative Strategies Inc., a technology industry analysis and market intelligence firm in Silicon Valley. He contributes to the “Big Picture” opinion column that appears every Monday on Techland.

With all the talk around 7-inch tablets lately, I thought it would be interesting to take a look at who actually stands a chance at making money from these devices. This is going to be a tricky segment because it will largely be driven by cost, but those who can tightly tie these devices to services and commerce stand the best chance to succeed.

The Market Opportunity

If you’re a regular reader of my column you will know that I am quite bullish on tablet devices and I write constantly about their role in the personal computing era.  Yet, due to recent events, we must now pause and make a distinction around tablet form factors.

When the iPad was first gaining momentum, I heavily advocated that my analyst colleagues not use the term media tablet to describe it. I was, and still am, convinced that tablets are fully functional computers that sufficiently meet the needs of many as personal computing devices. Yet with the recent growth of a 7-inch tablet market, we must now make the distinction between media tablets and general purpose tablets like the iPad.

(MORE: 12 Unique Computers, Tablets and Gadgets That Are Just Around the Bend)

From my perspective, we should look at 7-inch tablets purely as media devices. In this view, the 7-inch form factor will excel primarily as a portable entertainment device primarily. This is not to say that it isn’t capable of other things, but rather that the main value proposition and the job consumers will hire these products to do will be largely based around entertainment.

This is why the most successful media tablet to date, the Kindle Fire, is positioned around portable entertainment. Google’s Nexus 7 is similarly positioned as a pure media tablet. And if Apple does make a 7.85-inch iPad, as rumored, it should be viewed as the evolution of the iPod — not the evolution of the iPad.

The 7-inch tablets and their focus on media and entertainment will mean that they remain companion media devices. They can be either companions to a cloud ecosystem like in Amazon and Google’s case, or as a part of an entire personal computing ecosystem in Apple’s case.

Who Can Make Money

Having just outlined the role that 7-inch tablets will play in the market, the question now turns to who can actually make money. If you think about these devices, they’re being sold at extremely affordable price points that will push the price barrier.

Many suppliers in the supply chain I have spoken with say it’s accepted that both the Kindle Fire and the Nexus 7 are being sold at slightly below the cost to manufacture. That means that any company looking to sell a 7-inch tablet for around the $200 price is going to have to do so with razor thin margins, if any at all.

Amazon and Google can breathe slightly easier under this pricing model because they can tie these devices to their commerce ecosystems and drive revenue in other ways.  The same can’t be said for many OEMs (original equipment manufacturers) who may make a go at 7-inch tablets.

Apple is also in a strong position due to its commerce and services ecosystem. Because of its aggressive spending to lock up cost reduction in the supply chain, Apple may be in a position to make decent margins selling a 7.85-inch tablet — but it may be the only company that’s able to do so. For everyone else, margins will be razor thin to non-existent.

With such razor thin margins, it’s hard to imagine how these devices can show up in retail and still be aggressive in the $200 price range, at least in the short term. This will be another point which may keep companies other than Google, Amazon and Apple from trying to compete in this segment. Unlike smartphones, there may be little to no opportunity for carrier subsidization in this form factor. That’s primarily because the first few generations of devices will most likely be Wi-Fi only in an effort to keep costs down. This may change over time if carriers can be aggressive with family data plans or other pay-as-you-go models.

From where I sit, Amazon, Google, and Apple are in the best position to make money from this segment. How much is up for debate, but because these three companies each have a media ecosystem and commerce engine to leverage, they’re in the best position.

Other companies who plan to enter the space will need to figure out how to tie 7-inch media tablets into their broader hardware, software and services ecosystem.  Perhaps companies like HP, Acer, Lenovo, and others can create media tablets as accessories to other computing products in their portfolios.

At a high level, I believe the market for 7-inch media tablets will be very similar to the iPod market in its heyday. History shows us how difficult it was for many companies to try to compete in the iPod market. We will soon see if the 7-inch tablet market has room for many players or just a few.

(MORE: Time to Admit It: A Smaller iPad Would Spell Doom for Everyone Else)

Ben Bajarin is a principal at Creative Strategies Inc., a technology industry analysis and market intelligence firm in Silicon Valley. He contributes to the “Big Picture” opinion column that appears every Monday on Techland.

8 comments
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Benmartin1974
Benmartin1974

Finnaly got my Apple iPad after reading this review http://search4reviews.net/ and so glad I did, this thing is amazing, the new retina display looks great, highly recommend getting one.`

Jack N Fran Farrell
Jack N Fran Farrell

If you are a student, or wish you were still a student, a knapsack is fine for a ten inch tablet, or Chrome Book or other light computer. However if you want to pullout your digital assistant from your pocket it will be 3_4" wide and 4_8" long.

Mounted on a dashboard, ten inch screens might make sense. Who'd buy a car to get a PDA?

Jack N Fran Farrell
Jack N Fran Farrell

Who can make money from a personal artificially intelligent hand held=7" device that you walk around with, at home, at work, before work, after work, to shop, to brainstorm with colleagues or hangout with family.  Who can't?

The keys are handheld assistance. Simplified access to knowledge while mobile is more important than texting or calling. 

Rod Halisi
Rod Halisi

hey guys i found this site called unlockatt it allows you to unlock any attphone for a low price its awesome 

Brian Elliott
Brian Elliott

I do not agree that the 7-inch tablets should be considered media tablets. I use my 7-inch tablets just as I would my iPad, primarily for business. The reason I like the smaller tablets is mobility and the fact that they are lighter and more easily held in my small hands. 

For this reason, there are tablets that I avoid, like the Kindle Fire and the Nexus 7. These are true media tablets that reduce the possible  all-round functionality of the tablets. I prefer more general tablets like the Playbook (although sadly lacking apps) and the Galaxy Tab 2 7.0.

AhmadZainiChia
AhmadZainiChia

Very good article! i think clear distinctions need to be made between 7-inch and 10-inch tablets. Much like how netbooks were given their own name and brand to tell people that "this machine cannot take over the full functionalities of a laptop" due to certain inherent and unavoidable qualities like screen size, etc. 

Similarly, 7 and 10 inch tablets need to be marketed properly too, otherwise customer's might not make an informed decision.

An interesting way to look at it, to me, is to see a 10-inch tablet sort of coming 'down' from a laptop; ie, it's meant to serve similar functionalities as it, but better in some ways, and not as good in others. The 7-inch tablet, to me, can be seen as 'coming up' from smartphones instead, and they would serve similar functionalities, and will be better than smartphones in some ways, and not so good in others.

I think smartphones and laptops/pc's are still the most stable markets as of now, and many things are coming up to fill the space between these two devices. I think this space is the most exciting now as there really are many good choices, which suits many different people and their needs :)

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jvhhkfcjhbvli

I can appreciate your point on assigning different designations to different size tablets however I think that insisting on splitting tablets into two different arbitrary classes based solely on a size difference of 2-3 inches isn't a good idea. There will surely be overlap in functionality between the two sizes and I know many people who use their iPads (I would propose that the great majority, in fact) solely for media consumption. Furthermore, what will you call an 8-9 inch tablet? A personal computing or a media device?