Why Some 7-inch Tablets Will Eventually Be Given Away Free

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REUTERS / Shannon Stapleton

About 18 months ago, I was one of the first to write about what I thought Amazon’s business model would be for its tablet that launched last fall. I had heard from my sources in Taiwan that Amazon was looking at selling the tablet at cost or even below cost and then make up the profit through products and services offered to customers.

Sure enough, when the first Kindle Fire was announced at $199, my sources in Taiwan said that the tablet’s actual bill of materials (BOM) cost was probably close to $212. That means that Amazon would have to rely on customers buying music, books, videos, and hard goods and then amortize a portion of the profit from those sales to make any money on the device itself.

Since then, Amazon CEO Jeff Bezos has said that Amazon doesn’t plan to make money on hardware. Instead, the company will make money from the goods and services consumers buy while using products like the Kindle Fire and the Kindle Fire HD tablets.

(MORE: Why PC Companies Fear Amazon)

What Bezos understands well is that his tablets — or any tablets, for that matter — can act as front ends for delivering content, services and, in Amazon’s case, physical products. While Amazon has made the new Kindle Fire HD tablets valuable in their own right, the real reason they exist is to spotlight all of the offerings Amazon has for its tablet users.

In April of this year, I wrote an article here called “A Tablet in Every Room: How to ‘Think Different’ About the Future.”

In it, I emphasized the fact that someday a home might have four or five tablets scattered around the house and those tablets would just act as screens to access all types of content and services. And I also suggested that a lot of these might be subsidized by the likes of Wal-Mart or even Procter and Gamble to drive the users of their tablets to buy products and/or services they have to offer. But when I initially wrote the article, I still thought that the companies offering these tablets would subsidize a portion of the cost of each device and just sell them at a discount like Amazon has done in order to get customers tied into their product ecosytems.

But in talking with various folks involved with the supply chain as well as consumer brands, the possibility is now real that in the future, companies that have an especially rich ecosystem of product could actually give out tablets to their best customers — or at least those who sign up for a set of services that might have a recurring cost. But in essence, the tablet or screen that serves as a front end to buy things from these companies would actually be free.

(MORE: The Future of Personal Computing: Cloud-Connected Screens Everywhere)

A good example of this would be Amazon itself. The company offers a $79-per-year “Prime” service where Amazon basically offers two-day shipping of any product covered by Prime free of charge. (By the way, this is one of the greatest bargains on the planet for anyone who buys a lot of products from Amazon every year.) What if Amazon increased the cost of Prime to $99 or $109 a year and threw in the Kindle Fire for free? I don’t know about you, but since I’m an avid Prime customer, I would do this in a heartbeat.

I was recently at the local Fry’s store here in San Jose (Fry’s is a large consumer electronics superstore) and saw a 7-inch tablet for $79. It was an Android tablet and while it was not of the quality of the Kindle Fire or more expensive 7-inch tablets, it was very functional. It could run Android’s web browser and most Android apps. But since it was a hardware-only brand and not tied to any services that could add profit for the tablet maker, this suggests that perhaps the BOM cost on the tablet might be about $65-$70 if the vendor planned to make any profit at all.

This low BOM cost is important. If it is $65-$70 today, it will be under $50 within 12-18 months. That would mean that a company with a lot of products and services to offer — and is tied to perhaps a retail store with broad distribution — could create a special service like Amazon Prime or some type of yearly premium service. The company would charge a small subscription fee and then just give away a 7-inch tablet to each subscriber.

There is precedence for this already in the cell phone market. Many feature phones or even some newer smartphones are given away for free if the buyer signs a two-year service contract that covers a monthly fee for voice, text and data. The phone companies gladly eat the cost of the phone knowing that they will have a steady stream of revenue for two years; they’ll easily make up the cost of the phone within the first two or three months the services are being used.

While Wi-Fi-only tablets would not work like a smartphone plan does today, if the BOM costs of these 7-inch tablets continue to fall, we could see big players like Wal-Mart or even someone like JC Penny or Bank of America create subscription services of some type and then offer the tablets for free as part of the service. In fact, the financial services companies might be the first to offer free tablets if customers commit to perhaps a two- or three-year program of buying stocks and other financial offerings from them exclusively.

How soon could this happen? I suspect that a lot of companies will test or play around with a whole host of subsidized or premium-type subscription programs to see what sticks over the next two to three years. But things are moving very fast in the tablet world and I would not be surprised if we see the first wave of “free” tablets being offered during the 2013 holiday season.

I do believe that we will have tablets in many price ranges and sizes that will still carry up-front costs for many years to come. But I also think that the 7-inch tablet form factor, serving as a window into a set of services or being offered as a part of a subscription, will become a significant part of the tablet market in the not-too-distant future.

MORE: A Tablet in Every Room: How to ‘Think Different’ About the Future
Bajarin is the president of Creative Strategies Inc., a technology industry analysis and market-intelligence firm in Silicon Valley. He contributes to Big Picture, an opinion column that appears every Monday on Techland.

15 comments
MonteMalone
MonteMalone

And it'll have a gps beacon, and probably some other sensors to beam ads to you in every store or as you pass a restuarant the menu pops up. 

How long before the contact lens versions are forcibly implanted on everyone not rich or connected (no pun intended) enough to opt out?

PhilCooper
PhilCooper

I wonder if they slipped a decimal point on the Kindle BOM cost.  Not so long ago I worked for a well-known disk drive manufacturer where the BOM cost of a 3.5-inch hard drive was on the order of $21.  The drives retailed around $100 and were sold for a bit less to OEMs.  The mechanical complexity and precision of a disk drive far exceeds that of a tablet computer, as the latter has few, if any, moving parts.

PaulAnderson
PaulAnderson

This is not a radical new idea by any means. Computer printer manufacturers have been doing something like this for years. Years ago I got a Techtronics Phaser printer that probably would have retailed for well over a thousand dollars for free by simply indicating that I printed in excess of a certain number of pages each month. The printer was free but the ink was expensive- and that was where they made their money. I believe that many other printer manufacturers, while not giving away the printers, sell them below cost and make their money on the ink. Grocery stores do the same kind of thing: they sell an item (heavily advertised) at a loss (a "loss leader") to get you into the store, then recoup the loss and make a profit on the other things you buy while you are there.

Tablet
Tablet

lg-optimus-l9-another-smartphone

Gary McCray
Gary McCray

The problem with a free for all tablet model is that it requires people to have and master multiple tablets and in fact tablets which are really only going to be good for providing a sales opportunity for each provider.

What a mess.

Certainly Amazons model is for a sales device.

But multipurpose, useful for creation or cross compatible, not at all.

They made it to make money for them and that's it.

The IPad, the Nexus and the coming Mini and Surface support a much more global and long term useful model that is not locked in solely as a sales tool.

The Fire HD could orient more towards true utility and cross compatibility, but because their thrust is to extract more dollars from their customers they have little incentive to do so.

Probably there will be a continuing market for Fire HD like tablets, but I'm betting that the primary shift will be more towards a truly useful tool than a simple marketing and entertainment device.

The IPad Mini is going to eat the others for lunch this Christmas if it's pricing is even half reasonable. It's a proven wide use device with a record of happy customers.

Albin
Albin

Not so different from basic cell phone hardware as part of a subscription.   Quel surprise.

Landi Dexter
Landi Dexter

Excellent article.  I would be on board for a free tablet (quality tablet) just like I am about a cell phone.  Your idea is rather intriguing and hopefully it can begin soon.

Philip A. Kaiser
Philip A. Kaiser

This is not very different from the way cable companies throw their set top boxes at their customers. Cable boxes and DVR versions are not cheap devices and actually cost quite a bit of money yet they are treated worse than a 20yr old VCR. The cable companies don't care about the boxes because they make up the money by the content you purchase via the box. I was thinking about this very subject just a few days ago. A company like Amazon could partner with some high speed internet providers and then literally throw tablets at their subscribers for nothing. Maybe even lease the device like a cable box and then allow the stream of content to flow in.

JM Angotti
JM Angotti

those who sign up for GoogleFiber in Kansas City receive a free Nexus 7 to be used as a television remote... yes, google just valued its flagship tablet as simply a TV remote.

Jonathan Hirt
Jonathan Hirt

Including a Fire with a prime membership would be a great deal. Not only for the shipping (which would increase my Amazon purchases greatly), but for the streaming movie service, and their book borrowing service.

-avideogamelife.com

-lootit.net

iPad Case Stand
iPad Case Stand

 But why are they pricing it like that? eventhough there is a tablet war it is not practical to price it that way if the really want to survive in the market.

Guest
Guest

amazon sure is generous

John Kolak
John Kolak

This is also like signing up for an internet service and getting a free modem/router.

Riley Wave
Riley Wave

The "Tablet Wars" are definately heating up--  I purchased another Android tablet that launched last week called the Novo 7 Flame by Ainol Electronics, priced at $189 at a site called TabletSprint - it really gives Kindle and Nexus a run for the money with a high resolution 1280x800 IPS screen, a 5 megapixel Rear Camera and 2 MP webcam, HDMI with Full 1080p HD, a Micro SD card storage slot, Wifi, Bluetooth, Ethernet Connection and an option for 3G Wireless - definately worth checking out and comparing - especially for the price -- Ainol is an Award Winner of "Best Tablet of the Year" at CNET / CES 2012 Electronics Consumer Show -- Price is by far the biggest advantage of Android devices - I'm sure the anticipated Mini iPad is going to be at least a $100 more - and for such a small screen device, I'd rather pocket the savings and go with an Android --