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.