Any doubt surrounding Google‘s (NASDAQ:GOOG) seriousness about the tablet business have surely been put to rest with the appearance of the Nexus 7 on Google’s otherwise pristine homepage.
Tablets are officially big business, and Google is determined to carve a chunk of that business out for itself — even if it takes extreme measures to preemptively protect that turf from the threat of Apple’s (NSADAQ:AAPL) expected foray into the 7-inch tablet market with the iPad Mini and Amazon‘s (NASDAQ:AMZN) Kindle Fire.
While Apple is expected to stick with a premium-price model (Tech-Thoughts did a breakdown and estimated that a $299 price point would net a tidy profit), Google sells the Nexus-7 at a loss, starting at $199. The result has been an early sellout of the $249 16GB model and numbers that have greatly exceeded Google’s expectations. Where it was hoping to move 3 million tablets by the end of 2012, analysts are now predicting between 6 million and 8 million.
While Apple is expected to continue selling tablets for profit — earning $9.2 billion in revenue from iPad sales last quarter alone — Google and Amazon are playing a different game. They want tablets in consumers’ hands so people will use them to buy their online goods.
So far, Android (which Google gives away for free as an open-source platform) was supposed to drive users to Google’s online store, but the best-selling Kindle Fire runs a customized version of Android that steers users to Amazon instead. The Nexus 7 is Google’s attempt to capture users before they lock in with Amazon.
And between the Nexus 7 — which is riding strong demand and positive reviews — and the coming iPad Mini and the expected replacement for the Kindle Fire, this holiday season is going to be an all-out war for consumers’ wallets, budget-tablet market share and flogging online content — apps, e-books, movies and music.
Forrester Research pegs the number of tablets in global use for 2012 at 191 million, but predicts huge growth to 760 million by just 2016. Google’s move to tout the Nexus 7 on its home page (which is off-limits to other advertisers) was a big opening salvo. Gizmodo points out that a large percentage of the 190 million unique visitors to Google sites in July landed on that home page, making those eyeballs worth millions of dollars in free advertising.
There are also other contenders in the 7-inch tablet market. Research in Motion (NSADAQ:RIMM) and Barnes & Noble (NYSE:BKS) all come to mind, but of these, the only one that’s really made any headway is B&N with its Nook tablets — and those are getting a bit long in the tooth.
The 10-inch market will also be hot, but it’s pretty much wrapped up already by Apple’s iPad. It’s expected that Amazon will release a 10-inch Kindle tablet and Microsoft may well have its Surface tablets on the market, but with all due respect to the late Steve Jobs, I expect that smaller tablets is where the action is going to be for the near future.
Why? Here are four reasons:
A good chunk of the people who would fork out the money for a full-sized tablet already have. It sounds funny saying this after only three years, but this is a mature market. The big rush of early adopters is over and now it’s a steady stream of new customers, supplemented by existing tablet owners that manufacturers can convince to upgrade to the latest and greatest.
7-inch tablets priced in the $200 to $300 range are at that sweet spot where holdouts from the pricier iPads may be willing to jump on the bandwagon. They’re also inexpensive enough that parents may begin buying them for kids en masse, especially when they do the math and realize that a $200 Nexus is only $50 more than a Nintendo 3DS, plays games that cost a buck (compared to $30 cartridges), has a battery that lasts twice as long, doubles as a movie player and can be used for basic schoolwork such as research or writing short essays.
Full-sized tablets such as the iPad are great, but lots of people are put off by the size. Let’s face it, an iPad isn’t exactly pocketable. A good quality tablet in a 7-inch form factor is liable to bring on a fresh wave of adopters who have avoided tablets because of their bulk. Expect many gadget hounds to add a smaller model to their existing iPad as well, to give them a portable option.
Google has fired the first shot with its prominent promotion of the Nexus 7 and you can expect Amazon to do the same with a new Kindle Fire. In fact, Amazon isn’t sitting still in the meantime — I found a press release from the company in my inbox this morning announcing that the Kindle Fire is now “sold out” and trumpeting the fact that the device captured 22% of U.S. tablet sales in the nine months since its launch.
The building buzz over the iPad Mini (with a rumored October announcement date) is going to make it impossible to ignore these things. The inevitable lineups at Apple Stores will be all over the news and once all three are “real” and available and being compared, it’s going to be impossible to avoid the bombardment of reviews and advertising.
So expect this Christmas to be the “year of the small tablet.” Whether Apple, Amazon or Google comes out on top depends on a number of factors, but Google’s Nexus 7 has a head start, positive press, a likely price advantage and full access to Google Play. I expect it’s going to easily clear those 6 million to 8 million units that analysts are predicting.
And while the Nexus 7 won’t directly goose Google’s bottom line if that’s the case, it will still establish a user base that contributes revenue over time through Google Play purchases.
As of this writing, Brad Moon didn’t own any securities mentioned here.