Kindle Fire, Nexus, iPad, Galaxy Tab and … Ellipsis? Tablets are big business, but unless you happen to be Apple (AAPL) or Samsung (SSNLF) they’re not particularly profitable. The market is also brutally competitive, with tech blogs and consumers fixated on specs, design and price. So why would Verizon (VZ) decide to enter the tablet fray with its own device?
The Android-powered Ellipsis 7 is the first in what the wireless provider says is a new line of tablets to be featured in its stores, where the newcomer will compete head-to-head against the iPads and Galaxy Tabs it currently sells.
What makes Verizon’s move even more of a head-scratcher is the poor value proposition the Ellipsis 7 represents. It’s priced at $249 on a month-to-month contract, more than Amazon’s (AMZN) Kindle Fire HDX 7 or Google’s (GOOG) Nexus 7. But while these market leaders offer 1200 x 1920 pixel (323 PPI) displays, the Ellipsis 7 has a much lower resolution (216 PPI) display. That difference is going to be noticeable to comparison shoppers.
The Ellipsis 7 has less RAM, less storage, a slower processor. Its primary camera is a 3.2MP model, while 5MP is the norm. It’s heavier than the other tablets. It does ship with the latest version of Android — 4.2.2 Jelly Bean — but the Ellipsis 7 very much resembles a tablet designed to be competitive last year, not in 2013.
So how does VZ expect to get away with charging a premium for this thing?
First of all, you won’t find the Kindle Fire HDX or the Nexus 7 in Verizon stores — VZ doesn’t sell those less expensive 7-inch tablet market leaders. Instead, the Ellipsis 7 sits beside a collection of tablets that are much more expensive. Apple’s new iPad Air starts at $629 (for a month-to-month contract) and Samsung’s Galaxy Note 10.1 is priced at $599. The Ellipsis 7 is the cheapest new tablet Verizon offers. The only thing close to its price point is last year’s Galaxy Tab 2 ($299 new or $209.99 pre-owned).
Verizon will gladly sell a walk-in (or online) customer an iPad Air, but for those on a budget, the Ellipsis 7 is front and center as a new, 2013 model tablet with LTE connectivity at a comparative “bargain” $249 price. It has full access to Google Play and is running the latest version of Android. I’m willing to bet Verizon makes a profit margin off these that rivals Apple’s 45% margin on the base iPad Air.
But what about the more informed Verizon customer?
Tech savvy customers could rightly point out that Google’s popular Nexus 7 not only leaves the Ellipsis 7 in the dust, it’s cheaper too. Well, Verizon is currently offering $100 off tablets on a two-year contract, bringing that Ellipsis 7 down to $150 with wicked fast LTE wireless for mobile use.
And although the Nexus is also LTE-capable, Verizon has been delaying certification of Google’s tablet on its LTE network. Until that’s sorted out, the Ellipse 7 has a distinct advantage over buying a Nexus 7 for Verizon customers — LTE compatibility. Verizon is also positioning it as a mobile hotspot, capable of sharing that LTE connection with up to eight other Wi-Fi devices.
There’s one more piece to this puzzle. Verizon is in a partnership with Outerwall’s (OUTR) Redbox video rental business, with the relatively new Redbox Instant streaming. Guess what pre-installed app gets prime billing on the Ellipsis features page? You guessed it: Redbox Instant. The Netflix (NFLX) wannabe could see a boost in adoption thanks to prominent placement on the tablet, exposure on the tablet’s marketing material and Verizon’s streaming-friendly LTE network.
Verizon is paying an unnamed manufacturer to build the Ellipsis 7. Assembled as-is from previous generation parts and having no breakthrough hardware components, the Ellipsis 7 can’t have cost much of anything in R&D to develop this thing.
If the Ellipsis 7 doesn’t move, Verizon should have little development cost to recoup and if it has to discount stock, well it should be able to slash prices without taking a loss. So there’s little risk involved. It’s certainly not a venture on the level of BlackBerry’s (BBRY) $1.5 billion PlayBook tablet debacle or the $900 million write down Microsoft (MSFT) took earlier this year on its Surface RT tablet.
Verizon noted that the Ellipsis 7 is available exclusively from Verizon Wireless. That’s another bit of marketing obfuscation. Yes, it’s an “exclusive” but that’s only because no one in their right mind would buy the Ellipsis 7 if they saw it on a store shelf beside a Nexus 7 or pretty much any other current Android tablet. It would be dead on arrival. Tablet early adopters will know to steer clear altogether, but that’s not VZ’s target demographic.
Verizon is clearly positioning this tablet to be a money-maker aimed at the group of customers who haven’t jumped on the tablet bandwagon yet, but want to. The same customers who want a new device and know buzzwords like “Jelly Bean,” “HD,” “Google Play” and “4G” but lack technological savvy. It’s a predatory strategy, but that’s how it expects to sell a distinctly outclassed tablet at a premium price. And if moving some Ellipsis 7 tablets helps boost Redbox Instant subscriptions too, all the better for Verizon.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.