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Verizon Contract May Hinder Xoom Sales

Verizon Wireless and Motorola announced Tuesday that Verizon will offer Motorola's Xoom, the first Google Android 3.0 device, later this week for $599 with a two-year contract.Customers can also opt for a no-contract price of $799 when the device launches on Feb.24.Intended to compete against Apple's popular iPad tablet, the no-contract Xoom costs $70 more than a comparable iPad.As with other tablets, Verizon will offer data buckets for the Xoom, with 1 GB of data costing $20 per month. While consumers can save $200 in upfront costs for a Xoom, will they take on a 24-month commitment in exchange? It's doubtful.

Verizon's contract pricing for the device comes as a surprise in view of how the company has been selling the Samsung Galaxy Tab, a 7-inch Android 2.2 tablet. While all four major U.S. carriers sell the Tab, only Verizon offers it solely without a contract. Consumers who wish to buy from Verizon pay the full price of $499 whereas my own Tab, which runs on T-Mobile's network, can be had for $249 with a two-year data-plan contract. Indeed, I suspect that Verizon is subsidizing the Xoom because, at $799 without a contract, the tablet is far beyond the $499 starting price for Apple's iPad. Yes, that iPad model is Wi-Fi only and limited to 16 GB of storage, but it attracts consumer interest. Consumers with interest will consider upselling themselves on 3G and more storage. As a single model, the Xoom has no such potential.

High pricing aside, a further challenge facing Motorola's Xoom on contract is that it's the first of many new Android 3.0 tablets due soon. We listed our top 10 to watch out of roughly 100 new tablets at last month's Consumer Electronics Show.Most of them will be Android devices.Nor did the tablet parade end there: At last week's Mobile World Congress, additional Android tablets were introduced, both in 7-in. and 10-in. sizes. Some consumers may be unaware of the numerous tablet choices coming soon, but those who know may well have reservations about committing to a 2-year contract for the first Honeycomb device that comes along.

Xoom's Likely Early Termination Fee

An open question I have about= the Xoom contract pricing is the cost of breaking the contract. In December 2009, Verizon boosted the ETF, or early termination fee, of such contracts to $350 on "advanced devices." I reached out to Verizon representatives to discuss the ETF for the Xoom contract and am awaiting a response. I'll update if and when I hear back, but my guess is that the Xoom is considered an advanced device and will face the same ETF structure as many of Verizon's smartphones.

Xoom appears caught in a catch-22 situation. At $799, it may be too expensive to attract mainstream interest. But the subsidized price saves only $200 upfront, with all owners paying the same monthly data-plan prices. If Verizon wants to get the Xoom in consumer hands and reap monthly data plan revenues before the onslaught of Android 3.0 tablets, it might be wise to consider subsidizing the tablet even further: say, $599 for no-contract and $399 for a two-year commitment. Growing demand for data should enable the carrier to recoup some of the additional subsidy as consumers boost their mobile broadband usage.

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Tofel is a writer for the GigaOm Network.

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