How Much Will Consumers Pay for Tablets?
When the Motorola Xoom tablet came to market at $799, a collective grumble was heard. Many said the price was simply too high. That makes sense when compared to Apple's iPad, which starts out at $499. Apple also enjoys a competitive pricing advantage, due to multibillion deals that prepay for device components. But the closest comparison of a Xoom to an iPad is really the latter's $729 model, which includes a 3G radio and 32 GB of memory, just like Motorola's Xoom. Clearly then, a $499 option gives Apple customers a foot in the tablet door, but what price are consumers really looking to pay for a tablet?
Based on a survey by the Institute for Mobile Markets Research, that figure ranges from $351 to $524. The former figure represents the mean amount regarded as such a good value that a consumer would definitely purchase a tablet. The latter price of $524 is the mean response from survey participants who say they'd never pay that much for a tablet. The survey included 814 participants, 38 percent of whom were already "very or extremely interested" in a tablet device, which makes sense. (People who lack interest would be likely to skew prices lower.) There's even a price point that's "too low," with survey respondents finding a mean tablet price of $202 to likely represent a device of "questionable quality."
Only one out of the six current iPad models falls into the desirable price range. Yet Apple has sold more than 15 million of its first iPad iteration and is expected to move up to 40 million additional units in 2011 after iPad 2 arrives this week. How then are sales rising so quickly, given that the models cost more?
I suspect many mainstream customers consider the base model with 16 GB and Wi-Fi a mere starting point. For some, that particular unit is more than good enough to experience the "post-PC" era. It works at home with no monthly data plan and has plenty of room for hundreds of apps. These consumers essentially consider a self-upsell for additional storage because you can't add capacity later. Or they justify the 3G radio with the lack of a contract. There's currently no such choice with the Xoom: It's either $799 for a month-to-month 3G deal or $599 with a two-year data commitment—an obstacle for those on tight budgets.
Still Addicted to Hardware Subsidies
How much negative impact does a data-plan contract have? While the IMMR survey will be updated with this data in the coming days, I obtained an early peek at results showing that only 25 percent of would-be tablet consumers are interested in a hardware subsidy in return for a data-plan commitment. As in our own poll last week, the majority of survey participants would rather purchase a lower-cost, Wi-Fi only tablet. Surprisingly, however, more of those who preferred a 3G device in the IMMR survey said they'd go with a contract data plan than would proceed on a month-to-month basis. Clearly our hardware-subsidy addiction is still in full force.
I should also note that the survey's question assumed that a 3G tablet would add $100 to the price of a Wi-Fi model. That seems low to me: The 3G option for iPad adds $130 and a Xoom with Wi-Fi only is expected to carry a $200 cost difference. If the question were phrased to reflect these cost increments, I think more would prefer a Wi-Fi model, as indicated by the 75 percent result in our poll last week.
I expect these results to change over time to further favor Wi-Fi tablets over 3G units as more consumers purchase handsets that can double as mobile-broadband hot spots. Once they better understand that this feature is a monthly service—and not a separate data plan that requires a 24-month commitment—the 3G tablet's appeal diminishes. Some will always want a dedicated connection for their tablet, but by the end of this year, I wouldn't be surprised to see many more Wi-Fi tablets sold, compared to those with a 3G radio.
What does this mean for Motorola and the other Android tablet makers lining up to launch new tablets? Tablet consumers want a range of choices. They want them to be cheap and they don't relish the prospect of committing to a carrier. It thus may actually make more sense for LG, HTC, Samsung, and others who haven't yet launched Honeycomb tablets to start with lower-cost Wi-Fi models. They can always add more expensive 3G versions once buzz builds around a Wi-Fi Android unit.
This sheds light on Apple's other advantage: Few peers in the tablet arena have distribution channels outside of carrier stores. You might find a Samsung tablet in the local Best Buy, for example, but there's no Samsung store to compete with Apple's retail chain. That adds an entirely new layer of complexity and cost risk for non-Apple tablets. These companies have to negotiate with retail stores and possibly give up a cut of profits to get shelf space if they wish to bypass the carriers as their primary distribution channel.
Also from GigaOM:
Why iPad 2 Will Lead Consumers Into the Post-PC Era (subscription required)