Google's Nexus 7 tablet move could be costly

Apps expected to be key to new tablet's success

A $US199 Nexus 7 tablet from Google would raise the stakes for Amazon's Kindle Fire and Barnes & Noble's Nook tablet, which sell at a similar price and screen size.

But since the 7-in. touchscreen device is reportedly a quad-core tablet with other costly hardware, the Nexus 7 might also in some ways compete with the popular Apple iPad or perhaps the Microsoft Surface tablets unveiled last week. The iPad starts at $499; pricing for the Surface has not yet been announced.

To offer high-end features at a low cost with the Nexus 7, Google seems to be acknowledging that the Android strategy of having third-party companies make tablets hasn't worked. And that means Google must take aggressive pricing steps to make up the difference.

"If Google wants to jump-start the Android tablet market, which has been weak to date, then a low-priced, high-quality device could do that," said Jack Gold, an analyst at J. Gold Associates. "Google certainly has an incentive to make the Android tablet a competitive product in the market, and maybe driven more by wanting to capture a bigger share of the pie, than by supporting its OEMs (Original Equipment Makers)."

Google could be subsidizing the Nexus 7 to the tune of hundreds of dollars per tablet, some analysts said. Even so, "getting revenues is the name of the game for Google, and right now the OEMs are driving very little revenue to them on Android-based tablets," Gold said.

The big payback to Google from selling a $US199 tablet would come from the sales of apps and the ads that Google sells for its search tool, analysts noted. "Considering that the tablet ecosystem war is getting heated now with Microsoft having a bigger role, Google might feel the need for a more aggressive [pricing] strategy," said Carolina Milanesi, an analyst at Gartner.

She said that 40 million iPad sales in 2011 at a cost of $US499 or more show there's room for Android sales, especially at lower prices. "You would think that 40 million would not seem impossible for the combination of all the vendors supporting Android," she said.

IDC said iPads accounted for 59 per cent of tablet sales globally in 2011. Among Android tablets, Samsung had 6.3 per cent of the market, and Asus took 2.5 per cent. Amazon had 6.9 per cent of the market with its Android variant and Barnes & Noble had 4.9 per cent.

"Google has to be more than a little frustrated that the first mainstream hit Android tablet is the Kindle Fire," said Tom Mainelli, an analyst at IDC. "Google is desperate to get some market traction for Android tablets and the Google ecosystem that supports them."

With the Fire, Amazon changed the Android interface and removed ties to Google services, replacing them with Android services. "I believe Google wants to prove that a pure Android experience can be a good one," Mainelli said.

The key to success will not only be robust hardware but also software - and plenty of apps, some analysts said.

"The hardware is only part of the recipe, so Google better be coming up with exciting news for developers so that the number of dedicated tablet apps grows and grows fast," Milanesi said. "Apps, an intuitive user interface and sleek hardware make a winner. Android so far has had very limited apps, and okay user interface and some good hardware."

Ken Dulaney, an analyst at Gartner, noted that Android tablets didn't do well competing with the iPad mainly "because many people thought the software was more difficult to use than on the iPad."

Dulaney said that part of the problem with Android software was a familiar one for the tablet OS: a lack of upgrades. "Many Android tablets were using 3.0 and there were no upgrades or [the] new Ice Cream Sandwich-version, Android 4.0 tablets to be found."

The Nexus 7 will reportedly run Jelly Bean, the next generation of Android that may be version 4.1. More will be known at Google I/O, which opens on Wednesday in San Francisco.

With Microsoft coming into the market with Surface - and continued speculation about a mini-iPad from Apple - the market could suddenly become much more crowded. If that happens, tablet-optimized applications could become a major differentiator. "This is the time when the three big players - Microsoft, Google and Apple - have to stake their claim for the future... It had better be good, with lots of tablet-optimized applications."

As for what the Nexus 7 would cost Google in subsidies and other costs, analysts were not too concerned, given Google's cash reserves. "Google can afford any subsidy it wants," Gold said.

"I do think Google is willing to lose money on tablets, at least in the near term, to try to build marketshare," Mainelli added. "It's going to be an uphill battle though."

Matt Hamblen covers mobile and wireless, smartphones and other handhelds, and wireless networking for Computerworld. Follow Matt on Twitter at Twitter @matthamblen or subscribe to Matt's RSS feed. His email address is mhamblen@computerworld.com.

See more by Matt Hamblen on Computerworld.com.

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