When Amazon launched the Kindle Fire last year, most analysts assumed that it was taking a small loss on every unit of the Kindle Fire sold. When Google and Asus launched the Nexus 7 last month at around the same price range, the same assumption held — either selling the tablet at breakeven, or at very low profit margins.
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However, a new analysis by iSuppli suggests that Google and Asus may be making a nice profit on each unit of the Nexus 7, as the total bill of materials or the gross cost adds up to just around $150 for the Nexus 7. The $199 Nexus 7 8 GB variant costs exactly $151.75 to build while the $249 Nexus 7 16 GB variant costs $159.25. This implies gross margins of nearly 25% to 35% for the device, which are closer to what Apple makes on each iPad.
While this won’t help Google’s bottom line much, it could definitely help improve Asus’ earnings in the next couple of quarters and also proves that it is viable to build good budget tablets at low prices. Another important implication of this is that other manufacturers could launch their own offerings in the same price range, intensifying the competition in the budget tablet space and boosting sales numbers for the Nexus 7.
This also underlines the need for Apple to launch a cheaper iPad soon.
We can expect a deluge of cheap Android tablets running Ice Cream sandwich or Jelly Bean in the coming year, and they would be a significant threat to the iPad especially if it continues to be priced at the current levels, which is more than double that of the Nexus 7.
Check out our complete analysis of Apple
If Asus is able to manage such a decent profit margin on the Nexus 7; Apple, with its scale and ODM partnerships, would definitely be able to squeeze even more profit out of a cheaper iPad, which it can easily afford to price a bit higher than the Nexus 7 without losing customers given its past success with premium pricing.
The cost structure of the Nexus 7 in a way just validates the assumption that Apple could easily manage a healthy profit on the iPad Mini, were it to launch it in the next couple of months, as is rumored.
We currently have a $680 Trefis price estimate for Google and a $700 Trefis price estimate for Apple. While tablet hardware hardly accounts for any of Google’s value, the iPad is Apple’s second most valuable business accounting for nearly 12% of its value.
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