Race to the Bottom

A few years ago, developers of mobile apps were on a “race to the bottom.” When the iPhone App Store opened, apps were priced reasonably, but in the months that followed developers dropped prices to remain competitive until the most popular price point became just $0.99.

Today I read this article on Engadget about Amazon and Google selling their latest tablets at or below cost. Sounds familiar…

Honestly, I think the only reason Google and Amazon are doing so well in the tablet market is because they have this no-profit hardware model. Apple is the big player here, and has always priced their products to have a healthy hardware profit margin. There were several earlier Android-based tablets before the Nexus series and the Kindle Fire, all priced in the same ballpark as the iPad. Unfortunately (for these other companies), customers decided that at the same price point they would rather have an iOS device.

Amazon realized the only way they could break into the market would be to sell at cost, and make up the profits when customers purchased content to read or watch. Since Amazon also sells that same content, they are in a good position to turn a profit using this model.

The problem is consumers are now expecting all hardware to be sold at this lower price. Just look at the reaction to Apple’s recent $329 starting price of the iPad Mini. The Mini’s starting price is $80-130 more expensive than Android-based competitors, and people have had something to say about it. In reality, Apple is just pricing it in a way where it can sustain their business.

I don’t place the blame on consumers for this attitude. The latest mobile craze has people buying the newest models year after year. Corporations like Apple and Google are pushing for this consumerism attitude, so they can continue to sell record numbers of devices and maximize profit. The thing is, many people don’t need and can’t afford to buy the latest tablet/phone/etc year after year (at least not at prices with a healthy profit margin). So consumers continue to pressure the corporations to sell at lower prices. In this respect, this consumerism attitude the corporations have pushed has backfired on them.

The tablet market is still young. Last year, I thought Apple had such a big lead with the iPad, that it would be very difficult for other platforms to catch up. But a lot has happened in the last 12 months. It should be interesting to see just how this plays out in the long term.