Amazon’s Kindle Fire is $19 cheaper to build than Google and Asus’ Nexus 7, according to an estimate by the research firm IHS iSuppli. Photo: Peter McCollough/Wired
The Google-designed, Asus-built Nexus 7 is currently the best 7-inch tablet money can buy, but it isn’t the most profitable. Its biggest rival, Amazon’s Kindle Fire, is about $19 cheaper to produce.
While $19 might not seem like much, it adds up quickly when tablets are sold in the millions, as Amazon has done with the Fire and as Asus and Google hope to do with the Nexus 7.
The 8GB versions of both tablets sell for $200. But while the 8GB Nexus 7 has a manufacturing cost of $159.25 to build, the 8GB Kindle’s is just $139.80, according to a production cost estimate of the two slates based on product teardowns by the research firm IHS iSuppli. (The 16GB version of the Nexus 7 is far more profitable — it sells for $250 but costs just $166.75 to manufacture.)
But for less than $20, you get a lot more tablet in the Nexus 7. The major cost differences between the two devices are tied to the Nexus 7′s most distinctive hardware advantages over the Fire — its display, its CPU, a front-facing camera and a near field communications chip, said Andrew Rassweiler, a senior principal analyst at iSuppli.
The Nexus 7 has a brilliant 1280×800 7-inch display, using high-end IPS touchscreen technology, that costs Asus about $62 per unit. The Fire’s 1240×600 display isn’t nearly as pretty. While it too has an IPS touchscreen, Amazon has gone the cheaper route and its display units run a cost of about $59 per each Fire built. Every Nexus 7 also includes a $2.50 camera that the Fire doesn’t have.
Before the Nexus 7, Nvidia’s Tegra 3 quad-core CPU was only found in iPad-fighting high-end tablets such as Asus’ Transformer Pad series that boast $500 price points and 10-inch screens. But just as with everything else, the cost of the Tegra 3 has dipped a bit too. Asus pays $21 for each 1.2GHz Tegra 3 CPU used in the Nexus 7. Amazon, on the other hand, uses a 1GHz OMAP dual-core processor from Texas Instruments, which it pays $13.50 per CPU for.
“When the Fire came out, Amazon wasn’t making any money,” Rassweiler told Wired. “They had almost no margin at that point. But things change and they change very quickly. NAND flash for storage came down, display costs came down, the cost of RAM came down. Now, the cost picture looks a lot different for Amazon and for Asus and everyone else making tablets.”
Rassweiler said the Fire and the Nexus 7 owe much to the first hot-selling low-priced tablet, the HP TouchPad, for supply costs falling so sharply.
The TouchPad went on sale about a year ago at the same price as the iPad and it was a failure. In response, HP cut the price down to $100 for a 16GB TouchPad and $150 for a 32GB slate last August. Consumers went nuts, and TouchPads sold out all across the U.S. and Canada.
“It was really the TouchPad that clued everyone into the fact that a cheap tablet can really sell,” Rassweiler said. “Before that, the only $200 tablets available were really from no-name companies and nothing anyone would want to buy. But then came the Kindle Fire late last year, and Amazon catapults itself into the second-best-selling tablet spot behind the iPad. And of course, Google was paying attention to that.”
Oddly, unsuccessful tablet lines from the likes of Asus, Acer, Samsung, Toshiba and Motorola also helped bring prices down.
“A lot of suppliers geared up for a tablet market that was promised as the next big thing, but has so far yet to take off outside of the iPad,” Rassweiler said. “HP had a tablet that went nowhere, RIM has a tablet that went nowhere, Motorola has had multiple tablets that have failed to gain widespread traction. With all that happening, suppliers were willing to bargain and that leveled the playing field for Amazon to come in and purchase at a low price.”
Before those sales disappointments, companies with great supplier relationships such as Asus had an advantage over non-traditional players like Amazon in getting lower prices on components. Not so today.
According to IHS iSuppli’s estimates, Asus and Amazon have been able to source components at largely the same price points. Amazon pays about $13.35 for each 8GB of flash storage found in the Kindle Fire. Asus pays $13.50 for each 8GB storage chunk in the entry-level Nexus 7. Both tablets sell for $200. A 16GB Nexus 7 sells for $250, but Asus pays only an extra $8 for the storage bump, adding another $42 into the margin of the more expensive tablet.
“The margins on the Nexus 7 and the Kindle Fire still won’t result in huge profits,” Rassweiler said. “But unlike a lot of other hardware makers, both Amazon and Google are willing to take thin, thin margins on hardware to drive people to their online stores, and in the case of Google, to maintain brand image and drive people to use their online services and just simply get Google in people’s hands.”
Although prices on components will continue to drop, don’t expect retail price points to follow. Flash storage has gotten cheaper every year, but Apple still charges an extra $100 for each step up in storage for its iPhone and iPad, Rassweiler noted. And with the Nexus 7, by IHS iSuppli’s estimates, Google and Asus are charging an extra $50 for an $8 storage increase. So while manufacturing and supply costs will fall, it’s likely that price points will stay the same, meaning margins will increase some on higher end gadgets while consumers buying at the lower end will get more bang for their buck.
“Tomorrow’s cheap smartphone is not some new design,” Rassweiler said. “Tomorrow’s cheap smartphone is essentially today’s iPhone. The same thing is already happening with tablets.”
Amazon’s Kindle Fire (left) is the second-best-selling tablet after Apple’s iPad. But Google and Asus are hoping to change that with their Nexus 7, which is still only available for pre-order. Photo: Peter McCollough/Wired