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Why Cheap Tech May Kill Tech!

Will companies invest in innovation if they have to make millions of devices at low profits?

brunch Updated: Nov 24, 2012 17:21 IST
Rajiv Makhni

Google nexus devices and Amazon Kindle Tablets are state-of-the-art gadgets at impossibly low price points – there’s a big price to pay for us consumers in the long run.

The $299 marvel
The Google Nexus 4 phone is a complete sell out. It’s got a nice form factor, a holographic patterned toughened glass at the back, a 4.7-inch IPS display, 1.5 GHz quad-core processor (just about the fastest processor on a phone right now), 2GB RAM, a 1.3 megapixel front-facing camera and an 8.0 megapixel rear camera at the back. Add to this Wi-Fi 802.11b/g/n, HSPA+ and Bluetooth connectivity plus NFC that also works with Android’s ‘Beam’ feature. It can also charge wirelessly with an optional wireless charging Orb. And all of this for just $299. That’s totally state-of-the-art technology at an unbelievable price, right?

The Google Nexus 4 is built by LG.

The On-Fire Fire

The Amazon Kindle Fire HD 7.0 and 8.9 have excellent hardware, great looks and fantastic screens. The 8.9 has a screen resolution of 1920x1200 plus Dolby audio. They are also cheaper than any similar tablet by at least $150. And the previous generation Kindle Fire is now retailing at just $159. Sales of all three have gone through the roof. Amazing, that we can get so much hardware for so less, right?

The Nexus of Amazement
The only tablet to take on the Amazon Kindle Fire HD 7 and beat it at its own game is the Google Nexus 7. While it was already a price and performance leader, Google just upped the ante with an upgraded version while keeping the price the same, $199. And the all-new Nexus 10 tablet takes high-end tablets to a whole new level with an incredible screen, eye-popping resolution (the best in the world as of now) and great performance. The Google Nexus series of tablets are bestsellers wherever they’ve been released. It’s awesome for consumers to be able to afford top-of-the-line tablets without breaking their bank, right?

No, it isn’t!
Unfortunately, the long-term answer to all three questions asked above is: no, it’s not awesome and no, it’s not amazing! Welcome to a whole new world of technology where it’s not about hardware and costs and prices based on a bill of materials. This is all about selling hardware and making money off the usage of services and content consumed after. Welcome to the all-new world of Subsidised Tech.

The Galaxy Nexus 10 is built by Samsung.

The How and Why

So, how do Google and Amazon sell hardware at such incredible prices? Well, Google contracts it to other big brands. For instance, the Google Nexus 4 phone is built by LG, the Galaxy Nexus 7 is built by Asus and the Galaxy Nexus 10 is built by Samsung. And it seems there are many more such ‘partnerships’ coming up, with Huawei, Acer and Sony also rumoured to be making future Nexus products. While the contract between Google and these companies is super secret, there can only be one business model that works: Google asking the partner to give them at very low prices in exchange for huge numbers, with Google taking the complete hit for selling at low retail prices. The idea is to get people to buy these devices in huge numbers, get them completely invested into the OS and the ecosystem and make the money back from all the Google services used. The hardware partner gets all the benefits of economies of scale and also use up all that expensive investment they’ve made in huge infrastructure and factories.

The Other side
Amazon, on the other hand, is doing more or less what Apple does. It sub-contracts its production of the Kindle Fire HD to companies like Foxconn that make it for them. But that’s where the similarity ends. While Apple then tacks on a nice premium and profit, Amazon may well be selling at a substantial loss. Amazon’s hardware strategy is a pure play-content-seller business model and the way the Kindle Fire is designed is to make sure that you buy e-books, music and movies from Amazon only. That’s where it’ll make its money back from you. While Apple also makes oodles of money from content sale, it’s still a sideline for them and making a healthy profit from hardware is critical.

Smart plan: The Kindle Fire is designed to make sure that you buy e-books, music and movies from Amazon only. That’s where it’ll make its money from you.

Why should anybody care?

As a consumer, if you can get a top-of-the-line, state-of-the-art, no-compromise tablet or phone at half the price, why should you care about internal business models of various companies and the how and what of their devices? It’s because this subsidy model in the long run will kill innovation. Today, a smaller tablet has no chance of selling if it’s priced over $199! Will a company make huge investments in new breakthrough technology or expensive R&D if it knows it can’t recoup it? What if a company with a great product doesn’t have a content or services revenue model? How will it sell at a competitive price and keep a healthy balance sheet? What about new companies trying to get a foothold in this business? Aren’t they going to be blown out of the water as they can’t subsidise and sell below cost? Even now most of the brands Google partners with are able to give them fantastic new products as they’ve all spent money on technologies and innovations in the last few years and Google is reaping that benefit. But will these companies pour in new money to carry on innovating and investing in greater infrastructure if they know that they have to make millions of devices at very low profits? Each of these brands have their own similar products out in the market and each of them know that they are priced much higher. Aren’t they going to cannibalise their own brand sales in the long run?

The Future of Tech is in your pocket
At the end, we all have to ask yourselves: what do we really pay for when we buy a new device or gadget? We buy it for the thrill of new innovation, that jaw-dropping sensation of experiencing tech magic take place in front of our own eyes. If subsidised tech had taken place 20 years ago, we may never have seen a flat TV, a tablet or a smartphone – and would have been using a much cheaper priced landline telephone set and a much cheaper fat CRT TV. Maybe, paying a little premium, an extra $50 for an out-of-the-box device, isn’t asking for too much. After all, the future of tech may well depend on it!

Rajiv Makhni is managing editor, Technology, NDTV and the anchor of Gadget Guru, Cell Guru and Newsnet 3.

Follow Rajiv on Twitter at twitter.com/RajivMakhni

From HT Brunch, November 25

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