The tablet market

Today, the clear leader in the tablet market is Apple, with its iPad. According to a study by iSuppli, the device costs Apple between $230 and $346 (depending on configuration) to manufacture and is sold between $499 and $829.

Meanwhile, HP came out with its touchpad and, thanks to another isuppli study, we learned that it costs between $306 and $328 (depending on configuration) to manufacture it. Currently, the company has put those device in fire-sale mode, retailing them for $99 and $149, leading many to highlight that the company is losing large amounts of money.

Comparing the two, based on roughly the same feature sets, we get the following (for the sake of comparison, I used the non-3G version of the iPad since HP has only sold WiFi enabled tablets and doesn’t have a 3G product out):

Looking at this chart, it is clear that Apple is substantially more efficient in its supply chain, being able to build a tablet for about a third less than HP. But what also becomes clear is that the Cupertino company has been pricing the device to maximize profit and there seems to be a lot of room for selling tablets at a lower price without losing one’s shirt.

But how much would people be willing to pay?

Listening to the market

One of the most fascinating things I’ve noticed recently is that the price of ebay auctions, on most goods, tends to be relatively consistent as the auction comes closer to its conclusion. Take any given good and you will find that there is relatively little difference in the bids on several auctions for the same thing ending within minutes of each other.

Another interesting artifact is that the price of a second hand device on craigslist tends to be close to the price of the same device at the end of an ebay auction.

Those two facts seem to point to a natural equilibrium when it comes to pricing goods, where a majority of sellers and buyers cluster around a price point that seems to be what the market is agreeing to as a price point.

On its face, it’s interesting to see that iPad2, as a product, does not seem to loose much value on the resell market, with second-hand versions reselling for roughly the same price as the retail one.

However, there is an interesting phenomenon here with the HP Touchpad selling for over $100 more in the after-market than the suggested retail price. While this is partly due to scarcity, it is interesting to see that the price ceiling has actually sustained itself for the last couple of weeks, even as more supply has been made available.

The evidence seems to point to customers being interested in buying a 16Gb tablet for between $200 and $250 and paying up to $50 more for double the space. The challenge still remains that HP actually would continue losing money at those price points.

Looking at this, however, it seems the losses could get lower if HP priced the market closer to what the market currently seems to dictate. However, a loss is a loss and there would still be question as to how the company could actually make this a success.

Options for HP

Based on the above data, it looks like there could be a chance for HP to attack the marketplace and make WebOS the second most popular operating system in the tablet space, succeeding in establishing WebOS as an alternative to iOS and potentially besting Android in that arena. To do so, the company could look at a number of different approaches to subsidize the difference in price.

One of the first things HP might want to look at is the lifetime value of a customer. Is there a way they could recoup the $28 or $56 they are losing on that customers.

Could they, through the sales of apps, make that money back? Assuming a 30% cut, as most people seem to take these days, it would mean that they would need to sell $96 (for the 32Gb) or $186 (for the 16Gb) worth of app. Assuming apps are selling for $3 per app (which a cursory look at the recommended apps seem to point to as an average price point), they would need to sell an average of 32 apps per 32Gb Touchpad sold or 62 apps per 16Gb tablet sold.

What about movies? A downloadable app on the Touchpad is called the HP movie store. It appears movies rent for $3.99 and sell for $20. Assuming the same 30% split, they would make $6 on every movie sold or $1.20 on every movie rented. To recoup their cost, they would need to either sell 10 movies per 16Gb tablet or 5 movies for the 32Gb model. Alternately, they would need to rent 47 movies for the 16Gb model or 24 on the 32Gb one.

Assuming a two year life on the devices and its associated customers, it seems that recovery of cost could be realized.

But let’s not forget some of the other (potentially more lucrative options). As a successful alternative to iOS, the company could develop an ecosystem of components (keyboards, cases, etc…) that work with the device. They could charge a small fee for certification as “Made for HP Touchpad” and receive revenue from that source. Furthermore, with a strong position in the market for their offering, they could then potentially license out the operating system itself (as more and more devices enter the market, the chances that more developers will be attracted to the platform increase), generating enough revenue to more than subsidize the cost of the initial production run.

Looking at the production costs of Apple’s iPad, it also seems clear that there is much that can be done to optimize the supply chain and manufacturing of the Touchpad. HP could initially target their own internal efforts with a goal to get the Touchpad produced at a rate that was low enough that they could first offer them at cost and eventually make a small profit on the hardware itself.

As a long term play, though, it looks like the main goal of this slew of HP touchpad would be to establish WebOS (and thus HP) as a leader in the tablet market. To do so may allow the company to build some strong margins on OS licensing at some point in the future. However, it would require a willingness to take some short term losses (under 12 months) to establish a strong position in the market in the long term.

Options for tablet manufacturers

It seems the HP touchpad has given the industry an idea of what the market is willing to pay for a tablet not produced by Apple. While it is true that the WebOS operating system is very polished, I think that factored less in people’s interest in the device. The market wants an inexpensive tablet that works relatively decently and they’re willing to spend $250–300 for it.

There are now rumors that Amazon is considering entering the market with its own Android-flavored tablet, priced in that range. To do so, considering the fact that Amazon will generate revenue from alternate sources like the Kindle store, the app store, and streaming movies and TV shows, seems to be a natural evolution and it appears that a pricing strategy that would be the tablet in the sub-$300 range makes sense. If they do so, it will be interesting to see how their offering fares. A failure to take off could translate in trouble for Android as a lower price point Android offering ought to be successful and failure would mean a problem with the OS. If it takes off, Amazon could reignite the tablet market and cut off HP’s chances to establish their operating system as a strong contender in the tablet space.

Because technology costs continuously go down, it is clear that we will see a sub-$250 tablet within the next 24 months from someone other than Apple (Apple has a tendency to price rigidity and may drop some older generation iPad models to the $299 range but I doubt they would go much lower than that). Efficiencies in production and supply lines make that not just a possibility but pretty much a sure thing.

As to who will control the second most popular operating system (assuming Apple retains its lead) in the tablet business, it’s really up to HP to decide how it wants to play. It has a unique opportunity to take that spot right now but the window of opportunity may be closing extremely fast for them.

As a final note, realize that the observations I’m making above are only relating to the tablet market and do not affect the smartphone marketplace at this time: that ship has mostly sailed and it’s a two-player game at this time: iOS and Android.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Pricing a Tablet. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Then, I picked up the same info from the Apple store offerings for the MacBook today:

So looking at this, the comparison in terms of a price drop, since we’re talking about features, would probably have to be around the 2.4 GHz version since it’s the only version that appears on both pages (the MacBook didn’t have any 2.0 GHz or 2.1 GHz version.)

However, here is the first problem with the statement. The 2.4Ghz MacBook version offered today is $1599 and the 2.4 Ghz MacBook Pro version offered yesterday was $1999. That’s only a $400 price drop.

Using the same advanced “check the Google cache” methodology, I pulled up the technical specification list for the MacBook Pro as it appeared on Apple’s site yesterday. It looked like this:

I then pulled up the similar data from today’s specifications for the MacBook. The idea here is to get a fair assessment, based on Apple’s words yesterday and today, about whether one really gets the same value for less.

So let’s take a quick run down through the features of each devices, since Steve Jobs asked us to keep thinking of today’s MacBook offering as equivalent to yesterday’s MacBook Pro, based on the data provided by Apple itself:

So by the look of it,it’s not an exact match. The screen of the old MacBook Pro is, of course, larger, which accounts for it being heavier and bigger. But other features seem to have disappeared: The 2 firewire ports are gone, as is the ExpressCard slot; So is the antiglare screen (with glossy available as an option instead of a default) and the DVI port. Oh, and the supported screen resolution goes from a top of 1440 by 900 to 1280 by 800.

On the plus side, the multi-touch pad is a glassy button-less one, a new video card is available, as is a larger hard drive (50 more Gb to use) and a speedier motherboard is available. Also, it appears that the battery is now a 45-watt-hour one instead of a 60-watt one so I suspect that there are some power enhancements in this new machine.

Are the two machines similar? No. However, each of them has pluses and minuses and they are only $400 apart which, considering some of the things that have been dropped and added, seems to point to a machine that, assuming depreciation, is probably in line, price-wise, with the earlier one.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Apple: Same value, lower price?. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Having gotten that data, I then tried to understand the percentage of fluctuation as far as the high and low values for a given day and then for the close of day. I’ve bolded the values that are over 1 percent of fluctuation for a given day.

From this, a few interesting points come up:

• It seems that market swings of over 1 percent are not that uncommon these days. For the observed period of a month, the market closed with a change of over 1 percent for 19 days compared to 5 under 1 percent.
• Since Lehman went under, a swing of less than 1 percent only happened twice, both times on Wednesdays (September 24th and October 1st)
• Significant swings (over 4 percent in either direction for top or low) seem to be becoming more common with 7 of the last 24 trading sessions seeing such swings.

So all this activity begs the question: is high volatility the new normal?

In order to figure that out, I averaged out the percentage of change for the recorded period and then tried to compare that to the volatility since the Lehman failure (with September 15th being the first trading day after the news became official). The results looks as follows:

I would love for readers to check my math here as it seems that there’s a pretty stunning change (38%) in the overall open to close change in price since the Lehman crisis happens, which makes me wonder whether this is only a temporary period or whether we are going to have to get more used to the concept of large swings in the market.

Anyway one slices it, however, it’s pretty clear that we are looking at a market that is largely panicking and it seems that one cannot deduct any trends (either up or down) from what we are now witnessing. Yes, it’s true that the market has dropped over 10 percent in the weeks following the Lehman bankruptcy, but all this at a time when we’ve seen the market drop almost 7 percent on one day to be followed by an almost 5 percent gain the next day.

I am by no mean a financial wizard, so I’d love some of my more economically astute readers to explain (or provide another area that needs to be explored) whether any of this data holds any value to better understanding what is currently happening.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Is high volatility the new normal?. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

In the United States, cable television has what is called a tiered structure. That means that channels are grouped in packages that are then sold as a whole. The most basic service includes the regular “free” networks (for people who have low or no reception), the next package above that generally offers an extended set that includes CNN, ESPN and a bunch of other channels. Then, on the third tier, you can buy more expensive channels like HBO or Showtime, which are not supported by advertising.

If you were to draw a parallel to the online world, you would have Internet access being the basic package, then a pre-paid package which would offer access to a certain number of sites (similar to what AOL is starting to do by pulling Time and Entertainment Weekly behind its own service), and then would pay extra for a few one-off sites that may warrant it.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Paid Content on a tiered structure. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Since Boo’s failure, we now all know that trying to attack 15 markets at once is sheer insanity when you’re a startup. As some of the people within Boo used to say, if we make it, people will think of us as geniuses, and if we don’t, there will be studies written about how it’s impossible to do it. Hindsight being 20/20, we can now say that the attempt to capture so many markets quickly failed.

In my discussions with European companies, however, I’ve noticed a number of ways in which companies are globalizing. Here’s a quick rundown.

Partnerships

When Internet.com started expanding overseas, we were looking at a way to limit our potential risk. As a result, the approach we took (back in 1996) was one of joint partnerships, offering our content in exchange for a stake in the new business unit. Internet.com would focus on producing content and the partner would translate the content, market the brand in the local market, and sell advertising in the local market. In exchange, Internet.com would receive a quarterly fee based on a percentage of advertising revenues. This approach has advantages for content providers in that it does not affect the bottom line in a negative way. The downside, however, is that you do not have much control over the total deal and it makes it harder to assume full control if you feel like doing so.

Franchising

Etrade is now in 9 countries outside of the United States. In doing so, they have been using a franchising model. Entrepreneurs have approached them and bought the rights to the name and are renting the technology from Etrade. If the market succeeds, Etrade then looks at the partnership and talks to its franchisee about possibly merging the operations within the global Etrade by acquiring the franchise. It’s an interesting model in that it goes beyond what Internet.com did. The one extra step is the license of technology. As a result, Etrade is a financial technology company when it comes to the international market. This model seems to have worked well for Etrade and seems to be the most cost-efficient approach to going global.

Glocalization

This is a term popularized by Yahoo! The basic idea of glocalization is best embodied in the slogan think globally, act locally. In entering foreign markets, Yahoo! hires a completely local team which has full control of the local Yahoo! portal. The team strikes partnerships, sells advertising, and does marketing as an almost independent company. Essentially, the local Yahoo! portals are wholly-owned subsidiaries of Yahoo! corporation and act relatively independently of the parent company.

In this model, Yahoo! essentially becomes an incubator for people who want to become the Yahoo! of [insert country here]. Yahoo! owns the whole company but by going local, can be more in tune with local business traditions, which may be different from those of the United States.

As a result, overseas Yahoos sometimes have strategies that differ from the main site but are a better fit for the country they are in. For example, Yahoo! Europe entered into distribution deals with large media companies whereas it wasn’t traditionally something Yahoo! US did and got into the access game long before its US counterpart did.

As time went by, the US operation have started to take a look at what its European counterpart is doing and sometimes adapted similar strategies.

Another advantage in this approach is that, by having local executives, your company is not seen as an American invader (and in Europe in particular, American domination is a big issue).

Buy It!

Back when it was riding high, Amazon did something very smart: it started using its overpriced stock to acquire companies. In doing so, Amazon ended up picking up a German online retailer. This approach can be seen as a good way to quickly enter a market if you’ve got the money.

However, this is a strategy that is very difficult to accomplish. First you have to have the cash or stock to make the acquisition. But that’s the easy part. The tough part comes in the integration of back-end systems and the switch in brand name. If you want to become a dominant player globally, having a strong brand is essential but what do you do when you have several.

In the case of Amazon, they went out and completely changed the name from the get-go, creating some controversy in the process. Over time, this proved to be the right strategy but had they picked up a more established player, it might have been difficult for them to do so.

The other issue they have had is in integrating the back-ends. In the final analysis, they decided to drop the integration altogether and completely switch to Amazon’s back-end, but not after having spent many months trying to make the two systems talk to each others. Once again, this is something they managed to do without causing too much trouble for the customer but it shows that you need more money than just the price of acquisition in order to take that approach.

An interesting case to follow now is the acquisition of Lycos by Terra Networks. At the current time, few customer facing changes have been made but it will be interesting to track as both companies are trying to merge their operations.

Which brings me back to Boo.com’s revival. Fashionmall bought the brand name and is now trying to relaunch Boo under a new model. Will they succeed? I really don’t know but I’d like to wish them the best as they attempt it. What is interesting in this attempt is the fact that Boo may or may not be a tarnished name. What I mean is that Boo is a well known name but many people know it because of the headline-grabbing failure of the previous iteration.

Interestingly enough, however, there were still enough visitors to the site this summer, after it had closed, for it to rank in the Media Metrix ratings. It will be interesting to see if Boo can survive as a brand and whether the original ad campaign built enough goodwill for it to succeed.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Boo’s Rebirth. You can follow him on twitter here or receive his weekly newsletter by subscribing here.