Battle Of The Tablet Business Models: Google Nexus 7

by John Kirk   |   September 27th, 2012

RECAP

We’re looking at the tablet business models of Apple, Amazon, Google, Samsung and Microsoft. Today we focus on the Google Nexus 7.

3.0 Google Nexus 7

3.1 WHERE DOES THE GOOGLE NEXUS 7 MAKE ITS MONEY?

When introducing the new Amazon tablets, Jeff Bezos said:

“We want to make money when people use our devices, not when they buy our devices.”

Interestingly, the Google Nexus 7 has the very same business model as do the new Amazon tablets. Google gives away the Nexus 7 hardware at cost and then seeks to make its money by selling content and advertising.

3.2 WHERE DOES THE GOOGLE NEXUS 7 PROVIDE VALUE?

The Google Nexus 7 has excellent hardware and it sports one the world’s premiere mobile operating systems in Android’s Jelly Bean. But where Google really brings value to their tablet customers is in the Nexus 7′s low tablet price.

Google is able to keep their tablet prices low because they don’t intend to make any (or much) money on the initial sale of their devices. They can give their customers more tablet for less because they are making it up in content and advertisement sales. Google wants to lure you into their store with their tablet and then have you buy content there.

Do the above two paragraphs sound familiar? If you read yesterday’s article on the Amazon Kindle Fire, they should because they are almost word for word the same. (Battle Of The Tablet Business Models: Amazon Kindle Fire, section 2.2.)

The Google Nexus 7 and the new Amazon tablet share the very same business model so they will naturally compete head-to-head with one another. Which one is likely to prevail over the other? Understanding their similarities and their differences should give us the answer to that question.

3.3 GOOGLE NEXUS 7 BUSINESS MODEL ADVANTAGES AND DISADVANTAGES

The Google Nexus 7 has received many fine reviews for both its hardware and its software but I think the reviewers are missing the larger picture. When I look at the Nexus 7 business model, there is little there to like. The Nexus 7 business model has all the downsides of the Amazon tablet business model and few of the upsides. Despite the almost universal praise the Nexus 7 has received from analysts and pundits, I predict that the Nexus 7 will fail to have any long lasting impact on the tablet markets other than to eliminate other Android manufacturers from contention.

The Google Nexus 7 and the Amazon Kindle Fire business models share many of the same issues:

— It’s hard to make a significant profit solely from the sale of low margin content and mobile advertising.

— Devices can only be sold in countries where content can be made available via the Google Play store. Sales of devices outside of those countries are counter-productive.

— Tablet sales must be carefully targeted at only those customers who voraciously consume (and are willing to pay for) content or who positively respond to advertising. Tablets sold to non-consumers are a waste of time, money and effort.

— Subsidized tablets draw exactly the wrong type of customer. Bargain hunters are less likely than others to consume content and respond well to advertising.

— A subsidy business model thrives on low cost hardware and long refresh cycles. However, we live in a world where Apple, Samsung and Microsoft are rapidly iterating their tablet hardware offerings and pushing the barriers of what it is technologically possible for a tablet to do. It will be difficult, if not impossible, to pursue the contradictory goals of spending as little as possible on the tablet hardware while still remaining competitive with the tablet offerings of competitors.

— A content focused, ad driven tablet will have little or no appeal to government, business or educational entities.

— Online only distribution will be difficult and other methods of distribution are sparse and immature.

(For a further discussion of the difficulties inherent in pursuing a subsidized tablet business model, please refer to section 2.3 of my earlier article: Battle Of The Tablet Business Models: Amazon Kindle Fire.)

In addition to the issues it shares with the Amazon tablets, the Nexus 7 has problems all its own:

— The business model relies upon making a profit from content sales and content sales are not Google’s core strength. When it comes to online stores, Google Play is a distant third to Amazon and Apple.

— Open business models are good for many things, but the maintenance of a store is not one of them. While closed companies like Amazon and Apple run their stores with an iron fist, Google runs its store with abandon.

— Google is not known for its customer service. Its current customers are advertisers, carriers and manufacturers, not end users. The one time Google did sell directly to consumers with the Nexus, their efforts failed. Customer support is hard, Google has little experience in it and it would be a radical shift in their business model. There’s plenty of doubt about whether they can pull it off and until they prove otherwise, they don’t get the benefit of that doubt.

  • Google Nexus 7 v. Amazon Kindle Fire:
  • A head-to-head battle between the Nexus 7 and the Kindle Fire will not end well for the Nexus 7. The Nexus 7 probably has better hardware and software (although I know that Amazon would dispute that) and it also has a very strong and loyal user base. But the subsidy game is all about content and in content, Amazon shines.

    The Google Nexus 7 business model is like a coach taking a great athlete and playing them out of position – like taking a superior skater and having them play baseball instead of hockey, or taking a great baseball hitter and having them play soccer instead of baseball. Amazon is playing to their strengths. Google is playing to their weakness. In the long run, Google’s putative superiority in hardware and software will come to naught. In the battle of the business models, when Amazon and Google go head-to-head in the sale of content, Amazon will win every single time.

  • Content v. Apps:
  • I think Google pursued the wrong strategy. They have focused on the sale of content when, in my opinion, they should have focused on apps and the creation of a stronger app platform. I wrote about their abandonment of tablet optimized apps in my article entitled: “With Apps, Size Matters.”

    However, it’s too late to turn back now. Google’s failure to focus on tablet apps has all but doomed their already faltering tablet efforts.

  • Reversing The Business Model: Open v. Closed:
  • With the Nexus 7, Google abandoned their open business model and adopted a closed business model instead. Now they have none of the advantages of the open model yet they’ve gained few of the advantages of the closed model. Open allowed Google to focus solely on the operating system and to license that operating system to all comers which, in turn, led to the proliferation a wide variety of low cost, inexpensive hardware options. The Google Nexus 7 has none of those advantages. It is made by one manufacturer so its production numbers are limited. It is a single form factor. All of the things that make an open business model great – cost, choice, variety, distribution, ubiquity, etc. – are lost.

    And what is gained in its stead? Not much.

    – The original Android concept was to get Android everywhere in order to capture eyeballs in order to sell mobile advertising. As discussed above, a subsidized model LIMITS production to only those who are willing to buy content.

    – The closed Nexus 7 business model will gut the tablet efforts of the remaining Android manufacturers. How are they supposed to compete with a for-cost Google tablet when they do not share in the profits that Google garners from the sale of content or advertising?

    The change from an open model to the closed Nexus 7 business model will have dramatic long-term negative consequences for Google’s tablet efforts. For the reasons described above, the Nexus 7 will not sell well enough to garner large scale content and advertising profits but it will sell well enough to eviscerate the efforts of all other Android tablet manufacturers. For Google, it’s the worst of both worlds.

    Summation

    The Google Nexus 7 does not represent a coherent business strategy. It represents the abandonment of strategy. While others are singing the praises of the Google Nexus 7, I am singing a dirge.

    I predict that we’ll continue to hear a lot about Android tablet activations but we’ll continue to hear little about content and advertising profits, which is all that matters in a subsidized business model.

    I predict that the already moribund tablet efforts of the other Android manufacturers will simply give up the ghost altogether. (Caveat: I am not counting Amazon as an Android manufacturer since their operating system is so radically forked from Google’s version of Android.)

    I predict that – unless Google makes a dramatic change – the Nexus 7 will all but fade from sight.

    Bold predictions, I know. But they’re dictated, not be me but, by Google’s own flawed business model.

    Next

    We’ve now looked at the Apple, Amazon and Google tablet business models. Tomorrow, we look at Samsung and the Galaxy Tab.

    John Kirk

    John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?
    • Yours Truly

      It would help if you proofread your article before publishing. It would help to take you more seriously.

      Reading the article gives me the impression that you are just being flippant. Many of your “points” are your own conjecture and not based on reality. You say that the Nexus probably has better hardware AND software, but the Fire is better because it force feeds its content to the user. I would argue that I would use a device more that performs better hardware-wise and software-wise, and thus increase my exposure level to revenue creating advertisements/content. Also, I would be in a better mood when seeing such content resulting in a higher tendency to actually buy something.

      But the ironic part is that you later chastise Google for closing it’s content platform. When you heavily praise the Fire for having a completely closed ecosystem with an AppStore that is magnitudes inferior to the PlayStore.

      Also, you forget to mention that the Nexus 7 actually is sold a profit vs the Fire that is sold at loss.

      As far as ubiquity, people never fail to remember that every time you check your mail or “Google” something, you are helping Google generate revenue. The same can’t be said about the Fire or any other competitor.

      • mhikl

        Yours Truly, you might want to proofread your second to last paragraph.

      • FalKirk

        “…you forget to mention that the Nexus 7 actually is sold a profit vs the Fire that is sold at loss.” – Yours Truly

        This is not as cut and dried as you make it sound. When the Nexus 7 was announced, Google said that it make no money from the device. Later reports indicated that they probably made a small profit although that remains unconfirmed.

        With regard to Amazon, it’s widely believed that the Amazon tablets are is sold at cost or for a slight loss. However, Jeff Bezos specifically stated that he rejected the “Razor/Razor blade” economic model. This was interpreted by some to mean that the Amazon tablets were being sold at a profit albeit a small one. Again, there are no numbers to confirm this either way.

        In any case, a small profit does not change my analysis. If the company is not making the bulk of its money from the sale of its hardware then its profits rely upon the subsequent sale of content or advertising.

    • mhikl

      Delightful article, Kirk! Inspirational.
      What if Apple had an iPhone line that did as Amazon and Google do and sold that line at cost. It would be mostly the same as the model of its series, iPhone 5 vs the iPhone 5$, but it would have adverts popping up, it would follow you everywhere you went and it would take all that grand information and sell it to the highest bidder. Amazon could buy your info, Google could buy your info, every Tom Dick and Harriet with tracking interests could buy your info and your info would save you, the special devi¢e holder, a good chunk of change off an original Apple iPhone 5. Also, you could check to see who was buying you, what they were paying for you but you couldn’t turn what it does, off. Jail breaking it would render it obnoxious, and unfixable.
      Comparison charts could be published to compare tracking and transitions between the customers on the Apple iPhone 5$, Amazon and Google tracking devices. The Apple devi¢e would be made of plastic, but to the same high standard as its cousins from Android and Google, the same such standards that seem to matter to Amazon and Google buyers.
      In such a bizarro world, I wonder how it would sell? The devi¢e should work as well as it does for Google and Amazon and with the Apple name, it might be the real thing for the cheap and indentured.
      Kirk, one thing you don’t address is pirating to consumers who don’t live in targeted areas that bring profits to Amazon and Google? Would there not be a profit for the entrepreneur with luck and good business sense?
      “The Nexus 7 probably has better hardware and software (although I know that Amazon would dispute that) and it also has a very strong and loyal user base.”
      That loyal user base does seem to be Google’s Achilles heel. Success due to the determination of Google’s thoughtful cheerleaders for the game of Google is a delicious possibility in the realm of backfiring.
      “Bargain hunters are less likely than others to consume content and respond well to advertising.”
      In a world where counter intelligence from open markets run rampant, how can Amazon and Google protect themselves? Now here is a story that would delight the minds of the twisted.
      I like your style Kirk. It may just be that Google and Amazon think in fairy tale dreams and like the lessons children learn from traditional tales the lessons from A&G’s experiment might come to provide interesting lessons to business classes across the land.
      I think we learn a lot of good lessons from the fairytales of our youth. The tortoise and the hare is my favourite. Apple plugs along at measured speed and the other two are spasmodic hares with possibilities that delight us similar to the crazy ideas from the twisted mind of Gary Larson and his Far Side cartoons.

    • jfutral

      Thanks for this series. I’m not always the sharpest knife in the drawer so I figured it was just me not being smart enough to figure these guys out.

      Google really has not done their Android partners any service. [edit to add] I mean, all Google has done for tablets is said “Hey, here is something that is almost like Apple!” Is that compelling enough? maybe for now, but not as MS and Amazon continue to stake their claim.

      Amazon is in a better position than Google in that Amazon has at least created a _reason_ to buy a Kindle. Except I am not so sure it was all that smart to let themselves get kicked out of Target and Walmart. But again, I’m not all that smart.

      With regards to the tablet market I don’t think it is all that hard to envision Microsoft Windows quickly over taking Android tablet market share. As for what that translates to in human years vs dog years, I don’t know. And of course, MS has to actually SHIP product.

      Joe

    • eaala

      Nice reading. In my opinion, Google business model implies organizing/indexing all the information on the web, whenever and wherever that is. From there they can build an advertising business.

      The thing is, as time goes by, it gets harder doing this and growing. Tablets and smartphones are the next big thing for them. They are big in smartphones but very small in tablets.

      They don’t care whether you buy content or not. Apple charges 30% to developers and it does not even need the money! Google charges just 10%, and I guess it just for covering the maintenance of the OS.

      Content is just the excuse people need to buy their tablet and start surfing the web, where Google really makes money. As far as they are concerned, building a tablet and selling it a zero profit is just the same as deploying a mobile browser or creating an OS for mobile devices.

      In the end, tiny bits and pieces add up to Google’s profits whether from google.com, android, chrome, gmail, nexus 7…

      PS: why are my comments disappearing after hitting the “Post” button?

    • brad

      My understanding was that Google was in the data industry. Even though they licence android out to other OEMs and have their own hardware just as Microsoft is doing now. The key is to get as man people using their software and apps online cause they sell the data to other companies. They are the real customers we are just their product line. Or perhaps I have misunderstood the Google business model ?

      • steve_wildstrom

        Google is in the advertising business. They do not sell user data, rather they use it to steer ads to users. This may sound like a distinction without a difference, but it is of considerable legal and practical importance.

    • Daleos

      Hmm. I’m not sure I agree with all of this article. For a start, where are the numbers for the cost of Nexus 7 devices coming from? There are reports out there that suggest that they may be being sold at up to 35% profit.
      http://www.forbes.com/sites/greatspeculations/2012/07/13/google-and-asuss-tidy-profit-on-nexus-7-necessitates-an-ipad-mini/
      Secondly, Google make most of their money from advertising. With many major players now attempting to cirucumvent Google’s ad systems, *not* doing their own devices is a sure way to lose on advertising market share, their core profit bringer.
      The last thing on my mind when I bought my tablet was ‘content’. At least in the entertainment sense. My device is 95% utility 5% entertainent. Even the size of the 7″ is a benefit to functionality. Any bigger and I may as well have brought my laptop. Any more expensive and I may as well bought a new laptop.
      I firmly believe the Nexus 7 is that push that Android tablets needed to get the ball rolling. In a couple of years, Android will have the tablet market sewn up as much as they have with smartphones.
      The iPad is simply too big and too expensive. If the reports are anything to go by, the iPad mini will be too wide to fit in a jeans or jacket pocket and I’ll be very surprised if they manage to get it cheap enough for it to fall in my price/performance window. Functionality is always my top criteria and now there are tablets out there that can give me that at the price I am comfortable spending on a non-essential/complimentary bit of kit. Apple may have the cornered the ‘shiney’ crowd but I think it’s Android that will corner the utility market.
      I was hoping MS would come out with a compelling competative format but frankly, as a person who is normally happy cheering for Windows, I think they’ve made a real pigs ear of Windows 8. The last thing I wanted was a cheesy front end on top of a crippled full OS. Ah well, at least they usually get things right the second time around. Until then, it’s Android for me

      • FalKirk

        “…where are the numbers for the cost of Nexus 7 devices coming from? There are reports out there that suggest that they may be being sold at up to 35% profit.” – Daleos

        On the day that the Nexus 7 was announced, no less a personage than Andy Rubin said that the Nexus 7 was a “wash”. We’ve never gotten any hard numbers, so it’s hard to say for sure. I’d certainly be happy to revise my analysis if new data were available.

        Nevertheless, it’s pretty hard to believe that Google is making much money from the Nexus 7 when they’re selling their device for only $199.

      • FalKirk

        “…Google make most of their money from advertising.” – Daleos

        Everyone says that, but no one ever provides hard data to support it. Google has never released any numbers regarding profits made from their Android devices. They brag all day about “activations” and never say a word about revenues or profits. And profits from Android are never reflected in their quarterly earnings statements.

        Now, why do you suppose that is?

        • steve_wildstrom

          The only revenue Google gets any directly from Android is from the sales of Google-branded Nexus 7 tablets and sales at Google Play. Neither is likely to produce significant profits. Google’s business is to give away products and services that drive search, then sell ads around the search. Google knows how much of their search advertising goes through Android devices, but everyone else has to guess.

          Google’s financials are about as impenetrable as Amazon’s, but in the year ended Dec. 31, 2011, all but $1.4 billion of its $37.9 billion in gross revenues came from advertising activities.

    • http://www.facebook.com/profile.php?id=1195911909 Myles Crouther

      Great article, however, google still has a small profit margin when they sell Nexus 7′s or at least that is what news outlets have estimated and told the internet…