Will Google’s Nexus 7 Grow or Cannibalize the Android Tablet Market?

When Google had set out to brand its own smartphones under the Nexus moniker, it ambitiously did so with the goal of setting industry trends that other OEMs–like HTC, Samsung, LG, Motorola, and others–could follow. Now, with the smartphone market maturing, Google is focusing its attention on the tablet market to compete against Apple’s market-leading iPad and the very likable Amazon Kindle Fire, which uses a heavily skinned version of Google’s Android operating system and comes at a palatable $200 price point. Doing so, Google released its own $200 contender in the form of the Nexus 7, a 7-inch slate with features that will appeal to many including a high resolution 720p HD display, quad-core processing power, and a Google experience that promises the device to be among the first to receive future OS and software updates directly from Google. However, will the Nexus 7 set an example for other manufacturers or will Google’s hardware partners shy away now that Google is in the tablet race?

True Cost

There’s no denying that the Nexus 7 does a lot right. However, it’s pricing, while attractive to consumers, may deter other manufacturers from entering or continuing in the tablet race. According to a recent report in theĀ Wall Street Journal, a break down of the components on the base8 GB $200 Nexus 7 shows that Google’s expense for building the tablet is approximately $152. Add in marketing, shipping, and packaging expenses and the tablet’s cost may be just about $200 and Google is breaking even with the hardware.

Before the Nexus 7, Samsung’s re-hashed Galaxy Tab 2 7.0 priced at $249 was thought to be a steal of a deal.

Breaking Even is Bad for OEMs

Breaking even is good for Google as the company is not a hardware company and makes the bulk of its revenue through services. Google makes money on Android–an OS that it freely gives away to others to use and build upon–because it hopes to make money through advertising impressions when users search the web and through digital content sales via its Google Play Store. This is a similar strategy that Amazon is employing with its Kindle Fire tablet–the company is shunning Google Play on its slate in favor of its own stores for music, TV shows, movies, digital books, e-magazines, and other content where it could generate post-sales profits. However, hardware makers in the ecosystems–like the HTCs and the Samsungs–may not be able to share in Google’s profit-making through post-purchase digital sales.

As such, it would not make sense for Samsung and HTC to compete with Google and Amazon at the $200 price point. Android hardware manufacturers have found it hard in the past to compete at higher price points, where their products were compared to the iPad in pricing and consumers did not want to shell out money for a slate that’s equivalent to the cost of an iPad. At the low-end, these manufacturers cannot make money so competing would be futile.

Taking the Amazon Route

For these manufacturers to continue to compete and remain in the tablet race, they would need to create revenue streams. This means that Samsung and HTC and other manufacturers may have to create or expand their digital content offerings. HTC already has its own storefront for TV and videos through an on-device app called HTC Watch that’s already found on the company’s tablets and smartphones and Samsung has its own Media Hub, Reader Hub (for e-books and magazines), and other digital content hubs where it could generate money.

In the future, as the Android tablet market will be competing on price, rather than features, we’ll probably begin to see more of these specialized stores and these stores will grow.

Fragmentation May Be Required

As the Android platform grows, fragmentation may not be the worst thing. Rather than sticking with Google and the Google Play Store, the leading Android hardware manufacturers may begin to build highly specialized versions of the Android OS to fit their needs and layer on their own stores. Amazon already did this with the Kindle Fire and on this slate, we see very little–if any at all–traces of Android. It’s as if Amazon created its own OS using Android code. In the future, perhaps that’s what we’ll see from HTC, Samsung, and LG. HTC Sense and the TouchWiz and Nature UX won’t be just overlays anymore–they’ll be their own OSes and experiences derived from Android. And to make money, these players may just eschew Google Play Store all together and have their own storefronts for apps, music, movies, TV shows, books, and magazines.

Rather than thinking of fragmented experiences as we do today, the tablet market of the future may require us to think about individual OSes from different manufacturers. Instead of clustering everything under the Android umbrella, which would cause fragmentation, the Android market may need to be divided under the Sense OS, the TouchWiz OS, and the Optimus OS where third-party apps would require some minimal coding to be compatible with each OS.

Android Was Built With the Flexibility to Expand

If consumers demand competition, this may be an easy and immediate solution for Android manufacturers to compete in the tablet market. Prices are already hitting rock bottom for a premium, high-end quad-core tablet at $200. To remain in the market, we may need to re-imagine what Android means, rather than sticking to our definitions of the ‘pure Google experience.’ Hardware manufacturers will also need to think outside of the box to remain competitive and stay in the market.