Monopoly Power of the Motorola Xoom

20 Mar

With the Motorola Xoom hitting the shelves soon in a Wi-Fi incarnation at $599, I think it’s the perfect time to step back and criticize some of these critics who have been going nuts over the initial 3G model’s $799 price point.

According to just about everybody, the model was priced far too ambitiously and didn’t stand a chance in a head to head battle with the iPad.  Nobody implied that the Xoom was too expensive given its features (as it cost a mere 80 dollars more than the nearest comparable iPad) but rather that without a $499 entry model it wouldn’t stand a chance of competing with the iPad.
I posit an entirely different view on this matter.  I begin by assuming that the people who purchase a Xoom do not consider an iPad a viable substitution. We’re talking IT nerds, computer programmers, gadget freaks, open source acolytes, etc. Therefor, although surely the Xoom is part of the larger “Tablet Market”, it is not truly in open competition with the iPad.
It is, on the other hand, in competition with the other Android tablets.  And those are…..
Exactly.  There are no other Android tablets.  The Samsung Galaxy Tab is a cute little machine, but it’s running an operating system designed for a phone and not the tablet-optimized Honeycomb.  The Dell Streak may have counted as a tablet when it was first dropped in mid-2010, but only in lieu of the fact that the, besides the iPad, it was the only other Slate-style tablet from a major manufacturer (sorry Archos!) on the market.  Today, with two iPads, the Xoom and the Tab making waves, and the huge HTC Evos and Samsung Galaxy S phone models en vogue, I’m loathe to call the 5” device a tablet and more a “gigantic waffle phone”.
So coming back to markets, anyone who ever took a little Microeconomics knows that it behooves producers to price discriminate (charge different groups of consumers different prices for the same product).  Let’s think about this for a moment in the context of the Xoom.  You’ve got the iPad 2 to contend with (and the marked down to less than 50% of  the Xoom price iPad 1).  Should you really try to undercut a company like Apple?  Apple is making money off of iTunes, off of the AppStore, off of in-App subscriptions.  Additionally due to economies of scale, monopsony issues and the First-Mover Advantage, Apple is making tablets at less cost than other manufacturers.  Is it realistic to try to undercut a company that can make devices cheaper than you can and additionally derives profit from more than just the sale of said machine?
I side with Motorola on this one.  All those oddball Android fanboys who need a tablet need a tablet PRONTO and they don’t want anything from Apple’s closed garden.  A lot of these guys have decent incomes, and what’s more, they dedicate inordinate fractions of said income to the purchase of gadgets.  Why not then, knowing that they’re boxed into the Android Honeycomb market, of which you, Motorola, are the only supplier, charge a ridiculous price for your tablet?  These guys are going to pay it anyways.  You can maximize your Producer’s Surplus by literally stealing away all of these early adapter’s Consumer Surplus in a way that pop-hit Apple could only dream of.
Then, on that faraway day that Samsung drops a Galaxy Tab 10”, HTC comes through with a 10” Evo or whatever they are currently cooking up, and Archos throws their hat into the ‘legit-tablet market’, Motorola can lower price to $600 or $500 or whatever the equilibrium price turns out being.  In the meantime though, why not suck as much money out of early-Android-adapters as you can?
In sum I generalize to this rule: There is a tablet market, but its participants do not cross clearly delineating borders in the market.  I, myself, have considered buying both the Xoom and the iPad 2 but I am an outlier.  I know Archos and Xoom owners ecstatic for the next Galaxy tablet, and I know people fretting over whether to buy the iPad2 or a refurb’ed iPad 1 for half the price, but outside of myself I know no one in the interesection of these two groups.
I applaud Motorola for understanding this and pricing accordingly.
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Posted by on March 20, 2011 in Uncategorized


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