The price of touch tablets used to make sense. Apple's iPad has cost between $US499 and $US829 since it first shipped a year and a half ago. And for a while, competitors all hovered around that price.
The Motorola Xoom and RIM's BlackBerry Playbook both start at $US499 and go up from there with added connectivity and storage.
HP's TouchPad used to cost about the same.
This $US499-and-up range was considered a reasonable price for these powerful and useful little computers. It's a price point that works, right?
Well, no. It's a price point that lets Apple run away with the market. So in the last month or so, we've seen touch tablet pricing go nuts.
How low can they go?
When price competition hits a market, it usually happens gradually. But in the touch tablet market, the bottom seems to have suddenly dropped out.
HP shocked everyone when it announced last month that it would get out of the tablet business and stop making all webOS hardware. To move excess inventory, it announced a stunning $400 reduction in TouchPad prices.
Apparently $99 is a popular price point. The tablets were completely sold out in a matter of days.
Of course, that's not a sustainable price for HP. Pundits estimate that it costs HP about $300 to make each TouchPad, so the company is probably losing about $US200 on every tablet sold.
That's why HP confused everybody when it announced that it would manufacture more TouchPads through Oct. 31 in order to respond to the "stunning" uptick in demand.
This makes no sense at all. That demand was the direct result of a money-losing price designed to clear inventory. Why would HP make more devices?
There are three likely reasons. First, many of the costs for manufacturing the TouchPad have already been paid, including factory tooling, some components, package development and so on. So the cost of manufacturing additional units may not be as high as the initial run.
Second, HP may have freaked out the supply chain with its sudden cancellation of expected TouchPad manufacturing. Companies are in competition with one another to get components such as screens and other scarce resources. By making more, HP can keep component suppliers happy.
And third, HP may be hedging its bets, and possibly planning a comeback. It's possible that the company could say later that it was impressed by demand, and that it plans to either stay in the TouchPad business or sell off the webOS hardware organization to another company -- possibly the same company that buys its PC hardware business, which HP announced will soon be for sale.
HP's TouchPad price is a fluke. However, other companies are dropping prices, and they intend to keep them low.
Amazon.com, which currently sells its feature-limited Kindle e-book reader for $114, reportedly intends to ship a full-featured Android-based touch tablet as early as next month for "hundreds less" than Apple's iPad. If that's true, it means the Amazon tablet could start at $US299, or even lower.
Lenovo announced recently that, outside the US, it would charge $US199 for an 8GB, 7-inch Android tablet called the IdeaPad A1, which will include front and rear cameras. A 16GB version will be sold in the U.S. for the impressive price of $249.
India's human resources minister announced last summer that Indian researchers had reached a "breakthrough" in the costs of tablet manufacturing, and by "early 2011" would unveil a $US35 touch tablet - a device whose price could drop to $10 in the future. The announcement was wholly cow manure, nothing more than politicians pandering to the public. But the media -- including CNN, the BBC and others - fell for it, reporting the "news" without skepticism. I exposed the sham in this space in July of last year.
In June, a wave of reports suggested that a small number of units would ship within a month at the price of $49. It never happened. The whole project is still smoke and mirrors, even as Indian politicians continue to claim credit for the project, promising a shipment of 1 million units this year.
Meanwhile, back in reality, a little-known Indian company called Lakshmi Access Communications Systems has announced a spicy range of low-price Android tablet lines called Pepper, Paprika, Tamarind and Mirchi. The cheapest of the lot, the 7-inch Magnum Pepper, will reportedly sell for $99. That figure matches the price of China's cheapest 7-inch Android tablets.
(Cheap Indian tablets are for students, apparently. Members of the Indian Parliament are buying themselves Apple iPads and Samsung Galaxy Tabs as part of an effort to reduce paper shuffling.) This is just the beginning
The industry has discovered that $US499 is a popular price only for the iPad. All other companies are struggling to sell tablets at that price.
And as HP has demonstrated, as soon as you can get a tablet into the two-digit range, people will buy them in huge quantities.
There's just one problem: In order to build a tablet that can be sold at a profit at $US99, you have to build a piece of junk that nobody wants.
And that's why I believe the next phase for touch tablets will be aggressive subsidies.
The main uses of touch tablets are the consumption of content - movies, TV shows, e-books, magazines - and the enjoyment of apps. Because they're wireless mobile devices, they also benefit from mobile broadband data connections.
Because tablets are content- and connectivity-centric, they can be sold like razors, where the razor is dirt cheap, and the real money is in blades.
Over the next two years, I'm predicting all kinds of experiments that will bring high-quality, relatively large-screen touch tablets down into the $99 price range and below - as long as you commit to buying content or connectivity.
One of the most interesting possibilities is Amazon's forthcoming Android tablet. Amazon's business model with the Kindle is to make the hardware very cheap and the connectivity free - and then make money selling e-books.
Amazon started out as a bookstore and evolved into an everything store. Maybe it will follow the same path with tablets. It started out offering subsidized e-readers so it could sell electronic books, and now it may be planning to offer subsidized tablets so it can sell everything else.
If Amazon tablet owners buy enough stuff from Amazon, there's no reason for the company to charge them a lot - or anything at all - for the hardware. Netcasting mogul Leo Laport and guests speculate on a recent episode of This Week In Tech that Amazon Prime members could be offered free Kindles, for example. A similar subsidy could be offered for the tablet as well. The reason is that, unlike the Kindle, which can really handle only e-books, an Android tablet could entice people to download e-books, TV shows, movies, music and apps from the Amazon app store. More content could mean more subsidy.
Such an offer would be consistent with Amazon's overall strategy, which is not to be in the business of making consumer electronics, but to use consumer electronics to get people to buy stuff on Amazon.com.
Think of free Android tablets as a way to provide "free shipping" for electronic content.
Tablet makers may also cut more aggressive deals to offer their tablets free with two-year contracts for 3G service. Other possibilities include subsidized tablets with, say, a Netflix contract or an agreement to subscribe to other content for some period of time.
One way or another, it appears that the path to success for iPad competitors is low, low pricing. And the best way to get there is probably aggressive subsidies.
We can soon expect a reasonable selection of pretty good touch tablets priced at $US99, or even free.