Google’s Nexus 7 Spills Its Guts

What do we have here? Google’s (Nasdaq: GOOG  ) brand new Nexus 7 tablet is now starting to reach industry analysts, who want little more than to promptly destroy the tablet. Both iSuppli and iFixit have gotten their hands on the device and torn it down. What did they find lurking inside? Margins! Sort of.

I’ll believe it when I see it
There weren’t any real meaningful component surprises found beneath the surface. We already knew the juicy details like the NVIDIA (Nasdaq: NVDA  ) quad-core Tegra 3 powering its apps. The device is one of the first tablets on the market to feature a near-field communications, or NFC, chip. In this case, NXP Semiconductor (Nasdaq: NXPI  ) sources the chip that will play a large role in mobile payments.

Source: iFixit.

Sharp makes an Android tablet with NFC, but it’s geared towards the Japanese market. As far as mainstream domestic ones, there simply aren’t any. Apple’s (Nasdaq: AAPL  ) iPad certainly doesn’t carry one, nor does any iDevice. The Nexus 7 also just received a software update to include Google Wallet functionality, tapping its NFC powers. This is a little odd, because it’s rather unwieldy to pay for a cup of coffee by pulling out your 7-inch tablet. It’s almost as awkward as using a full-sized iPad as a camera.

Dollars and sense
iSuppli provides a preliminary bill of materials, and compares it to Amazon.com’s (Nasdaq: AMZN  ) Kindle Fire as its closest competitor, which is now nearly a year old. The supply chain specialist estimates the total component cost at just under $152, before including other operating expenditures like distribution, sales, or various licensing payments. Here are some notable mentions:
 

Components Nexus 7 (8 GB) Nexus 7 (16 GB) Kindle Fire (8 GB)
Memory $13.50 $21 $13.35
Display and touchscreen $62 $62 $59
Processor $21 $21 $13.50
Components and manufacturing total $159.25 $166.75 $139.80
Retail price $199 $249 $199
Gross margin 20% 33% 30%
Source: IHS iSupply July 2012.

The Kindle Fire has seen its component cost come down significantly since its release. Its original costs were estimated near $192 and have fallen to $133.80 (before manufacturing). The 8 GB Nexus 7 costs $18 more in components than the Kindle Fire.

When you include manufacturing costs, the total for the 8 GB model increases to $159, meaning Google may see a gross margin of 20%. After including those additional costs, iSuppli believes that Google will likely break even on the 8 GB model. Especially when you include the $25 Google Play credit that Big G is handing out as a promotion for an unspecified "limited time."

However, if you look at the 16 GB model, the extra storage costs an incremental $7.50, while it retails for an additional $50. On the 16 GB model, there is some margin to make. For comparison, when the third-generation iPad was released, the entry-level 16 GB model fetched an estimated 37% gross margin (including manufacturing).

Three’s company
These numbers also help explain why the Nexus 7, which is about to launch at third-party retailers, is only available in the 16 GB model. Retailers need to try and make some money for their troubles, and that wouldn’t be possible with the 8 GB breakeven model. By making a couple of extra bucks on the high-end model, Google can pay for distribution costs and help subsidize any early losses it incurs on the low-end model.

Amazon is undoubtedly preparing to update its Kindle Fire, and presumably would keep a similar price point, but beef up the specs. The second-generation is even rumored to carry the very same Tegra 3. I’d also expect it to continue selling its own newer device at cost, while potentially discounting the first-generation Kindle Fire.

Within a matter of months, we’ll likely see Amazon and Google dominating the $200 price point with breakeven devices, and Apple will probably sit just above them with a slightly larger (7.85-inch), slightly more expensive ($250) offering, leaving little for everyone else.

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Fool contributor Evan Niuowns shares of Amazon.com and Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Amazon.com. The Fool owns shares of Apple. The Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, NXP Semiconductors, Google, and NVIDIA. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended writing puts on NVIDIA. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 12, 2012, at 9:36 PM, macgregor54 wrote:

    do you folks own a calculator?

    gm for nexus8 is 20%, not 25.

    gm for nexus16 is 33%, not 49.

    gm for kindle fire is 30%, not 42.

    gm = ((sp - cgs)/sp) * 100.

    it's the percentage of the sales price that exceeds cost of goods sold, not the percentage of the sales price compared to the cost of goods sold.

    fool.com is right. get with it, kids.

  • Report this Comment On July 12, 2012, at 10:05 PM, H3D wrote:

    Other costs?

    Manufacturing wastage and rejects

    Distribution

    Customer support

    Returns

    Warranty provision and handling

    IP licensing

    NPV of Finance lag

    Now where is the profit?

  • Report this Comment On July 12, 2012, at 10:23 PM, TMFNewCow wrote:

    Well, macgregor54, you see, it was merely my brain that wasn't functioning properly. My calculator is in tip top shape (I just got it out of the shop).

    In any event, you are absolutely correct. I'll have the article updated with correct figures (including the 37% iPad gross margin). Nice catch.

    -- Evan

  • Report this Comment On July 13, 2012, at 6:53 AM, macgregor54 wrote:

    fwiw, evan, my brain doesn't work any better than my calculator, but the numbers failed the reasonableness test (i.e., the margins looked GREAT) so i checked the math. sorry to be so prissy with my comments!

    i routinely make the point in posts that competitive margins in these also-ran products are low and i can't understand why anyone wants to compete against apple, whose margins are large and apparently growing. so they stuck out like a sore thumb.

    i didn't mention that the rest of your article was good, either, which it is. thanks for the effort.

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