Microsoft and Apple look more alike every day: The two tech giants are competing head-to-head with their tablets, and reportedly collect the highest profit margins on their tablets in the industry, according to a new report from research firm IHS. Google and Amazon follow Microsoft and Apple in highest tablet profit margins, the company said.
Microsoft's first in-house made tablet, the Surface RT, costs about $267 in parts and labor, when excluding its optional keyboard cover. The device went on sale Oct. 26. The 32GB entry-level model - which really only has 16GB, because apps and software take up 16GB - is priced at $499, for a profit margin of around 46 percent. Surface comes with a 10.6-inch (26.9-centimeter) screen measured diagonally, and can access the Internet only through Wi-Fi.
With a similar configuration, the Surface bakes in slightly more profit for Microsoft than Apple Inc. did when it released its iPad 3 in March.
According to IHS, Apple's third-generation Wi-Fi-only 32GB iPad with a 9.7-inch (24.6-centimeter) screen cost an estimated $333 and retailed for $599, for a 44 percent profit margin. The 16GB entry-level version costs $316 and is priced at $499, for a profit margin of 37 percent.
An introductory analysis of Apple's iPad 4 reveals the device costs about $305 in parts and labor for the 32GB Wi-Fi-only model, for a 49 percent margin, estimates IHS analyst Andrew Rassweiler. The iPad 4 contains a faster processor than the previous model and went on sale Nov. 2. The 16GB base model costs about $295 and sells for $499, says Rassweiler.
The research conducted by IHS does not included marketing costs, sales, or operating system software, which Microsoft has heralded with its Surface tablet. According to IHS, the firm obtained the tablets independently and then broke them apart to estimate the cost of the components.
The report from IHS suggests that Microsoft is "imputing a cost for its latest operating system, the slimmed-down Windows RT," says the firm. Microsoft also needs to price the Surface high enough, so that tech-manufacturing partners like Dell and Lenovo can still viably compete even after paying Microsoft to use Windows 8 on their devices.
In the smaller-sized tablet market, Apple's iPad mini, which the company released Nov. 2, has a 7.9-inch (20.1-centimeter) screen measured diagonally, and costs $198 for parts and labor. The 16GB model has a retail price tag of $329, for a profit margin of 40 percent.
Google's 7-inch tablet, the Nexus 7, costs $159 for its 8GB model and sells for $199, for a profit margin of 20 percent, according to IHS. Google makes a little more on its 16GB model, which costs about $167 to make but sells for $249, for a 33 percent margin.
Amazon reportedly spends about $174 to make its 16GB 7-inch Kindle Fire HD and prices it at $199, for a profit margin of 13 percent. That's a big step up for Amazon, the original Kindle Fire actually lost money, costing the company $202 for every $199 it collected on a sale.
"Amazon and Google want to put tablets in consumers' hands - even if it means doing so at a minimal hardware profit," Rassweiler said in a statement.
Analysts expect tablets to be a top gift this year. Fifteen percent of tablet buyers told the Maritz Research firm that, if given the chance, they would purchase a tablet before buying a computer, smartphone or even a television, making it a potential all-in-one replacement device.
"People coming in at this point are a wide cross section of society. They held back initially to see if it was a fad but are now seeing these devices everywhere they go," said Rhoda Alexander, a tech analyst at IHS iSuppli.
This holiday season could establish the tablet narrative for years to come and even provide insight into what consumers value most in making a tablet purchase: price, functionality, top-of-the-line specs, or app and entertainment options.
"The value proposition for a retailer is to drive additional sales of their physical goods or to build brand recognition," Alexander said. Barnes & Noble sells its Nook for $199 and bets users are likely to turn back to the bookstore when they want to get their hands on the next hot novel.
That strategy, employed by the likes of Barnes & Noble and Amazon to keep prices down, usually includes making little or no profit on the tablets upfront. Companies can always make money later, said Alexander, by introducing tablets with new features in the second generation. The most important part of the puzzle is getting in the ring with the rest of the big boys.
However, no other company has managed to profit from that business model, but Apple, according to Alexander.
Only Apple has shown it can make a profit in this increasingly competitive market. It prices its tablets at a premium and cashes in on the thousands of apps developed for them.
In a sign that Apple's stronghold over the tablet market is finally loosening, the company's share of the tablet market dropped 16 percent in the last quarter alone, according to research firm IDC.
IDC's report shows Apple's 66 percent share fell to 50 percent from the prior three-month period while demand for competing devices from Amazon and Samsung surged.