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February 27, 2011 3:30 pm

Battle brews over digital tablet profits

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A battle is brewing between tablet computer manufacturers, component suppliers and media companies over how to share revenues generated by the fast-selling devices, according to a study showing that Apple’s iPad, Motorola’s Xoom and other tablets may not become mass market devices unless prices fall sharply.

The Boston Consulting Group study, released before Apple’s expected announcement of a second generation iPad on Wednesday, finds a growing preference for such multi-use tablets over e-readers, but says the “sweet spot” for pricing will be below $200.

Apple sells iPad models for $499-$829 (£439-£714 in the UK), while Best Buy is taking pre-orders of the 3G Xoom for $800. “It sets up a huge battle for value creation over the next 12 months between different tablet manufacturers, component manufacturers and the content industry,” said John Rose, global leader of BCG’s media practice.

BCG, which conducted a similar survey before the iPad hit the market last year, said the main change it saw was awareness, with two-thirds of US consumers now somewhat or very familiar with e-readers and tablets in December 2010, up from 54 per cent in March.

There was no statistically significant change in consumers’ willingness to buy tablets and e-readers however, he said: “What’s more meaningful is that it didn’t grow with increased awareness.”

Price would determine which devices succeed more than functionality or integration with digital media stores such as Apple’s App Store, he said: “If I [could] get the Motorola Xoom for $250, it [would not] matter what the iPad 2 is.”

The survey of 14,000 consumers in 16 countries found that 53 per cent preferred multipurpose tablets, while 13 per cent preferred e-readers such as Amazon’s Kindle, Sony’s Reader and Barnes & Noble’s Nook.

They were willing to pay $80-$130 for single-purpose devices. Consumers were prepared to pay “good prices” for content on e-readers and tablets, Mr Rose said, pointing to the survey’s findings that US users would pay $5-$10 for an e-book, $2-$4 for a single copy of a magazine or $5-$10 for a monthly subscription to a digital newspaper.

Users were typically spending an hour with magazine apps as opposed to the few minutes they would spend reading a magazine’s website, Mr Rose said.

“They’re perceiving the tablet form of this content as a media experience, not as an information experience, and they seem to be willing to pay a physical-world price,” he said.

“There’s enough money in the system to make the content providers happy. The question is where is value going to be captured,” he added, warning of a looming “business model collision” following Apple’s new rules for subscriptions.

Some publishers have expressed concern that their plans to bundle print and digital subscriptions could see Apple taking a cut of their print revenues if they have to hand it 30 per cent of subscriptions taken out through the App Store.

Device prices may come down if telecoms companies bundle subsidised tablets with wireless broadband contracts, Mr Rose said.

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