How Amazon will lead the way to cheaper tabletsMarch 23, 2011: 1:26 PM ET
By busting up the Open Handset Alliance with its Appstore, Amazon will make cheaper Android tablets more desirable and perhaps cut Google out of the loop.
If you think it is hard to build a $200 tablet, take a look at a $200 netbook made by HP (HPQ), ACER, Dell (DELL) or Lenovo. Netbooks run on a more expensive Intel (INTC) architecture, they have hinges and bigger superstructures. They have a litany of ports and they have a $25 Microsoft Windows license. They have a Gig of RAM, a keyboard and touchpad and a 160GB hard drive or 32GB of Flash storage. And somehow they sell for as low as $200
Then consider a typical tablet, be it an iPad, XOOM, Samsung or the Viewsonic above. It is a 10-inch screen attached to a cheaper ARM processor architecture, smaller battery, a few sensors (like GPS, accelerometers, camera) and a touch screen. Besides the touch screens (which typically cost about $25 or so) and some of the cheap sensors, everything that is in a tablet is in a netbook, at much less of the expense.
So, why do most tablets currently cost $500 and up?
Apple (AAPL) caught the electronics world sleeping last year when they introduced the iPad. Even after its introduction, few thought it would sell more than a few million units in its first year.
Apple sold 15 million in 9 months and suddenly the electronics industry woke up. But, with typical time to market of electronics devices at two years, tablets have required a major rejiggering of the supply chain. Touch screens are in short supply and rumor has it that Apple has further constrained supply by pre-ordering $4 billion of them ahead of time.
Smaller, more agile second-tier companies like Viewsonic (above) and Archos, who've been building ARM tablets for years, were able to ramp up quicker. Samsung, a company that builds just about every part of a tablet, (and directly builds lots of parts that make up Apple's iPad) was also able to get a tablet out the door last year.
The big guys like Dell, Motorola and HP are just getting up to scale. When they do, prices will plummet.
Where does Amazon fit in?
Google's Android is an open source operating system. When Google completes Honeycomb, manufacturers can download the code, build software drivers for their hardware and sell it through mobile carriers, to stores or directly to consumers.
However, there is a divide. Only some, not all, of these manufacturers and carriers are members of the Open Handset Alliance (OHA) and can sell these devices with the Google Android Market and its 150,000-plus apps. If you buy an Archos 10 inch tablet, for instance, you don't get the Android Market. That means you get the apps that came with the device and that's about it. You can sideload apps but that's a bit geeky for most users and only a few apps are legally available to sideload. This is where Google has been able to keep control of the platform.
Here's a quick Primer on that:
Here is the thing people don't know about the Android Market.
Android Market is for OHA as in Open Handset Alliance members only. The maker has to join the OHA to get the Market.
Second, the device must pass through a strict hardware and software compatibility suite of tests. If a device doesn't get the Android Market, there is a good chance Android Market apps will fail on it.
These rigorous procedures is the reason it holds the Android ecosystem together and prevents it from truly fragmenting.
While the big Chinese and Taiwan companies like HTC, Acer, Huawei, ZTE, Lenovo might be OHA members, all the smaller companies, which often make the tablets, are not. Plus the tablets may not conform to the Android Market requirements, such as having a built in GPS and gyroscopic compass on the device.
Another issue is that when before you install an Android application, do you notice it has all these requirements you need to see before you download? A requirement that I see often is the apps looks for a "phone state". Unfortunately a tablet is not a phone and therefore has no "phone state". Thus the app may likely fail on the tablet. That is the reason why Android tablets that do have the Market are in fact, technically, phones.
However, with Amazon's (AMZN) Appstore (and if you think Google is happy about its existence, look for Amazon's Appstore in the Android Market) every manufacturer, including those who aren't members of the OHA, can now have a significant app store on their machines without having to join OHA and without submitting an application and having Google decide if the device is worthy.
The good/bad news for manufacturers is that Amazon has its own strict procedures on what is worthy and what isn't as well. This means that Amazon isn't going to accept just any device, but it will likely open the door to companies that don't make phones, like Archos (which Amazon happens to sell).
Also, as Forrester analyst Sarah Rotman Epps said a few weeks ago and has been subsequently repeated by Dan Frommer, John Gruber and MG Siegler, Amazon is a pretty good candidate to build their own device.
The argument (and it is a good one): Amazon already has a media ecosystem with movies, music and TV shows. It also has a lot of credit card numbers and has demonstrated its ability to build an Android One-Click App Store which is in a lot of ways better than Google's own. Oh, and it sells a few eBooks on this device called a Kindle.
Why not make an Android Kindle (Kindroid?) that ties it all together?
But Amazon doesn't want to launch a device with only 4,000 apps (current Amazon Appstore count). More importantly, Microsoft has been suing anyone who even looks in Android's direction for silly patents (unless the company also plans to release Windows Phone devices). Amazon probably doesn't want to get into a patent war with Microsoft (it already is in an "App Store" trademark suit with Apple) or Oracle (ORCL), which disputes Google's use of Java.
We'll see if Amazon builds its own device -- I'm pretty sure it is going to happen.
In the meantime, something more interesting could evolve.
Amazon, which also doesn't sell Apple's iPad, though they sell iPods and Macs by the boatload, sells a lot of cheaper third-party tablets. By pre-installing their Appstore to these devices, they could create a pretty impressive ecosystem of low-priced tablet devices that also use Amazon's services. And they could do this without having to deal with patents or building their own hardware. Tablet manufacturers would jump at the chance to offer a full, App Store-like buying experience on their devices.
Although it is a bit difficult to get the Amazon Appstore on a typical Android device, a device with it pre-installed would be super simple. You turn on your Archos device and are greeted with a request to enter your Amazon login and password. You then have streaming movies, TV, a music store, Apps, eBooks and just about anything else that can be delivered to a tablet.
(Some have said even that is too hard and Amazon would have to create their own device for it to be seamless, like Kindle. But give people a little credit here, even Apple requires users to enter their account info.)
Look for second tier companies like Archos and Viewsonic that have established brands but are not able to get access to the market to be the first to release tablets with Amazon's Appstore built-in.
And also look for Amazon to make that $285 tablet above more interesting.
More from Fortune: