It Makes Sense For Google To Own Motorola's Hardware Business To Build Super Cheap Tablets (GOOG, MMI)

There was some speculation that Google was buying Motorola for its software patents and would spin off the hardware business as soon as possible. 

Google Chairman Eric Schmidt poured cold water on that idea. Google wants Motorola's hardware business. 

There's only one way that makes sense: if Google makes cheap tablets to compete with the iPad on price.

The success of the HP TouchPad fire sale and customer surveys show that there is pent-up consumer demand for a cheap tablet. And given the superiority of iPad hardware, the only way for Android to compete is to undercut on price. 

Is that possible? Well, iSuppli estimates the 16GB TouchPad's bill of materials at $296. The biggest cost items in a tablet are the touchscreen and memory chips, which could both be knocked down a peg for an explicitly low-cost tablet. Google could buy huge inventory upfront to bring down unit costs even further. 

And of course, it could sell a tablet at a loss or just breakeven. 

Could that bring a tablet to $300? $249? $200?

Here's why it makes sense for Google to potentially spend billions of dollars on this: Apple is right, we're moving to a post-PC world. Smartphones and tablets are the future of computing. And in that world, there is a race on to be the platform of the future, with network effects accruing to the biggest platform, just like in the PC wars of the 1980s.

On smartphones Google is winning that race, narrowly. By taking a disruptive approach, distributing Android for free, it has gotten manufacturers and carriers aboard and can flood the market with devices. Despite the iPhone's stunning success, Android is edging past it.

But this strategy doesn't work for tablets, where carriers offer few subsidies and Apple's manufacturing and design superiority means it can offer the best tablets at a price others can't match. Tablets are Apple's ace in the hole in the post-PC platform race. 

Google isn't going to beat Apple on design, so it needs to beat it on price, like PC manufacturers did in the 1980s. But Apple having become a manufacturing behemoth, that probably means selling tablets are breakeven or at a loss. Samsung and Motorola can't afford to do that, because they are commodity manufacturers with razor-thin margins. Google can. 

What's more, there's no time to waste. Apple knows what's at stake and has priced the iPad very aggressively. If and when Apple lowers the price on the iPad, all that pent-up consumer demand of people who want a tablet but can't bring themselves to spend $500, will go away and take away an opportunity to grab a big slice of marketshare right out of the gate.

If anything, that's what we suspect is behind the Motorola buy.

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