Is the Motorola Xoom Too Expensive?

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Update (5/2/2011): I stand by my position that the Xoom wasn’t too expensive when it launched, at $799 for the 3G/4G version unlocked. At least, I think that was theoretically true at the time. Since then, however, with the 4G update and SD card support still looming some time in the future, and with the Asus Transformer 16GB wifi-only version (kind of) on sale for $399 and the Acer Iconia A500 for $459, I’d say that the Xoom is now definitely priced too high. Even $599 for the Xoom 32GB wifi-only is too expensive. The bottom line is, the Honeycomb competition is here, and the Xoom has absolutely no competitive advantage. I’ve been using a Transformer for a few days now, and if I get a chance I’ll post some thoughts–for now, let me say that I prefer the Transformer even leaving price out of the equation.

I purchased my Motorola Xoom at Costco on launch day, one of three people there at 10:00am to pick up the first Honeycomb tablet. I haven’t seen sales figures, and so I don’t know if this was a good result or not—my local Costco tends not to be big on new gadgets, and so it’s not a good harbinger of market success for technology.

I paid the full, off-contract price for the Xoom, which at Costco was $789.99, plus an outrageous sales tax of 9.75%. I did have to sign up for a month’s service with a $35 activation fee because the word hadn’t yet filtered down to the staff that Verizon was waiving that requirement. The $35 activation fee will be refunded by check, as is the Costco Wireless policy.

As I’ve waited for the Xoom to be released, I’ve been fascinated by responses to its price. The general consensus seems to be that the Xoom is priced far too high, and I thought I’d take a few minutes to post some of my own thoughts on the matter. As a marketing professional, I recognize that pricing is a complicated issue, and the Xoom is no different. Here’s why I think that’s true.

Marketing 101

The only valid definition of what constitutes a proper price for a product is: whatever price the market will bear. You can refine it this way: whatever price the market will bear while achieving a company’s objectives. If a company wants to sell a million units of a product, all other things remaining equal, then the proper price is whatever price a million people are willing to pay for it. Other confounding factors include a company’s desired profit margin on a product, the cost of materials, and issues of pricing strategy such as how a company wants a product to be perceived by the market. As you know if you’ve ever visited a grocery store, companies often price products at a lost to get customers in the door, where they inevitably buy higher-priced (and higher margin) products.

We actually know very little of Motorola’s strategy with regards to the Xoom. We don’t know how much it costs Motorola to make the device, nor any particulars regarding what Motorola wants to accomplish at this point in the Xoom’s lifecycle. It’s possible that the constituent parts are more expensive than we know, that Motorola’s unit sales goals are relatively modest, and/or that Motorola simply wants to position the product at the high end of the market.

It could even be so simple as this: it’s easier to lower a product’s price than to raise it. Starting at $799 for the Xoom, off-contract, makes it relatively easy to lower the price to less stratospheric levels as other Honeycomb tablets hit the market, should Motorola see the need to do so. Furthermore, if components are in short supply (e.g., the Tegra 2 chipset, which is still fairly new), then perhaps Motorola simply doesn’t have that many units to sell and wanted to avoid creating a situation of undersupply that they cannot immediately rectify.

While all of this is speculation, we do have to assume that the marketing executives at Motorola who are making these decisions know something about what they’re doing. We see the Atrix coming in at surprisingly low prices ($129 at Costo on-contract, for example), and so this isn’t a matter of Motorola merely being incompetent when it comes to pricing. Therefore, I’m assuming that Motorola—for whatever reasons—simply wanted to price the Xoom at a point that would ensure some level of profitability while positioning the current device at the high end of the market. Unit sales may not be their concern at this point, and so they’re happy to snag the earliest adopters who are naturally more willing to spend the money.

Xoom vs. iPad

Another way to gauge a product’s pricing, of course, is to compare it to the competition. At this point, the Xoom’s only real competition is the iPad, both in real terms—certainly, the various inexpensive Android tablets don’t compete, and the Samsung Galaxy Tab doesn’t run Honeycomb—and in market terms. Inevitably, every new tablet will be compared to the iPad (soon the iPad 2), both in functionality and pricing, and that’s precisely what’s happening with the Xoom.

What’s a bit remarkable about the Xoom’s reception is that some folks seem unwilling to accept that this first model simply isn’t its entry level. Comparing the Xoom with 32GB and 3G capability to the base iPad with 16GB and wifi-only, is like comparing a fully loaded sedan to a competitor’s base model. Yes, you can get an iPad for $499, but the comparable iPad model is $729. This makes the Xoom—with its 4G capability, dual cameras, dual-core processor, quadruple the RAM, and SD card upgradability—only $70 more.

In just about any other comparison, say a car that includes navigation, rear-view cameras, and laser cruise control that’s $3000 more than a comparable model without these options, this kind of price difference would not only be accepted, but expected. The fact that the Xoom isn’t perceived this way is more a testament to Apple’s uncanny ability to dictate perceptions than to anything specific about the Xoom itself.

It’s true that you can’t, today, buy a more entry-level Xoom and thus the price point is too high for some segments of the market. However, Motorola very likely wanted to introduce the most capable device first, showing off the full capabilities of the platform and at the same time enlisting Verizon’s support in marketing the device. Introducing a wifi-only version by itself would have cut Verizon out of the mix, leaving it up to Google and Morotola to market the Xoom on their own. Introducing a wifi-only version along with the 3G model would have necessarily diluted Verizon’s commitment, and I’m guessing Verizon had something to say about the decision in any case.

Motorola has already let it be known that a wifi-only model is coming for $599, with the same specs but without the 3G/4G capabilities. That’s identically priced to the 32GB iPad, although of course by the time it’s released it will be competing directly against the iPad 2. This means that Motorola intends to go directly at Apple with Honeycomb, and we’ll have to see whether that strategy is viable. My initial impressions are that Honeycomb is very competitive with iOS, and will remain so unless Apple pulls some serious rabbits out of their hat. It’s no longer the case, I don’t think, that it’s merely how ubiquitous Android is that makes it so competitive to iOS; the platform is getting to the point that it competes quite well on its own merits, and Honeycomb is arguably better.

Conclusion

Having said all that, I do recognize that today’s Xoom isn’t likely to sell in iPad-like quantities. The best-selling iPad is the $499 model, and perhaps not enough people yet recognize what makes this form factor so special. They look at netbooks at $399 or less and compare it to a tablet and ask themselves—why would I pay so much more for a device that’s capable of doing fewer things?

I was in this camp not too long ago, but after playing with a Galaxy Tab at the office one day, I’ve become a convert. An instant-on, multi-touch-oriented device with outstanding battery life and uniformly good performance really is different, and it’s vastly more useful for so many tasks that I didn’t realize I do so often. Yes, one doesn’t use a modern tablet (as compared to, say, a Windows-based Tablet PC) to create content, but I’ve discovered, in fact, that I’m far more often consuming content and information, and capturing it from various online resources, than creating it. My opportunities to use a tablet are thus far more numerous than I’d thought.

My notebook remains important for when I’m writing long-form pieces like this post, but for all of the background research that went into it, the tablet is simply a better platform. It’s also easier to carry around and access, and works in more places and positions—including standing up and lying down—than any clamshell notebook or netbook. The differences are striking, but as with many things, sometimes you have to see it for yourself to believe it.

As far as the Xoom itself, it’s not perfect (I’ll post some of my initial thoughts soon), but it’s good enough to show off the platform’s capabilities. I’m perfectly aware that I might have paid something of a premium as an early adopter (although we’ll see if the price really does come down, and by how much), but I like having the 3G/4G option and so I’m okay with paying more than I’d pay for wifi only. I’m also okay with paying a bit more to have the device in my hands now–after all, I’m buying this thing for specific reasons, and the extra time I’ll get to use it is worth real money to me. In short, I’m very happy with my purchase, and as long as the bugs are worked out by the time my Costco 90-day return windows closes (which I’m sure they will be), I plan on keeping it.

Update: Here’s another reason why the Xoom is worth the money to me: Xoom overclocked to 1.5GHz. Other tablets might be this open, but the fact that Motorola left the bootloader completely unlockable is a very good thing, in my book. At the very least, it means developers will be doing some interesting things, and Xoom owners should find them all fairly easy to access.

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