When Google unveiled its new tablet computer earlier this month, the company disclosed that it wouldn’t be making much of a profit on the device. That’s partly true. This week iSuppli, a research firm that specializes in breaking down devices to determine the cost of their constituent parts, reported that Google and its hardware partner Asus spend about $159 to make the entry-level Nexus 7. That model holds 8GB of data and sells for $199. When you consider all the additional costs of selling the gadget—software, marketing, licensing, packaging, and the $25 of Google Play credits that come with the tablet—it’s quite likely that Google is making very little on every 8GB Nexus 7 it sells. It might even be losing money.
But that’s only half of the story. Google also offers a higher-end model of the Nexus 7, this one with 16GB of storage that goes for $249. According to iSuppli, doubling the storage capacity of the tablet costs Google and Asus just $7.50. By charging you a premium price for a low-cost upgrade, Google turns its cheap tablet into a nice moneymaker. If you fall for the 16GB model, you’re Google’s sucker.
It’s not just Google. Charging a lot of money for extra storage on phones and tablets has become a significant source of the tech industry’s profits. There’s only one company to blame (or credit) for this trend: Apple, of course.
Ever since the days of the iPod, Apple has boosted its bottom line through upgrades. The company offers the entry-level versions of its devices at a price that seems reasonable to many people. This entry-level price functions as a marketing come-on—a way to get you in the store. Once you’re there, your eye wanders to the next level. Is 16GB really enough space on my beautiful new iPad—won’t I feel cramped on a year or two? Shouldn’t I spring for more? It’s only $100 … .
That’s exactly what Apple wants you think. Once you decide to move beyond the entry-level iPad, the company’s profits soar. According to iSuppli, it costs Apple about $316 to make the low-end 16GB iPad, which the company sells for $499—a margin of about 37 percent, not including non-manufacturing costs. Doubling the storage space to 32GB costs Apple $17 more, but it charges you $599 for that model, boosting its margin to 45 percent. On the high-end Wi-Fi model, which offers you 64GB of space for $699, Apple’s non-manufacturing profit margin shoots up to 48 percent. But that’s not all! If you get an iPad with 4G cellular connectivity, you’re really in for it. The very top-end iPad, a 64GB model with 4G, will set you back $829 for a device that costs Apple $408 to make—a margin of 51 percent, or twice what Apple makes on the cheapest iPad. There may be other popular products that carry such a breathtaking markup, but I bet most of them are monitored by the DEA.
These enormous profit margins prompt two questions. First, why do tech companies charge so much for just a few dollars of extra stuff? Second, are they ripping you off? The answers are pretty simple: They gouge you because they can. And of course you’re getting ripped off! Try to remember this when you find yourself giving in to upgrade temptation. These days, for most people, upgrading to get extra space is usually overkill.
It’s easy to understand why storage upgrades are so tempting. Unlike PCs, phones and tablets are self-contained, locked-up devices. They carry the threat of obsolescence. If you run out of space on your desktop, you can always get an external hard drive. You can’t do that on your phone: Once you find yourself with too many photos, apps, videos, and songs, you might have to start deleting stuff, and nobody wants to do that. “I think that they want you to realize that since they’re giving you enough horsepower and resolution and features, you’ll find that 8GB probably isn’t going to cut it, and you’ll make the impulse upgrade,” says Andrew Rassweiler, an analyst at iSuppli. “I don’t want to call [the entry-level model] a false offering, but they expect a lot of people to upgrade out of necessity so that it improves their margins.”
The 8GB of storage that come with the Nexus 7’s entry-level tablet doesn’t sound like a lot, but I suspect it’s enough for most people. The 16GB of storage available on the cheapest iPad, meanwhile, should be more than plenty. You’ll almost always use these devices when they’re connected to a broadband line—when you’re at home, work, or a coffee shop—or when you’re in between those locations. This means you’ll always be pretty close to virtually unlimited online storage—the splendors of Dropbox, Netflix, Spotify, iCloud, Flickr, Facebook, et al—so you won’t need to keep all of your media on your tablet. On your cheap 16GB iPad, you’ll be able to keep the most important stuff with you all the time. For everything else, look to the cloud.
Now, I bet that more than a few readers will chime in to testify about their unquenchable appetite for more gigs. Perhaps your music collection is overwhelming. Perhaps you can never stand to be without tens of thousands of photos of your kid. Perhaps you’re in the movie business and you need lots and lots of room for various cuts of your next blockbuster. I’ll concede that the cloud just isn’t good enough yet—networks aren’t fast or reliable enough—to satisfy some power users, and for those people, paying $100 or $200 for extra space, even at a high markup, might be well worth it.
But I’m imploring you to take a minute to examine your needs. Don’t upgrade on impulse. Chances are you’re not a power user, especially if your tablet is meant to be a secondary device. If you’re mostly using it around the house to browse the Web, even the Nexus 7’s paltry-sounding 8GB should suit you.
Apple and other device makers probably recognize this as well. They’re making a lot of money from jacking up the price of storage now, but that party can’t last forever. For one thing, as Rassweiler points out, the cost of Flash memory is sliding. Earlier this year, Apple acquired Anobit, a startup that will likely reduce storage prices even further. (One theory is that Anobit’s technology will allow Apple to cram more data on each Flash chip, letting it make a 24GB iPad with a 16GB chip.) Today, Flash memory chips cost about $1 per gigabyte, but as tech improvements slash these prices, Apple and its rivals will feel pressure to bump up the base level of storage. Once that happens—if Apple’s entry-level iPad offers 24GB or 32GB—upgrading will become even less attractive, especially if broadband networks and cloud-enabled apps keep improving.
You should keep this future in mind when you’re at the Apple Store. How long are you going to keep your new iPad, anyway? Better phones and tablets come out every year. The one you’re buying now isn’t going to be with you forever. At best, you’ll get three years out of it before it becomes obsolete. Modern gadgets are meant to be disposable machines, not eternal repositories of all your stuff. So buy just as much as you need—and if you find yourself running out of room someday, well, Apple will be happy to take your money for whatever it’s peddling then.
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