As the tablet market enters its second year, the role the wireless carrier plays in the market remains somewhat cloudy. Should wireless carriers subsidize tablets? Should they stock the gadgets on their store shelves? Should they expect to generate significant revenues from the category?
Tablets are a "medium-sized opportunity" for carriers, explained Current Analysis analyst Avi Greengart. The devices will represent an important revenue stream for wireless carriers in the coming years, but won't hold a candle to carriers' primary business selling voice and data for phones.
But where exactly does wireless stand in the tablet sector? Most tablet vendors offer both Wi-Fi-only and cellular tablet options. ABI Research's Jeff Orr said that, of the 17 million media tablets sold last year, around 40 percent included a 3G modem--but only about half of those gadgets were ever connected to a cellular network. Orr said it appears the vast majority of tablet owners, even those who own 3G-capable devices, are content to use Wi-Fi networks to connect their tablets.
Nonetheless, wireless operators continue to push tablets with built-in cellular connections via a range of pricing scenarios. For example, Verizon Wireless (NYSE:VZ) offers the Motorola (NYSE:MMI) Xoom for $800 unsubsidized or $600 with a two-year contract, and offers data plans ranging from 1 GB for $20 to 10 GB for $80. Sprint Nextel (NYSE:S) only sells tablets with a two-year contract; the carrier's data plans start at $30 per month. T-Mobile USA, on the other hand, offers the Samsung GalaxyTab for $500 unsubsidized or $250 with a two-year contract, and offers data plans ranging from 200 MB for $30 per month to 10 GB for $85 per month. Interestingly, AT&T Mobility (NYSE:T) does not subsidize its tablets and does not require long-term commitments, and it offers about the same pricing options for tablet data as it does for smartphone data: 250 MB for $15 per month and 2 GB for $25 per month. AT&T said it activated 442,000 tablets during its fourth quarter, most of which were iPads.
A recent survey from Compete showed that a little less than half of tablet shoppers indicated that they would spend $15 per month or more on wireless data plans. However, 55 percent of smartphone owners and 70 percent of cell phone owners said they wouldn't spend more than $300 for a tablet device. Almost a quarter of prospective tablet buyers said they would only use Wi-Fi, and would not pay for a cellular connection.
"As more broadband devices pop up competing for a share of the end user's monthly wireless expenditure, carriers are better off offering flexible options to users and earning some additional revenue instead of having users turn their backs on them for trying to rope them into a long-term contract service," concluded Current Analysis' Deepa Karthikeyan.
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Many analysts expect the market to move toward shared data plans, where users can dip into their monthly cellular data allotments from a variety of devices. Already, smartphones capable of broadcasting a Wi-Fi hotspot create a scenario for users to connect their Wi-Fi-only tablets to a cellular network without paying for a separate data plan.
But pricing plans aren't the only sticking point in carriers' tablet strategies. ABI's Orr said the devices again bring up the question: Should operators become a retailer for computing-focused devices?
"What the network operators have failed to do is explain why they should be a destination for these types of products," Orr said. "Consumers haven't really flocked to the network operator as a trusted partner for shopping for computing."
After the tablet hype dies down, Orr said a likely scenario is that operators will remove tablets from their store shelves--thus eliminating the need for them to stock tablet inventories and subsidize the devices--and instead rely on the likes of Best Buy or RadioShack to sell tablets. Such outlets are often the go-to location for shoppers considering a computing--tablet or otherwise--purchase. Orr said operators have already jettisoned most netbooks from their inventories after discovering consumers prefer to purchase netbooks from established electronics retailers.
However, if operators do surrender tablet sales to electronics and big-box retailers, they could be relinquishing a potentially larger role in consumers' electronic lives. For example, Orr said shoppers in South Korea and Japan routinely purchase their phones, computers, TVs and set-top boxes from the same place: Their wired and wireless service provider. Telecom giants such as AT&T and Verizon, which own vast wired and wireless networks, could well leverage themselves into larger roles as electronics retailers.
But will they? Based on operators' troubles selling netbooks--once a hot item several years ago, wireless carriers have since cooled to the idea of selling 3G-capable, subsidized netbooks--I suspect carriers will take a much more measured approach to the tablet market. --Mike
P.S. While the future role of operators in the tablet market remains in flux, there's no doubt that tablets today are a hot item for just about every wireless player, from carriers to handset makers to accessory companies. With that in mind, we've put together a look at the top four competing tablets in the market today: The Apple iPad 2, the Motorola Xoom, the Research In Motion BlackBerry PlayBook and the Hewlett-Packard webOS-powered TouchPad. What are the pros and cons of each device? And which one will rise to the top of the market? Check out our special report.