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October 31, 2012

What growing tablet market means for gadget-lovers

(Continued)

This holiday season could establish a pecking order for the variety of tablets now cluttering the market as well as provide insight into what consumers value: price, functionality or app and entertainment options.

The $29 billion tablet market is attracting new competitors looking to offset flagging revenue in the personal computer industry, which is expected to shrink this year for the first time in a decade. Others see an opportunity to leverage the devices to reach consumers more directly.

"The value proposition for a retailer is to drive additional sales of their physical goods or to build brand recognition," Alexander said. For example, users who pick up a Barnes & Noble Nook are likely to turn to the bookstore chain when they want to get their hands on the next hot novel.

That strategy usually includes making little or no profit on the tablets upfront. Companies can always make money later, said Alexander, by introducing tablets with new features in the second generation — as Amazon has with its Kindle Fire line. The important thing is getting a foot in the door.

But so far, Alexander said, no one's managed to hit pay dirt with that business model.

Only Apple has shown it can make a profit in this increasingly competitive market. It prices its tablets at a premium and cashes in on the thousands of apps developed for them.

Yet the company reported that device profit margins on the iPad took a dive in the last quarter, raising some questions about whether the company can keep up its red-hot performance. The iPad currently has over 60 percent of the market, but that's down from 80 percent in 2010.

To get a new piece of the market, Apple introduced the smaller, more portable iPad mini but barely downsized its price. The 8-inch tablet's cheapest model is $329 while Google and Amazon are offering comparable tablets for $199.

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