Did iPad Just Become Google's Collateral Damage?

| About: Alphabet Inc. (GOOG)

In a somewhat surprising move, Google (NASDAQ:GOOG), which used to support Samsung's effort to produce an "iPad killer," switched gears. It decided to aim low by introducing its own $199 low end 7" tablet yesterday.

The new Nexus 7 bears eerie resemblance to Amazon's (NASDAQ:AMZN) Kindle Fire, but with a few distinctions. It is much lighter, great for holding with one hand. It has a front camera and microphone, presumably for chatting or video calls, and a GPS. Its battery also holds much longer, up to 8 hours.

On the surface, Google's primary target seems to be the leader in the tablet market, Apple's (NASDAQ:AAPL) iPad. It is however, not the case.

1. It is not up to par to iPad in functionality.

As much as Nexus 7 is better than Kindle Fire, it is still not up to par with iPad. Except for price, it is an inferior product in almost every aspect. It has a smaller screen with less pixel density. It does not have a high resolution back camera. It has shorter battery life. Nexus 7 and iPad are, to some extent, not even the same species. They are like old MP3 players vs. iPod in the early 2000s: one for budget consumers, the other for people who can afford more luxury. Although it doesn't compete with iPad directly, and it perhaps doesn't even intend to, Nexus 7 may steal some less quality sensitive and more price sensitive consumers from iPad.

2. It is too cheap to make much money.

When Amazon introduced Kindle Fire last year, it was widely believed that Amazon was losing money on each Kindle Fire sold. Amazon's strategy was to make money back on content sales, including books, magazines, movies, and apps. We cannot tell if that strategy worked, but Kindle Fire was the among the most successful tablets not named iPad last year, making Amazon the third largest tablet seller with almost 4 million units.

Nexus 7 has similar but improved configurations as Kindle Fire. Very likely Google also will not be making money on Nexus 7 sales, not directly anyway. If making money from hardware is not the goal, what is Google trying to achieve with Nexus 7 then?

3. The real target is Microsoft (MSFT).

Let's ask ourselves a few questions.

First, fundamentally, what kind of company is Google?
It is a software central, search engine company.

Second, what is Google's favorite way to make money?
It draws 98% of its revenue from advertising.

Third, who is Google's major competitor vis-a-vis Google's money making business?

Suddenly, it becomes obvious that Nexus 7 is just Google's bait to attract consumers to use its mobile OS Android, and hence its search engine. Since the mobile search market is a "must have" for Google, the introduction of Nexus 7 follows the same playbook as Kindle Fire: Google's goal is to make money from the search engine, not the tablet. Since iOS is already adopting Google as the default search engine, it's not hard to tell Google's primary target is Microsoft, whose Windows 8 is coming to the market later this year, armed with the super cool Surface and likely new smartphones from Nokia (NYSE:NOK), Samsung, and HTC.

However, by introducing this cheap tablet, Google is forcing Apple's hands. iPad can become collateral damage of Google's competition with Microsoft. With high end competition from Microsoft and low end alternative from Google, it gets tougher for Apple. Moreover, neither Microsoft nor Google may care much about making a profit on hardware alone. But hardware is Apple's bread and butter.

It will be a challenging year for iPad. Given its importance for Apple (15% of revenue), Apple's growth potential could take a sizable hit if the issue is not dealt with successfully. The situation will become more interesting getting into the holiday season.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.