(GOOG) Google Ventures into Tablet Market

Google Inc. (GOOG) announced its much-awaited debut into the tablet segment with the launch of its $199 tablet computer, Nexus 7. The move appears to be a direct challenge to Amazon.com Inc. (AMZN), while adding yet another challenger to market leader Apple Inc. (AAPL).

The tablet market has already turned into a battlefield with the presence of tablet makers such as Research In Motion Ltd. (RIMM), Hewlett-Packard Co. (HPQ), Dell Inc. (DELL), Samsung and Cisco Systems Inc. (CSCO) to name a few.

Recently, Microsoft Corp. (MSFT) also jumped on the bandwagon with the launch of Surface. Of course, Apple leads the pack in terms of unit shipments with its iPad.

Like Amazon’s Kindle Fire, Google’s Nexus 7 is competitively priced and has a 7-inch screen. Through this device, consumers can read digital books, listen to songs, consume other digital media and enjoy various other services that Google’s Play service offers.

Nexus 7 uses a new version of Google’s Android software, Jelly Bean, and uses NVIDIA Corp.’s (NVDA) Tegra mobile processor that enables longer battery life and significant advantages in playing game software. As per Google, Nexus 7 will be manufactured by its hardware partner Asustek Computer Inc.

Google will start taking orders on Nexus 7 now, but shipments for the device are expected to start from mid-July. Initially, the device will be launched in the United States, Australia, Canada and the United Kingdom.

Android tablets are already available from companies such as Samsung Electronics Co., HTC Corp. and Motorola Mobility Holdings Inc., acquired by Google for $12.5 billion last month. Amazon’s 7-inch-display Kindle Fire tablet also runs on Google’s operating system while featuring many of its own services, music as well as book sales.

Some analysts at Gartner Inc. expect the Nexus tablet to compete with the Kindle Fire, given its attractive price, sleek feature, varied services and content offerings.

Nexus 7 will be the first tablet to get Google’s Nexus designation. In the past, Google has worked with manufacturers such as Samsung for Nexus smartphones to highlight the best features of Android software. But unfortunately, Google had to close it down due to weakening margins and strong competition.

Hence, we believe that though its recent purchase of Motorola Mobility will expand its expertise in wireless technology and handset design, Google will not get into the handset hardware business as it will likely pull down its margins. However, the benefits of an integrated approach to hardware and software cannot be overlooked going by Apple’s success in recent years.

So far, Apple has managed to maintain its leadership position in the tablet market.  Market research firm Gartner expects Apple and its iPad to remain the global tablet leader through at least 2016, even if it loses some market share.

The iPad will account for an estimated 46% of shipments in 2016, down from a projected 61% this year. Google’s Android-based tablets will account for 37% by 2016, up from 32%.

Google also introduced a ball-shaped computing device called the Nexus Q, which was internally designed to stream music and videos from Google’s YouTube video service and its Play service. The Q device will cost $299 and will start shipping from next month.

Though Google is a market leader in online advertising, it has been trying to explore the mobile space and compete with Microsoft and others. We view Google’s decision to manufacture its own tablet as another bold move, designed to compete with Apple as it continues to encroach on the Internet-search giant’s territory with major software applications.

Earlier this month, Apple introduced a number of new software products, including a mapping service that would replace Google Maps as the default system for Apple devices.

Currently, Google shares carry a Zacks #3 Rank, implying a Hold rating for the near term.

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