Can Motorola Xoom Survive Over iPad 2?

Motorola Mobility launched the Xoom tablet for a retail price of $799 in February, while Apple's iPad 2 starts at $499.

By looking at this data, consumers may think that the iPad 2 is much cheaper than Xoom. However, there are a number of feature differences between the Xoom and the basic iPad 2 that can explain the discrepancy.

The key difference is iPad 2's basic version comes with only Wi-Fi and 16 GB memory, while Xoom comes with 3G compatibility and 32 GB memory. On the other hand, an iPad 2 with a 3G connectivity and 32 GB of memory costs $729, but yes this is still $70 less than Xoom.

This is where Motorola may have erred as it targeted its Xoom only to the high end market, while Apple's CEO Steve Jobs has employed the most phenomenal marketing brains known so far to achieve the market edge. He has made iPad 2 accessible for both high as well as low end markets by releasing a Wi-Fi only version with 16 GB memory for $499.

We believe the February release of the iPad2 has enabled Apple to maintain leadership in terms of both mindshare and market share in the fast-growing and strategic tablet market, analyst Rajesh Ghai at ThinkEquity wrote in a note to clients.

The main differences between the high and low end of the tablet market are memory capacity and network. The high end might be around 32 GB of memory vs. 16 GB for the low end. A high end device might also support 3G or 4G networks while low end tablets mainly support Wi-Fi.

Though, Xoom has comparable features and pricing to the high end version of Apple's iPad 2. The question now becomes, will the high end of the tablet market keep pace with the low end? This is a critical question from Motorola Mobility's perspective, as Xoom really only caters to the high-end market, stock analysis firm Trefis said.

Meanwhile, the increasing availability of Wi-Fi could diffuse the value proposition of high-end tablets and shift more consumers towards low end models, a negative for Motorola Mobility's perspective.

Market research firm Instat predicts the number of global Wi-Fi hotspot sessions could grow from 2 billion in 2010 to about 11 billion by 2014.

Given these factors, we are conservative in our estimates for the company's tablet unit sales and predict growth at a relatively slower pace than the overall market, stock analysis firm Trefis wrote in a note to clients.

Also, the amount of competitive new launches near-term is making it a little bit tougher for Xoom tablet.

While we think the new Xoom is a worthy contender with strong hardware features, the uptick may be below our initial expectations, RBC Capital Markets analyst Mark Sue wrote in a note to clients.

Some of the slower-than-expected adoption of the Xoom may be due to pricing, strength of the iPad 2 launch, and limited differentiation due in part to its being an initial Google Experience Device (Xoom does not come with MotorBlur).

Another competitive dynamic that weighs on Android tablets is the lack of a competitive iTunes-like solution to readily purchase video.

Meanwhile, the overall tablet market is expected to grow from 17 million in 2010 to 71 million in 2012, market research firm IDC says.

Trefis currently estimate that Motorola Mobility will sell about 4 million Xoom tablets in 2011 and grow annual tablet unit sales to roughly 8.5 million by the end of its forecast period. RBC Capital Markets expects Apple to sell 30 million iPad 2 units between April 2011 and March 2012.

Android data points to 100,000 Xoom tablets sold to date. The latest update to the Android developer website showing OS versioning indicates that 0.2 percent of Android devices run on version 3.0 aka Honeycomb.

However, Deutsche Bank analysts expressed optimism on Xoom sales. The brokerage currently estimates the Android installed base at around 50 million units, 0.2 percent of which is equivalent to about 100,000 units. This level of tablet sales is in line with the brokerage's estimates of 50,000 units in the first quarter and 150,000 units in the second quarter.

While we believe Street expectations may be a bit higher 100k units after only two months on the market is a decent start, Deutsche Bank analysts wrote in a note to clients.

Here is a comparison between iPad 2 and Motorola Xoom: