$25 tablets, $2 mobile data plans, and zero margins–how the internet is about to gain 3 billion new users

Six billion cell phone subscriptions are spread across five billion of the earth’s seven billion people, says Suneet Tuli, CEO of Datawind, maker of the world’s cheapest tablet computer. Yet only two billion people are connected to the internet, which means three billion people have everything they need to connect to the internet—except a suitable device.

“Are they lacking electricity?” asks Tuli. “Of course not–if you’ve got a cell phone, you’ve got some way of charging it. Are they lacking networks? No. If you’ve got a cell phone, you’ve got some way of being connected to it. So what is really left? What is left is affordability. A computer costs three or four hundred bucks, and a cell phone costs thirty or forty bucks. But what happens if a basic computing device that’s reasonably usable gets down to that price point?”

That’s the experiment that Tuli’s company, Datawind, is conducting in India and, hopefully, across the globe.

When I last spoke to him a few weeks ago, Tuli was in Mumbai for the launch of the 7-inch Aakash 2 tablet, a functional but basic device able to accomplish all the things you’d normally expect of an Android tablet. The Indian government has already ordered 100,000 of them, of which 20,000 have been delivered, while an additional 280,000 have been manufactured and are at some stage in the process of being shipped to private citizens who have ordered them online. Now Tuli is in New York for a second unveiling of the tablet, this time at the UN, where ambassadors from all 193 member countries will receive tablets as part of India’s effort to show off its “frugal innovations” for the developing world.

What’s changed since Tuli and I last spoke is that he has firmed up his estimates for when his tablet will be available at a price that renders it nearly disposable: $25 within 12 months. More importantly, he’ll hardly be the only one offering 7″ tablets at that price.

“As long as I’ve got constrained supply, [companies like Samsung] can sell tablets at a premium,” says Tuli, whose company is currently struggling to meet the four million orders from India that have already come in. “The moment I don’t have constrained supply, they can’t sell at a premium.”

What will unconstrain the supply of disposable tablets, says Tuli, is the fact that dozens of other manufacturers in China are currently trying to do what Datawind has already accomplished, which is build their own factories, called fabs, for making LCD touch panels. The screens on tablets are up to 50% of the cost of the devices, and Datawind has successfully reduced its cost per screen from $8 to $2.50 by building them on its own. Once those devices are shipped overseas, their price will go up on account of transportation costs and taxes, but that still means they’ll be very cheap.

“There’s 50 guys in China right now setting up fabs to make [LCD touch panels like Datawind's],” says Tuli. “In the next six to nine months they’re going to come online. And the moment they start coming online, pricing is going to tank. What’s going to happen is that those disruptive business models are going to change things for everybody. A sub-$50 retail price point in the next six months in the US is very practical for a product that, if you think of horsepower, has as much or more than the original iPad.”

In rich countries, cheap tablets could be replacements for schoolbooks and point of sale terminals, or they could enable new models for distribution of digital media. But in poor countries, these devices could represent the first contact with the internet for millions of people.

“To get that customer you’ve got to break the price,” says Tuli. “You’ve got to kill hardware margins, and that’s our big push.”

In India, cheap wireless connectivity is just as important as access to cheap hardware. Fortunately, deregulation and cutthroat competition among the country’s wireless carriers means that’s already available. Unlimited data plans for $2 a month are the norm, even though data speeds on India’s 2G and 2.5G networks are significantly slower than in the US. (Datawind has invested heavily in creating a system that compresses web pages before they are sent to its tablets, to reduce page loads from an agonizing 17 seconds on average to only three.)

Killing hardware margins could mean killing the tablet business of companies like Samsung, at least for low-end devices. But then how will Datawind make money? The same way Google does when it sells tablets at cost: advertising.

All of the apps on the Aakash 2′s native app store will be free, because in India, there is hardly any access to online payment systems, and especially not for the poorest. “Today, 70% of the country doesn’t even have a bank account,” says Tuli. “If they want to buy an upgraded version of Angry Birds, they can’t do it, no matter how cheap it is.”

India has a thriving advertising market, says Tuli, and the evidence is its plethora of print media and cable channels. Datawind will put ads on developers’ apps, and split the ad revenue with them; that way, no money ever has to be extracted from the tablet’s owner after the initial purchase.

And India is a market in which cheap, internet-connected tablets in the hands of people who have never had them before could lead to all kinds of interesting apps. He shows off one example, an app being developed by university students that is designed to create a point of sale ledger for India’s tens of millions of fruit sellers.

But becoming the Apple of India, whatever that would mean, hardly seems to be Tuli’s goal. For example, Datawind recently lost out on a contract to supply its tablets to the government of Thailand, after flooding in that country wiped out its budget for the devices. The Chinese government responded to the disaster by providing tablets for free, but they were of course made by a Chinese manufacturer.

“At the end of the day I don’t have to win every contract,” says Tuli. “If, at the bottom of my heart, I know that I helped seed that idea, the impact that has is a lot more powerful than, ‘OK, I could have made some nice money on it.’”

India has 360 million children, but only 220 million are in school, says Tuli. For those 220 million, a tablet that costs only about three times more than shipping a year’s worth of books to a remote Indian school makes sense. For the same reasons, Tuli thinks it will make sense in Bangladesh, Turkey, Greece, and other countries with whose leaders Tuli has met. In any country in which the quality of education drops as you journey to schools that are farther from major metropolitan centers, which is nearly every country on earth, Tuli believes that tablets, and especially internet access, can have a significant impact on kids by supplementing their education.