A few days ago I came across this article with an eye-catching title Hardware is dead. Two arguments are made there: first that consumer electronics designed and manufactured in Asia is becoming so cheap while maintaining a reasonable level of quality that western hardware companies don't stand a chance against them. And second that this will lead to a situation where content producers will be able to subsidize the whole cost of a device, giving hardware away for free with the hope that profits from content will more than make for the loss.
The first argument is nothing new. I remember how strongly it was voiced by the dean of Faculty of economics in the last year's round table on the role of engineers in society. Yet somehow there is still electronics design and manufacture going on in Europe. I am quite confident that the cost of eastern products will further go up as soon as their environmental and social standards catch up with the west, but this is merely my mostly uneducated opinion.
I'm more worried about the second prospect. It would create an incredible situation where you can get a physical object for free, something that necessarily requires a certain amount of raw materials and work to construct per copy, while on the other hand you pay for bits that are essentially free to copy. You may muddle up the issue by saying how selling hardware has low profit margins while content allows for a high margin. Still that doesn't change the fact that for the foreseeable future the cost of rearranging electrons in the RAM of your device into the recording of the latest blockbuster will be insignificant compared to the cost of rearranging atoms to make the said device itself.
I will conveniently skip the question of fixed costs, e.g. cost of design for hardware and production for content. We're talking here about complex devices produced by the millions where the situation regarding the cost of design is probably not all that different from the cost of producing some content for mass consumption. Hardware can still be surprisingly expensive for niche products though.
Subsidizing a product from the sale of consumables is nothing new of course. It's been done for all sorts of things, from printers, mobile phones, coffee machines to paper towels. The problem invariably appears when someone else tries to make consumables compatible with yours, only cheaper since they didn't have to subsidize your device. To prevent this kind of competition this business model always depends on some kind of intellectual-property monopoly-enabling legislation. In the past there have been some pretty creative uses of such laws in this context, for example where DMCA was applied to physical objects in the case of famous Lexmark ink cartridges.
What happens in the case where consumers themselves can make the consumable you depend on for your profit? Content shown on that give-away tablet is exactly such a case. Everyone can write text, make a program, record audio or video. Not to mention that pesky copy command every computer has that is just as effective as content producer's. Suddenly one product's users also become its enemies. This leads to nonsensical solutions like DRM and walled gardens. In some markets this practice has already been generally recognized as a bad idea. In European Union for instance mobile operators can no longer lock phones they are selling to their network, which means that at least in this country you can no longer get free mobile phones. Many are still subsidized of course, but whoever is selling them has to account for the subscriber's freedom to switch to another network. As regulators in other fields realize that such practice is harmful, I'm sure other kinds of give-away hardware will fail in a similar way.
Actually, I hope hardware subsidizing will never even come up to such a level. It might be great in the short term for hackers (hey, you get a free toy which you can jailbreak) and ordinary users (hey, you get a free toy) alike. But in the long term it will do more harm than good. For most people it basically exploits a psychological trick where people are bad at accounting for future costs, meaning you are tricked into buying things you don't actually need. Not to mention the throw-away culture such practice would enable (supposedly we are working towards a sustainable economy) and the escalation in the war over general purpose computing as companies more eagerly start to fight jailbreaks.