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Summary:

They say Apple has met its first real tablet competitor. And no, it is not Samsung or Motorola. Instead it is from Amazon. And while there is some truth to that assertion, I wouldn’t put a lot of weight in the argument. Here is why.

KindleFireFeature

They say Apple has met its first real tablet competitor. And no, it is not Samsung or Motorola. Instead it is from a company that started out selling books on the Internet: Amazon. And while there is some truth to that assertion, I wouldn’t put a lot of weight in the argument.

Under the stewardship of Jeff Bezos, Amazon is very much like Apple. It is not afraid to experiment (Amazon Web Services), disrupt (Kindle) and be ruthless (Amazon Prime). And like Apple, Amazon is a company with infinite patience. As Bezos once said, what makes his company different is its comfort with being wrong.

But before I get too far ahead, let me recap the news for you. Today Amazon announced that sometime later this year you can buy one or more of these devices:

  • A $199 Kindle Fire tablet
  • A $79 Kindle eReader
  • A $99 Kindle Touch eReader
  • A $149 Kindle Touch 3G eReader

The key device to be announced today is the Kindle Fire tablet. Writing for the Guardian, my friend Dan Gillmor sums it up best:

…this device, at just under $200, is to the iPad (about $500 in its least expensive version) as a cheap sedan is to a Lexus SUV: functional and useful, but nowhere near as elegant or powerful.

And just because it looks like a tablet doesn’t mean it is an iPad-killer, as some would have you believe. Just on the basis of features, it looks more like a competitive reaction to Barnes & Noble’s Nook and less like competition to the iPad. However, one has to take a step back and think of the strategic importance of the device.

As we learned from folks like Erick Tseng of Facebook and Michael Abbott of Twitter at our recently concluded Mobilize 2011 conference, the Internet is increasingly becoming a mobile-first experience. Our online behaviors are changing from browsing on the web to browsing on the go, whether on tablets or smartphones. If Amazon has to stay relevant, it needs to embrace this new world. It has chosen to do so by building an Amazon experience.

Fire sale

“What we are doing is offering premium products at non-premium prices,” Bezos told BusinessWeek magazine. “We don’t think of the Kindle Fire as a tablet. We think of it as a service . . . Certainly this is a for-profit business . . . Let’s put it this way. We are and always have been very comfortable at operating at extremely low margins.”

A few months ago, while appearing on Leo Laporte’s TwiT Internet TV show, I argued that sometime in the future, Amazon will create a physical retail space, mostly as a means for the company to extend its virtual franchise into the real world. Unfortunately, I was limited in imagining what could be a physical retail presence in our always-on, always-connected future.

With the new Kindles, Amazon has been able to define the hybrid retail environment. In fact, this reinvention of the retail experience will help the company not only keep fighting with newer competitors such as Apple but also take on today’s leviathans like Wal-Mart.

If you look at the price points of these devices, Amazon is willing to take deep losses in order to build market share and get people using its devices — fast. It needs to do so in order to ensure one thing and only one thing: that people keep buying from it what they need. Amazon has traditionally made money by selling physical goods: books, music and movies.

Given that we are increasingly shifting away from buying physical media and are instead opting for digital goods, Amazon is smart in its introducing the new Kindle tablet. The presence of these outlets allows us to buy more things more often and more easily. And that includes everyday stuff like toilet paper, soap, shoes and toys. Given that we have a new generation of children growing up using tablets, the very idea of “toys” for them might be quite different from what you and I experienced as tiny tots.

When I think of the new Kindle Fire (and whatever comes next), I see a strategic move that mirrors the introduction of Amazon Prime, the unlimited shipping plan that made it easy for us to buy more from the Seattle-based e-commerce giant. Morgan Stanley estimates that Amazon Prime customers annually spend about to four to five times the amount of non-Prime customers. There are about 12 million global Prime customers, versus a total of 144 million active users. My colleague Erica Ogg in a post earlier this month wrote:

should Amazon do a decent job selling tablets, it’s not necessarily going to be at the expense of Apple selling a lot of iPads. And that’s because the two are coming at the business from two different angles, and their customers have different expectations.

My colleague Ryan Kim, who was at the Kindle launch event in New York, had this to say about the device:

The Kindle Fire seems geared to not only help people play their content but shop for new things. The top option is a search field that can pull up stuff from Amazon store. Also, on the various media options below, users are able to get at their own magazines, books, videos and apps but a “store” button is usually present so people can quickly add to their library. There’s also going to be a shopping application, one of four main apps included in the Kindle Fire along with contacts, gallery and email.

By bundling a free one-month trial of the Amazon Prime service (that costs $80 a year and gives you access to over 11,000 videos and thousands of music tracks via streaming) and automatically subscribing Kindle Fire owners (unless they opt out), it’s clear that Amazon is thinking correctly about the money-making potential of the tablets.

The asymmetrical war

Amazon’s primary business is selling us things  — lots of them — and getting them to us as cheaply as possible. And that includes physical and digital goods and services. That is its corporate DNA, and that DNA is going to influence all of its decisions — whether it is redesigning its website or defining new tablets.

Amazon’s revenues and profits come from selling goods and services. For Amazon, the tablet is the lure and e-commerce is the catch. Apple, on the other hand, makes money by selling hardware, lots of it. Apps and digital goods and services are a way to attract people to its hardware platform.

Apple makes a lot of money — as in real dollars — from its hardware. Amazon is going to lose a lot of money on this hardware-based reinvention of its core commerce business for a long time. This move should worry those who are already worried about Amazon’s minuscule profit margins. “At $199, we view the device as loss-making or neutral at best based purely on hardware,” JP Morgan analyst Doug Anmuth writes in a note to his clients.

The bottom line is that Amazon will be successful — at least more successful than Motorola or HTC — but it won’t come at the expense of Apple’s iPad or Samsung’s Android-based tablets. Or as John Gruber puts it:

Motorola, Samsung, RIM — they seem to be chasing the iPad on specs, building the best tablet they can manage at the same starting price of around $500. But they have no clear message telling people what you can do with them.

  1. I just can’t help thinking this is a brilliant move for Bezos and Amazon. Apple set the bar with a premium priced unit and seemingly going after the general print web. Bezos lowering the bar for mass market adoption going after books, commerce, music, effectively flanking the Apple strategy…changing the game. All I can think is holy effing moly.

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    1. Peter

      I agree with you mostly except for your Apple comparison. I do think it is a brilliant move on Amazon’s part and doesn’t surprise me at all.

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    2. I don’t think they’re lowering the bar, they’re addressing a different market with a different size, application, and purpose. That’s like saying “Wow, Hyundai have a $12,999 car, BMW are going to go broke demanding $84,999 for their car now.” No, BMW’s profit margins are higher and while there are fewer on the road, there’s more prestige. If anything, this will make the iPad more of a prestige item and potentially enable Apple to raise their prices to improve profit margins, further distinguishing the iPad as the true victor, even though its platform is worlds apart. If anything was going to compromise Apple’s dominance, it was Android as a whole market, but it hasn’t happened because they’re offering an unprestigious, albeit probably better functioning, unit at the same price. It’s dumb.

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  2. Did you actually just quote Gruber to defend your hypothesis? I was actually thinking you made some good points right up until then. Geez.

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    1. Ouch. Why the hate?

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      1. Hamranhansenhansen Saturday, October 1, 2011

        Same reason some people hate Steve Jobs: turns out he was right.

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    2. You could quote Hitler on some things are still be relevant. Just because you dislike someone or even their entire belief structure doesn’t actually make their objective statements incorrect.

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  3. Bezo has a little over a year to pull this off, before Amazon has to start charging sales taxes in California and elsewhwere.

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  4. Wrong way round. Amazon Kindle appeals mainly to woman (Venus), but Apple iPad appeals mainly to men (Mars)
    http://www.emarketer.tv/Article.aspx?R=1008507

    I think this is because the iPad is too clumsy to carry in a handbag and Women read a lot more books than men, so they favor the smaller and more reader-friendly Kindle.

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    1. so you’re saying for women, size matters?

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    2. Hmmm – I know more women with iPads than men and just the opposite for the Kindle – My observation in my local coffee shops too.

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      1. I agree with you 100%. In my many travels, I hardly ever spot a male with an iPad. Tablets have almost no value for content creation. For a guy to haul around a phone (My Bionic’s screen is a mini-tablet anyway) AND another device just to suck your brain, isn’t the way the western world works.

        Women can toss the iPad into their bags and use them while waiting at the doctor’s office, or anywhere else their time is wasted.

        I see Kindles with males on planes, and loads of business books being read on them.

        For me, I use my Bionic and for content creation, a netbook provides me with a physical keyboard to do actual (GASP!) work, and if I want to watch a movie on a plane, also do that just as well as a tablet. 9 hours of batt life too – all at a price less than that of a tablet.

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      2. Dunno about men vs. women, but lugging around one more thing in a handbag just makes the chiropractors richer, trust me.

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      3. Hamranhansenhansen Saturday, October 1, 2011

        > Tablets have almost no value for content creation.

        Honestly, I beg you to please stop. Please, please stop. You are hurting the Internet.

        iPad is just a PC. It not only runs PC apps, it runs PC apps from the Mac, the content creation PC. Not baby Java versions that are entirely rewritten, but just the same damn Mac app with the mouse interface chopped off, and a touch interface put on. Underneath iPad’s touch interface is the same damn OS X from the Mac, again, with the mouse interface chopped off and touch put on.

        How does running iMovie on an iPad make it any different that running iMovie on the Mac? How does iMovie suddenly have almost no value for content creation because it is now EASIER to move your movie clips around when editing HD video? How does running Keynote on an iPad make it any different that running Keynote on the Mac? How does it now have almost no value for content creation because it is easier to reorder slides and now you also have a virtual laser pointer showing on the second display? You are still using the best presentation client in the world bar none.

        There are thousands of music and art tools that make you sound like a complete idiot.

        Plus, iPad has about 1000 apps that wirelessly control apps on a Mac. For example, there is a drawing surface for Photoshop, a mixing surface for Logic Pro, an interface for Spectrasonics synthesizers, various DJ interfaces, pianos, guitars, drums. I routinely control a whole professional music studio wirelessly with MIDI-over-Wi-Fi from an iPad sitting on top of a piano or music stand.

        What’s more, I have written hundreds of songs on iOS, not even just on iPad, but mostly on a tiny iPhone, running an app called FourTrack, which is based on a Mac app. Running it on iOS not only did not make it have almost no value for content creation, it actually made it BETTER because now the mixer sliders all work, even if you slide 2 or 3 or 4 at a time, and the transport controls are “real” you don’t have to press space bar for stop or anything like that, you press “stop.” And because it is in my pocket, I can do things like go away from a weekend and find myself singing a new song to myself and I can get my iPhone out and in 20 minutes record a demo of the song that I can share with musicians or anyone else I am working with. A 4-track recorder is what The Beatles used to make “Sgt. Pepper.” And there are many, many pro audio hardware accessories for iOS devices.

        So please, stop perpetrating this bizarre and stupid myth that tablets have almost no value for content creation. It’s absurd and it’s false and it’s borderline malicious at least.

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    3. I concur. I had an option of the Apple Ipad or Samsung Galaxy & chose the Galary so I can keep it in my purse. As women we are already carrying along a lot of JUNK to begin with :)

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  5. Good comments but I agree that the iPad is more Mars than Venus. Meanwhile, I’m happily reading my Kindle books on the iPad Kindle app. Syncs well with my iPhone and Mac as well. Amazon got me hooked without any new hardware.

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    1. Isn’t that the truth. They are certainly competing for world domination.

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  6. Kindle Fire will most likely be loved by hackers due to its low price (similar to discontinued TouchPad). I’m sure we can soon run other OSs with it :)

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    1. Hamranhansenhansen Saturday, October 1, 2011

      If so that is Amazon’s worst nightmare. They are paying each Kindle Fire buyer about $10 to take it off their hands. If you root it and don’t use it to shop, that is going to really hurt them.

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  7. I don’t think the margins on this product are as low as everyone imagines. Yes, they have priced it based on the assumption that they will generate revenue from media sales. However, there are other Android tablets that sell for less than $200 wholesale (look for products from Coby). Amazon has no middleman, so if these hardware companies can turn a profit at $180 or less, then Amazon should be able to make at least a little margin at $199.

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    1. Matt

      It depends on how powerful or leading edge they want the device to be. More cutting edge means that Fires are going to cost more. [I certainly wouldn't call Coby a premium tablet. ]

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      1. Arguably he’s right, though: volume does mean reduced costs in long run manufacturing. For every additional month you manufacture something, the costs drop between 5-15% m/m (depending its complexity). Which perplexes me as to why computer manufacturers continue to have tiny, marginal increments on models quarterly when they’d make much more money selling y/y models, like Apple does. Most consumer electronics have a slim margin, but as long as it’s in the black, it’s still profit and therefore sustainable. If you tried to sell Fire in stores, you’d probably go broke, since Amazon is selling without storefrontage, the markup for which can range between 15-30%, for which the net effect of a websale is either to flatline the profit for yourself, or pad for yourself and allow a profit for the retailer (Amazon does the former, for those who haven’t noticed yet).

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    2. Hamranhansenhansen Saturday, October 1, 2011

      The bill of materials is over $200. Just buying the parts costs them over $200, then they have to assemble, which is another $10 apparently. So they need users to come back and buy media to make any profit.

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  8. In the “can’t we all get along” column, I just want to say that this is excellent for the consumer. They get a good device for a good price. It forces Apple (and all the others) to compete on pricing and deliver more and better content. Overall a win for the consumer. This is capitalism at it’s best.

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    1. +1 to that

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    2. Hamranhansenhansen Saturday, October 1, 2011

      You’re right, except Kindle Fire competes with iPod, not iPad. Kindle Fire puts pricing pressure on iPod touch, which is $29 more and has a much smaller screen, although it has almost the same number of pixels and it has 2 cameras.

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  9. Peter H Pottinger Thursday, September 29, 2011

    The ironic thing about this kindle “fire”, is that its success will be determined by how easily it can be rooted and jailbroken. lulz.

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  10. As other comments have noted, the device is fairly lean, so much so that Amazon may not be subsiding the hardware much, if at all.

    The notions that Amazon’s tablet isn’t a competitive threat to Apple and high end Android tablet companies is preposterous. It is the sort of “analysis” that could only be given away for free. Are serious people really suggesting that the meat of the future tablet market is premium devices?

    No this device isn’t an iPad killer, at least in the sense that Fires won’t wake in the middle of the night and destroy iPads in their sleep-mode. It will, however, help relegate Apple to a premium category, is a monumental threat to growth, and puts the onus on Apple (and most of the rest) to justify its price point.

    The only thing worrisome about the Fire is just how pushy the “shop” component will be in the user experience. If the tablet can provide web, email, multimedia, social, games, etc. (i.e., everything the average user cares about) without coming off too strongly as a device designed for shopping, then it will be extremely alluring.

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    1. I couldn’t agree more. In fact, the Kindle Fire really signals a clear segmentation in the tablet market: e-readers, media devices (like the Fire), and tablet computers (like the iPad and upcoming Windows 8 devices).

      I penned a blog post exploring just that:

      http://blog.jasonthibeault.com/index.php/2011/09/28/what-the-kindle-fire-means-for-the-tablet-market/

      What’s more interesting, though, especially about this device is how well Amazon has integrated the cloud into it (text-book lending service, notes in the cloud, Kindle software platform with cloud-based delivery and synchronization). I think there are a lot of killer uses where a device like this clearly trumps the iPad:

      http://blog.jasonthibeault.com/index.php/2011/09/28/can-amazon-change-the-face-of-education-with-the-kindle-fire/

      This device is clearly a game changer. I won’t give up my iPad for it (as I want a more robust tablet computing device and, frankly, I’m married to iTunes; that’s the real battle: Kindle vs. iTunes) but I’d recommend it to a lot of people.

      @jnthibeault

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    2. Hamranhansenhansen Saturday, October 1, 2011

      Kindle Fire competes with iPod, another media player. Kindles and iPods have dominated the media player market for years now.

      What you are failing to appreciate is that Kindle Fire has 46% of the screen area of iPad, and 1% of the features. It is equivalent to an iPod. There are 2 kinds of apps: 9-10 inch “PC” apps, and 3-4 inch “phone” apps or “widgets.” 99.9% of all graphical apps ever made fall into these 2 categories. Therefore we need to have 2 categories of devices to run these apps: 9-10 inch PC’s, and 3-4 inch phones. What apps does a 7 inch device run? The 3-4 inch apps, but blown up. They cannot run the 9-10 inch apps, they are too big, the developer did not imagine a 7 inch device because no graphical PC has ever had a screen that small.

      > Are serious people really suggesting that the meat
      > of the future tablet market is premium devices?

      No.

      There is no “tablet market.” It simply does not exist. Touch is just a newer kind of mouse. When lasers replaced balls in mouses, we did not have a “laser mouse market.” We just had the same old PC markets as before, only now some PC’s had laser mouses and some had balls. Markets are defined more by use cases and price points. A PC with laser or ball mouse is still a PC, and some people will pay $500, tops, no matter what kind of mouse.

      So there are devices in the PC market which are “tablets,” and there are devices in the phone market that are “tablets,” and there are devices in the media player market that are “tablets.” But no “tablet market.”

      iPad is not a premium Kindle, it is a low-end PC. Kindle Fire is not a low-end iPad, it is a high-end media player.

      Here are the markets:

      - low-end media player: about $100 (iPod shuffle or nano, Kindle)

      - high-end media player: about $200 (iPod touch or classic, Kindle Fire)

      - low-end PC: about $500 (iPad, various Windows notebooks)

      - high-end PC: about $1000 (MacBook Air, various Windows tablets)

      What is confusing you is that we are about halfway through the transition from mouse/buttons to tablet. So yes, some media players have touch and some do not. Some PC’s have touch and some do not. Lumping all the touch devices together like they are all the same product does not make sense. There are Windows tablet PC’s that cost $3000. There is an iPod nano with touch for $149. These are extraordinarily different devices. Same with iPad and Kindle Fire. They are absolutely not the same device.

      > puts the onus on Apple (and most of the rest) to justify
      > its price point.

      That is easily done. iPad is $500, while Kindle Fire plus a $300 notebook PC is more like $500. iPad has top notch build quality and in-person service and the cheapest PC software titles in the world, while Kindle Fire and a notebook PC is 2 cheap devices, and the PC has incredibly high software and support costs, which can easily be more than the $300 price itself.

      The only people who think iPad is expensive are people who think it is a big iPod. It is not. It is a small MacBook Air. It’s a full PC. That is what users buy it for, that is what they expect, that is what they get.

      Similarly, the only people who think Kindle Fire is cheap are people who think it is a small iPad. It is not. It is a big Kindle. It’s a media player. The top level menu goes books, movies, music, games, like the menu on an iPod classic. The top level menu on iPad and other PC’s is apps.

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