Will The Next iPad Challenge Come From Amazon?

Just as the first early iPad 2 reviews are landing, there’s talk of a new Apple tablet competitor in the form of Amazon. Why? Because although there are solid hardware contenders available and coming soon from the likes of Motorola (s mmi), Samsung and others, all are following flawed strategies, according to research firm Forrester. These devices are comparatively priced too high — a point we explained with the Xoom — and all are reliant on external companies for the retail experience. So how and why could Amazon succeed where others are considered to be failing?

Sara Rotman Epps, a analyst who’s been with Forrester since 2004, lays out three key answers:

  • Motivation. Apple’s recent in-app subscription rules requiring 30 percent of content revenues — including Kindle books — could feed the fire for Amazon to take on Apple. Think of it as a hedge against relying upon the iPad for some Kindle content sales.
  • Price flexibility. Epps suggests that Amazon could design, build and then sell a tablet for less than costs. A similar sales model is rumored to be in the works for Amazon’s Kindle device: the eBook reader could be given away to all Amazon Prime customers.
  • Branding and channel. Amazon is already known as a leader in the online retail business. The same can’t be said of any tablet makers, save Apple. Strong sales of the Kindle show that Amazon can create a consumer electronics device, sell it to the masses — both directly online and in retail parter stores — and then reap benefits by providing content for the device.

Epps makes a solid case for Amazon as a potential player in the tablet market. And earlier this year, Amazon announced details for its own app store that will support Android mobile applications, so there’s little doubt that Amazon is looking to get in on the tablet action. But solid reasons to enter the market and an app store won’t guarantee success.

If Amazon does built a tablet device, it’s going to face the same operating system challenges found by all who are using Google’s Android Honeycomb platform. At the moment, Honeycomb feels a little rushed to market with stability issues, missing hardware support and a lack of tablet-optimized applications. That’s taking what could be a stellar experience on Motorola’s Xoom and turning it into one that cries “not ready for prime time.” These issues should diminish over time, but it gives Apple and even bigger head start in this market.

Then there’s the sales challenge involved. It’s one thing to rely primarily on the web to market and show off an e-book device, but tablets are far more complex. Put another way: it’s not difficult to understand what the Kindle does by hitting the Kindle website, because it primarily does one thing. Tablets are complex full-computing devices which will make it more of a challenge to re-use the Kindle marketing strategy. Simply put: tablets are different devices depending which apps are currently in use.

With such challenges, why should Amazon even attempt to crack the tablet market? The answer can be gleaned from the e-book market, where according to IDC, Amazon ended 2010 with a 48 percent market share. It’s the classic razor and razor-blade model that has propelled Gillette to success: get the product in consumers hands at a low cost and then reap rewards on refills. In the case of Kindle, those refills are e-books, while for tablets, the ongoing purchases are in the form of apps.

IDC estimates that e-book device shipments more than doubled from the third to fourth quarter of 2010 with 12.8 million sales in the final quarter compared to 6 million from the prior period. That’s a solid growth rate and it allows Amazon millions of content purchase opportunities where it makes a cut of e-book sales. But those numbers pale in comparison to the hot tablet market: IDC figures 50 million tablets will move in 2011, up from 18 million in 2010. And none of those tablets currently benefit Amazon’s revenue stream, save for the Kindle book purchases which can already be made from a number of other devices.

But with a tablet of its own, Amazon has the potential to earn a 30 percent cut of every single application purchase made through its store instead of ceding those revenues to the likes of Apple, Motorola, Samsung and others. And if smartly leveraged, Amazon could advance media distribution for music and video; two digital services the company provides today. That may be motivation enough for Amazon to succeed in a segment where others are still struggling.