Blog Post

Tablets wars: Apple is from Venus, Amazon is from Mars

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.

73 Responses to “Tablets wars: Apple is from Venus, Amazon is from Mars”

  1. vijaymukhi712

    My only beef with Amazon is that its too US centric. People like me in India are not on Amazons radar as today I cannot buy the Fire. Amazon should understand that the world marketplace is bigger than the US.

  2. I can’t believe I didn’t see this coming from Amazon. In my opinion they went about the release the right way, building a group of services, and then releasing the tablet as “Look, now you can use all these services on one device!” Books, MP3s, Movies, TV Shows, Apps… and then the Fire.

    And who cares if the profit margin is lower than Apple? With the volume Amazon does, I’m sure this will be worth their while.

  3. Kindle Fire is a safe device to give Young Children, best function is no Camera. This makes it ideal for Parent’s, with no nasty surprises posted on Facebook, or other Social Media, not to mention the price, which also means the Child is not going to be bashed for their i-Pad from Dad.

  4. Hamranhansenhansen

    > 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.

    No, that is totally wrong. They are not the same device and the cheap one is just cheaply built. Not at all. They are very different devices. Kindle Fire is cheaper than iPad for the same reason iPod touch is cheaper than iPad: fewer features.

    The reason Kindle Fire is cheaply built is Amazon does not have Apple’s economies of scale or expert efficiencies in hardware making. It costs Amazon $210 to make Kindle Fire. If Apple were to make this form factor of device, they could make it for $100 or so, based on the fact that they make the base iPad for $300.

    So with Kindle Fire, you are getting way fewer features than iPad, and you’re getting cheaply built instead of well-built. Both disadvantages.

    The right analogy is iPad is a car and Kindle Fire is a motorcycle. iPad runs full-size PC apps on a full-size PC screen, while Kindle Fire runs mini phone apps on a mini phone screen. The screen on Kindle Fire is literally half the size of iPad, as well as half the size of the smallest graphical PC screen ever shipped. A 1984 Mac has a screen that is twice the size of Kindle Fire.

    The equivalent product in Apple’s lineup to Kindle Fire is iPod touch, Apple’s “motorcycle.”

    > With the new Kindles, Amazon has been able to define
    > the hybrid retail environment.

    Only if they are in some alternate universe where iPad does not exist.

    Apple is also a retailer. They even have stores that Amazon doesn’t have.

    You can buy physical good from Apple Store in the Apple Store app for iPad. You can buy them from Toys R Us in the Toys R Us app. There is a Target app. A Macy’s app. There are apps from hundreds of retailers. There is even an iPad app from some outfit called Amazon.

    Everything on Kindle Fire is already on iPad. Nothing new has been invented. It is just a motorcycle to iPad’s car. A half an iPad in size, a little less than half an iPad in price, and 1% of an iPad in features.

    > By bundling a free one-month trial of the Amazon Prime service

    Which is free. A 1 month trial of Amazon Prime can be had by anyone at any time for free.

    > 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

    That is the same note where he said Kindle Fire will disappoint most users because they will think it can replace a PC. 90% of iPad buyers buy them to replace a PC, and 90% are satisfied, so they got what they wanted. 90% of the buyers of other tablets also buy them to be PC’s, but return them wholesales when they find they are not.

    The proof that he is right can be found in the quote at the top of this comment, where the writer obviously thinks that iPad and Kindle Fire are the same device but Kindle Fire is just cheaply made, and in the many tech writers who have fallen into this same trap. Consumers will be even more easily fooled, because they think that anything that has a Web browser but is not a phone is a PC.

    Me, I think Kindle Fire is great step forward for Kindle. It will maintain Kindle’s status as “iPod for books.” It is a breath of fresh air for publishers like me who make books with audio video in them. They will sell in Kindle numbers to Kindle users who have likely already pre-ordered the entire 2011 run, which will be small since Amazon is paying you to own this device.

    But compete with iPad? That is crazy. That is like saying “Macy’s has their own credit card now … watch out VISA!”

  5. Lawrence Guzzetta

    I don’t think we’re in a winner-take-all game at this point. The iPad and Fire, while similar form factors, offer significantly different feature sets. Beyond size (which of course matters), the Fire seems to be focused on consumption (no cameras, no mic) and lacks some advanced functionality like true multi-touch. Of course many consumers will compare the two before making a decision, I think we’ll find two very different camps that quite happily settle on one or the other. It is a brilliant move that plays to Amazon’s strengths and will likely line their coffers for years to come but it’ll be the death of many in the already crowed Android Tab Arena and likely leave the iPad market mostly intact.

  6. I have no doubt that Amazon’s Fire will be a success in its own pond but before anyone thinks that selling something cheaper than Apple 2.0 is an automatic game changer or is a “killer,” there is a lot of evidence to the contrary. (Rio, Amazon’s mp3 store, 200 iphone competitors).

    The simpleton analysis is to say that cheaper sells more but at what margin cost? If your margins are 2% while Apple’s is 40% as is the PC netbook to ipads, you have to outsell Apple by a HUGE NUMBER to get the same revenue. AND you automatically brand and occupy the low end with very little opprtunity to rebrand yourself at a higher price – unless you out-spend an outsize amount on marketing.

    Amazon strangely enters a paradox. Amazon’s audience is really a high end audience. Amazon’s strength is convenience and customer service (who else will mail you a replacement Tv before the damaged one is even picked up?!) … so auto going cheaper is not necessarily the right path here. Apple holds the hard sought after distinction of mass market luxury … buying anything less is well, not being able to afford the best …

    Just look at ereader sales. Amazon has NEVER announced an actual number sold – clearly too embarassed – there are some third party numbers – basically Apple managed to sell more ipads in the first 6 months than Amazon sold ereaders after 5 year. AND Amazon has been shoveling BILLION and BILLIONS of impressions of their Kindle on their front page (top 10 in page views since forever).

    Kindle is a fine ereader (have they resolved the horizontal reading issue?) and the added features are nice as announced but how NICE? For instance, it’s easy to put a browser on a portable device – even Nokia managed but beyond the obvious, how does it handle form filling, bookmarks, passwords, access to Instapaper or ReadItlater, etc, etc, etc … anyone can create a browser but is it a USEFUL browser? Only time will tell so let’s not get excited by a company who has ZERO experience with a real OS. No one thinks the Kindle is a great OS – it does its basic functions fine but no one thinks it’s the ipod of ereaders.

    So, Amazon should sell a bunch but how many will get returned thanks to Amazon’s liberal return policy because it’s not what they expected (aka: not really an ipad for $300 less) or bricked by android hackers in hopes to make it an “open” android device?

  7. Sharad Baranwal

    The content section under Kindle Fire starts with “18 million movies TV shows, apps, games…. ” whch gives a skewed picture. the “movies” are nowhere near the 18 million mark at about 22K per the other graphic above.

    Intersteing order of words though, probably some scmuck in Marketing/sales came up with the sentence saying, lets put movies at the beginning.

  8. Kevin Ledgister

    One other thought – the primary purpose of these new devices is to sell Amazon content. While Apple does sell lots of content, it isn’t in your face and is not required to subsidize the device.

    It will be interesting to see if Amazon can show restraint to prevent constant ads and offers showing up to spoil the experience. I do commend Amazon for trying a different business strategy than the other iPad “me too” device copycats that have not succeeded so far.