Analyst: Amazon Can Compete with iPad by Losing Money

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Amazon Android Tablet?If Amazon wants to compete with Apple’s iPad with its own tablet, it’s going to have to be willing to sell them at a loss. Forerester Research analyst Sarah Rotman Epps said that if the online retailer doesn’t mind losing money and can release a tablet for less than US$300, it could sell as many as 5 million units during the December quarter.

By doing so, the company’s goal would ostensibly be to make money by selling the company’s vast array of digital content that is already available on Amazon, including movies, TV shows, Android apps, and ebooks.

Never mind that Apple’s substantially larger iTunes and App Store runs just above breakeven, according to Apple, and that both services exist to sell Apple’s hardware, not the other way around. On top of that, Amazon’s margins on its content are even lower than Apple’s margins on iTunes and the App Store, which would make it very difficult for Amazon to make up the difference for those hardware losses.

In a report covered by The Wall Street Journal, Ms. Epps acknowledged that “Apple’s lead in the tablet market looks invincible,” which is why she said Amazon is going to have to be willing to lose money to gain share.

HP may be the proof in the pudding on this idea, as the company showed that as long as it was willing to lose $200 or so per unit, that it could sell $99 TouchPads all day long (while supplies last, that is).

The question is just how crappy would a tablet have to be for Amazon to be able to afford to sell them at $300, even at a loss? Apple is both the quality leader and price leader with a starting price at $499 for its iPad, and this is not about to change any time soon.

Every other competitor that has tried to match Apple’s price point has failed to move consumers to buy, and desperate hardware makers are expected to begin slashing prices this fall in an effort to move otherwise moribund inventory.

Amazon (or anyone else) can opt for a low-quality display, for instance, but that would be a bizarre choice for a company that offers such a great E-Ink-based reading experience on its Kindle devices. If it took that path anyway, would consumers then pay for ebooks, movies, and TV shows if it looked awful on their tablet?

Probably not.

Amazon can probably skimp on battery life without taking too much of a perception hit, and the company can go with cheaper plastic bodies and less sensitive touch screens. Amazon’s design tolerances can be looser than Apple’s, too, and the company can always opt for a smaller display.

Cut enough of those corners, and Amazon could maybe have a device it could sell—at a loss—for $300. Even if it can do so, however, will anyone buy it?

If the only lesson that analysts and pundits take from HP’s TouchPad debacle is that the way to compete with iPad is to throw away money hand over fist (while supplies last), Apple’s absolute ownership of the tablet space will be assured.

As I wrote in May, Amazon can compete with the iPad, but doing so will hinge on exploiting the company’s enviable ecosystem at Amazon.com, not in offering cheap, crappy hardware at a loss. Amazon has content, assets, infrastructure, and hundreds of millions of customers that no other would-be tablet maker can claim, and if it leverages all of those things properly, Apple will have some real competition on its hands.

Comments

Busterone

How silly to make some sort of conclusion based on the fire sale that HP had for it’s tablet.  All the $99 sale of the tablet says about people wanting a tablet is . . . . NOTHING.  Google is unable to monetized Android, my understanding of money spent by any buyer of the Android OS is less that $20 a year.  That right, most Android users are unable/unwilling to spend any more money after buying their phone, what study/sales/research shows otherwise that the Android tablet will be any better?  Amazon losing $200+ on each tablet in hopes that it might recover that some time in the future is ridicules and borders on insanity.  It will take at least two years before they can make money, so Amazon will lose a lot more than just the hardware cost, there is going to be an ongoing maintenance cost to keep the tablet bug/virus free.  No, unless Amazon can get the parts and technology at below cost or is able to make a HUGE gamble and buys their stuff in bulk (not knowing that all the parts purchased ahead of time will sell), I don’t see Amazon being a real threat.

Better yet, lets look at the Amazon Marketplace for Android applications, how is that going?  I’ll take a wild guess, not well.  Again, there is nothing in their sales report that would indicate that this would work or that there is even a market for an Amazon Tablet.  But this still leave the question that one needs to answer, why would I buy this tablet over the iPad?  I’m not precluded from buying the same services/stuff from Amazon on a platform that is better and easier to use.

ctt1wbw

The words “compete” and “losing money” should never be used in the same sentence.  Ever.  I think Dell and HP can attest to this.

Nemo

Forrester’s thesis is that Amazon will prevail because it can and will sell its tablet at an acceptable loss and make it up on sales of its other content and retail goods.  But that thesis has several problems.

First, thanks in large measure to Tim Cook’s brilliance in operations and to the massive scale of Apple’s operations in manufacture and parts, etc., and its IP, Apple has the lowest costs for producing a tablet computer that is comparable to its iPad in style, features, and capabilities.  That probably means that Amazon must not only sell its tablets at a loss; it probably also must offer a lesser tablet, a lot less.  But still, I guess that Amazon is hoping to reprise Microsoft’s ancient strategy against Apple, that is, people don’t care about a great product but will accept something that is just good enough.  Well, that clearly won’t be true for the segment of the market that Apple most values, the discriminating buyer with sufficient money to pay a fair price for superior quality.  But even with the low cost price-buyer, Apple can, if necessary, for the reasons, supra, offer a lesser tablet at a lower price.

Also, both Tim Cook and Steve Jobs are smart enough to engage in asymmetric warfare.  If Amazon can sell hardware at a loss in the hope of making that up on sale of content and retail at higher prices, Apple can sell content and retail at break-even or an acceptable loss that is subsidized by its profits from its hardware.  So Amazon had better think twice before starting down this road of subsidizing unprofitable sales of hardware with its profits from its retail businesses.  After all, Apple has a cloud that is second to none, not even Amazon’s cloud, and the money to enhance that cloud’s capacity, which it can use to offer goods and service for sale at prices that can badly hurt Amazon’s retail and cloud-services businesses.  Apple’s agency model has already taken a huge bite out of Amazon’s business model for selling books, but Apple doesn’t have to stop there.

Also, Apple’s ecosystem for developers is highly profitable for those developers who can build a successful app.  Amazon has yet to prove it can offer developers something at least as lucrative.

And last but not least, Amazon, as is true for every Android OEM, must now risk the prospect of Android’s IP infringement troubles.  The Oracle suit is threatening to add significant costs to all Android products sold outside of China, and, depending on what IP Amazon’s tablet uses, it too could run afoul of infringement suits from Apple, Microsoft, or others.  Those suits have the potential to at least add significant costs to Amazon’s Android tablet, reduce its functionality, and/or even force its removal from the market.

ctt1wbw

Like I said, selling a product at a loss in the “hopes” of making future money off of “something” is a very very poor business model.  Especially when it comes to tablets that you didn’t design and don’t build, meaning you have no vested interest in, plus slapping another version of Android on there in the hopes of competing?

How many Android devices are out there and what differentiates one from another?  The carrier badge on the back?  Bad business model.  I agree with your post, but still…  Dell thought they could do it and so did HP, but at least HP put a good OS on their stuff, albeit crappy hardware with no apps at all, and look where that got them.

geoduck

OK sure they will lose money on each tablet
OK fine, they won’t make anything on the content.
But they will make it up with volume.
LOL

Terrin

This analyst is ridiculous. Sure, HP can sell $400 Tablets for $99 all day long because people perceive they are receiving a great deal. However, HP wouldn’t be selling $99 Tablets for $99 all day long. The hardware wouldn’t compare.

There is some precedent for selling hardware at a loss to make it up with add on sales. For instance, game systems like the PS3 and X-Box are generally initially sold at a loss. The profit comes from game sales. Printers are often sold at a loss, break even, or small profit because profit is made from the sale of the expensive ink cartridges.

These examples, however, don’t carry over to tablets because the content sold for tablets is cheap with very small profit margins and Amazon would have to sell a lot of content to 1) make up for the loss on hardware, and 2) make a profit. Further, it would have to try and lock people into Amazon content. Do people really want to be restricted? For example, I want to be able to use Netflix, Hulu, and other such services. Amazon would make no money there.

Lee Dronick

Gillette did it with the safety razor and worked for a long time. However, these days it is hard to find to find double edged safety blades and disposables blade-handle combinations are expensive for what you get. Unfortunately I no longer have the luxury of shaving and must suffer with this Lord Kitchner mustache above a Czar Nichols II beard.

Anyway it might work for Amazon, there are people who gravite towards cheap no matter what the cost. There is wrench poised above the works, taxing online purchases; Here in California there s petition drive lead by Amazon to keep the Internet sales tax free.

mhikl

Very insightful commentary.

Apple?s iPads seem to be very well made, Apple has a history of support to its devices with OS updates and the iPad has a price range that reflects the product?s value and cost to produce. I suspect iPads will have long lives, which are reflected in Apple?s build standards. The knowledgeable consumer will get many years of service out of his iPad and iPad sales haven?t even scratched the surface of potential sales.

Amazon producing a plastic pad without matching the functionality of the iPad may sell to the wallet encumbered but the consumer of such devices will not probably not see longevity in their Amazon product. Then, s/he will have to make a choice. Continue to repurchase a limited life pad to keep compatibility or sacrifice their apps and data to change to the iPad.

There is room enough for both kinds of consumer and as pointed out in other discussions, Apple makes the profits and has a healthy following that is growing. Also, Apple is now showing how difficult it is to meet its quality and price. Amazon must decide how it is going to challenge Apple?s strengths. it will be a game to follow with interest but being late to the game, Amazon has its work cut out. They?d better hurry and we know what comes from those in a hurry.

mrmwebmax

+

Amazon does have a few advantages, though: By using Android, they can offer customers:

1) openness
2) Flash
3) porn apps!

‘Cause you see how much trouble Apple has selling iPads, which lack all three. smile

BurmaYank

mrmgraphics:

“Amazon does have a few advantages, though: By using Android, they can offer customers:

1) openness
2) Flash
3) porn apps!”

- My guess is that Android’s monopoly on “3)” will always be a powerful enough engine, all by itself,  to always keep Android smartphones (even though they might be inferior to iOS devices in quality +/or price competitiveness) ahead of iOS devices in the mobiledevice-OS market penetration rivalry.

- Flash monopoly surely offers Android no significant market penetration benefit.  (At least as long as Android’s Flash is so broken).

- “openness” monopoly:  ain’t.  That’s a totally bogus myth no one is willing to tithe towards.

mrmwebmax

+

- My guess is that Android?s monopoly on ?3)? will always be a powerful enough engine, all by itself,  to always keep Android smartphones (even though they might be inferior to iOS devices in quality +/or price competitiveness) ahead of iOS devices in the mobiledevice-OS market penetration rivalry

Should we really be talking about penetration rivalries and porn apps in the same breath??? smile

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