Amazon’s Three Difficult Choices

  • Posted: 28 September 2011 12:39 PM

    Today we saw how Amazon responded to the three difficult business decisions it had to make to compete with the iPad:

    1)  Use the Kindle brand or create a new brand.

    Amazon decided to attach the Kindle brand to the new tablet.  Obviously the Kindle has great name recognition, but attaching the Kindle name to a tablet will harm the tablet’s chances of competing with the iPad.  The Kindle is associated in the market with cheap e-readers.  What kid who wants a tablet is going to say to their parents:  “I want a Kindle for Xmas?”  Amazon now has the unenviable task of creating consumer awareness for two completely different kinds of products, both associated with the same brand.

    2)  Quality versus price. 

    Amazon has gone for price.  But this was a no-brainer for the Nook competitor.  When it comes out with a 10 inch Kindle next year, will it really skimp on hardware components?  It’s such a tough choice for Amazon, but the betting money is now that they will skimp, and offer a $299 10 inch tablet.  It will get sales, but at what cost to Amazon’s ongoing reputation?

    3)  Rush a product to market or make its best shot when its ready?

    Amazon has pulled out all the stops just to get a product—any product—into the market on November 15.  About as late as they could without completely ruining their chances for sales.


    Quite obviously, the Kindle Fire is all about competing with the Nook Color and not the iPad, but it very much sets the stage for the competition next year against the iPad.  All signs point next year to Amazon introducing an under-featured, underperforming tablet with challenging brand identity.  At $299 they will sell millions, but (1) they won’t make money on it, and (2) they won’t achieve their objective of slowing down Apple.

    There was another way:  Amazon could have held off this year, focused on delivering a $499 quality tablet with a new brand in early 2012 with unique interface and content, and competing head to head with Apple based on content, user loyalty, Amazon Prime and the hundreds of millions credit cards on file.

    Amazon went with quick and cheap.  Never a good long-term set of decisions.

         
  • Avatar

    Posted: 28 September 2011 01:07 PM #1

    The kindle fire appears to be more of a competitor to the iPod Touch then the iPad.  As far as market placement,  the focus during the presentation was on media consumption:  movies, tv shows,  music but I still don’t understand the mechanics for how an individual would populate the device.  Does the use assume you have uploaded all your content to Amazon’s cloud storage and then selectively download the content you will use onto the 8GB of storage.  Most of my digital movies weigh in at about 2GB per movie so they are stored on my Time Capsule and loaded when needed via iTunes.  As far as the naming, I think it is an attempt to expand Kindle beyond books and use Amazon’s cloud storage for instant delivery but the network piece, having to be in a wifi zone, limits flexibility some.  Without room for more media it has limited appeal imo,  They didnt focus on hardware but the teardowns will reveal what was said before, it is basically the playbook innards with a few parts missing.

         
  • Avatar

    Posted: 28 September 2011 01:51 PM #2

    adamthompson3232 - 28 September 2011 03:53 PM

    Kindle Fire reportedly gets 8 hours of continuous reading time battery life. Ha. What a failure.

    From the limited info I have read so far, I think the Kindle Fire may do quite nicely. It may turn out to be a much better tablet than Rim’s Playbook, at least for web and media centered users.

    Certainly the cloud assisted browser is likely to be much snappier than would otherwise be the case, reminds me of the system used by the Opera mobile browser.

    The WiFi only iPad 16GB is a popular model (most popular?), so perhaps 8GB and WiFi on the Fire won’t be a problem for ‘enough’ potential buyers.

    It will be interesting to see what calibre of email apps become available for the Fire. Having a curated app store should result in fewer malware concerns than the Android market.

         
  • Avatar

    Posted: 28 September 2011 02:36 PM #3

    macorange - 28 September 2011 03:39 PM

    Obviously the Kindle has great name recognition, but attaching the Kindle name to a tablet will harm the tablet’s chances of competing with the iPad.  The Kindle is associated in the market with cheap e-readers.  What kid who wants a tablet is going to say to their parents:  “I want a Kindle for Xmas?”

    I don’t think the KFire is competing directly with the iPad. There were a lot of books, comics, games and video content on the demos that will be very attractive to kids. Cheaper, smaller & lighter are all pluses in parents’ eyes. Kids might not ask for it by name, but it might be what a lot of parents will get them. Most kids probably won’t complain.

    Quite obviously, the Kindle Fire is all about competing with the Nook Color and not the iPad, but it very much sets the stage for the competition next year against the iPad.  All signs point next year to Amazon introducing an under-featured, underperforming tablet with challenging brand identity.  At $299 they will sell millions, but (1) they won?t make money on it, and (2) they won?t achieve their objective of slowing down Apple.

    I agree with the first half: the KF is competing with non-iPads. I don’t think Amazon is trying to slow down Apple. Their objective is to get more people to buy everything (digital & physical products) from or through them.

    There was another way:  Amazon could have held off this year, focused on delivering a $499 quality tablet with a new brand in early 2012 with unique interface and content, and competing head to head with Apple based on content, user loyalty, Amazon Prime and the hundreds of millions credit cards on file.

    They can still try this next year. But the $199 price tag is what makes the KF compelling. Once you start to play in the “big leagues” of tablets, however, you need to bring some serious app content. I very much doubt that will happen anytime soon with the Android platform.

    pats - 28 September 2011 04:07 PM

    The kindle fire appears to be more of a competitor to the iPod Touch then the iPad.

    Excellent observation. We’ll have to wait for full reviews to see just how well games work on the KF, but the demos look very promising. A screen more than twice as large as the iPod’s make books, comics & videos much more compelling for kids.

    I think Amazon has done just about everything perfectly with this product. They nailed it with the $199 price point. For that price they don’t have to match the iPad; they only have to produce something that is “good enough”.

    One thing we need more details about is the Silk browser. Andy Ihnakto tweeted that this could be the most significant part of today’s announcement. First a mobile browser, next a search engine with Amazon-optimized ads?

         
  • Avatar

    Posted: 28 September 2011 03:37 PM #4

    This is a new tablet business model, fully equipped to tackle apple for sure. Sell at cost, make money on content & apps.

    Anyone doubting that a 10” version of this thing isn’t coming soon, needs their head checked. Considering the 16 gig iPad 2 likely cost less than $300 to produce, amazon could easily bang out an iPad 1 comparable 10” model with 8 gig of storage for $299, they might even make a small hardware profit when they sell it through there website direct rather than through a retailer.

    Just as the iPad disrupted the market for cheap netbooks & PCs by offering a “good enough” computing experience at a similar or cheaper price, the kindle fire has a shot at disrupting iPad sales by offering a “good enough” tablet experience at a cheaper price.

    The big problem for amazon will be international distribution & sales (which is pathetic compared to the US operation) - as far as I can tell the kindle fire is US only, and I’m guessing will remain so for at least a year.

    Bring on the 5”-7” ipod touch for $249!

    Signature

    Full Disclosure:

    - Long Apple
    - Pro: Apple HDTV, iPhone Air, Stock split, Consumer robotics

         
  • Avatar

    Posted: 28 September 2011 04:05 PM #5

    Seems the Kindle Fire (not the best name) may not be too shabby.  Dual-core is certainly a plus.

    But Amazon seems to be making loss leaders out of all of the new Kindles.  The exact opposite of Apple.

    And Kindle Fire will _not_ be subsidized by ads?  Curious.

    Amazon has the resources to fund the Kindle Fire and it will.  But anyone thinking Amazon’s making any significant margin, if at all, on the Fire may find themselves very disappointed.  The Kindle Fire is “closed” to the world around it in many ways (no cameras or 3G…which…was…a pretty big thing for Kindles), and Amazon will be forced to make it up in media/content sales.  But if Apple, one of the Kings of Content, isn’t making all that much money off the “blades”, to use the razor analogy, what makes Amazon any different?  Gazillions of e-book sales?

    Signature

    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
  • Avatar

    Posted: 28 September 2011 04:06 PM #6

    iOSWeekly - 28 September 2011 06:37 PM

    ... Just as the iPad disrupted the market for cheap netbooks & PCs by offering a “good enough” computing experience at a similar or cheaper price, the kindle fire has a shot at disrupting iPad sales by offering a “good enough” tablet experience at a cheaper price ...

    That’s what I want to say :evil:, Kindle Fire = micro oven, iPad = oven.  We would need to go to the store to try one out.

    Signature

    Stay Hungry. Stay Foolish.  - Steve Jobs

         
  • Avatar

    Posted: 28 September 2011 04:16 PM #7

    Mav - 28 September 2011 07:05 PM

    Seems the Kindle Fire (not the best name) may not be too shabby.  Dual-core is certainly a plus.

    But Amazon seems to be making loss leaders out of all of the new Kindles.  The exact opposite of Apple.

    And Kindle Fire will _not_ be subsidized by ads?  Curious.

    Amazon has the resources to fund the Kindle Fire and it will.  But anyone thinking Amazon’s making any significant margin, if at all, on the Fire may find themselves very disappointed.  The Kindle Fire is “closed” to the world around it in many ways (no cameras or 3G…which…was…a pretty big thing for Kindles), and Amazon will be forced to make it up in media/content sales.  But if Apple, one of the Kings of Content, isn’t making all that much money off the “blades”, to use the razor analogy, what makes Amazon any different?  Gazillions of e-book sales?

    Maybe amazon is happy to make a similar average profit to apple from content sales to each kindle owner, and doesn’t mind foregoing the hardware margin that apple also gets. So for examole it’s going for $50 average per user per device sold over it’s lifetime use, whereas apple gets that same $50 + the extra $200 or more from the hardware sale.

    Signature

    Full Disclosure:

    - Long Apple
    - Pro: Apple HDTV, iPhone Air, Stock split, Consumer robotics

         
  • Avatar

    Posted: 28 September 2011 04:18 PM #8

    Lifetime, though.  _Lifetime_?

    Bad business model, if you ask me.

    Signature

    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
  • Avatar

    Posted: 28 September 2011 04:29 PM #9

    Mav - 28 September 2011 07:05 PM

    But if Apple, one of the Kings of Content, isn’t making all that much money off the “blades”, to use the razor analogy, what makes Amazon any different?  Gazillions of e-book sales?

    The difference is Amazon also sells physical products. If they can get a significant number of new Amazon Prime members, that alone could make it worthwhile for them. Remember that Amazon’s margin targets are much lower than Apple’s. Wall Street doesn’t seem to care much about that and focuses primarily on revenue growth.

         
  • Posted: 28 September 2011 04:30 PM #10

    It’s an Amazon catalog. They used to come in the mail from Sears.

         
  • Avatar

    Posted: 28 September 2011 04:41 PM #11

    Drew Bear - 28 September 2011 07:29 PM
    Mav - 28 September 2011 07:05 PM

    But if Apple, one of the Kings of Content, isn’t making all that much money off the “blades”, to use the razor analogy, what makes Amazon any different?  Gazillions of e-book sales?

    The difference is Amazon also sells physical products. If they can get a significant number of new Amazon Prime members, that alone could make it worthwhile for them. Remember that Amazon’s margin targets are much lower than Apple’s. Wall Street doesn’t seem to care much about that and focuses primarily on revenue growth.

    I’d mentioned that in prior musings.

    But it’s as I’d said before - Amazon fans are already Amazon fans.  Not-quite-so-big Amazon fans probably already shop Amazon anyway.  You can shop on Amazon from anywhere on every major platform.  I can’t see much incremental gain on the Amazon “Stuff” side of things.  You can redirect purchasing power to a degree, but you won’t increase it much in this economy.

    That WS cares only for revenues for Amazon is a running joke.  One day I’ll try to be there when the laughter stops.

    Signature

    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
  • Avatar

    Posted: 28 September 2011 04:46 PM #12

    They are willing to accept paltry margins for their products and as the low cost seller they will convert lots of consumers into the Amazon ecosystem.  They haven’t gained much traction against Apple with digital media except for books which they could tie into their kindle reader.  I think Amazon will capture the low end of the market for price sensitive buyers, but as far as Amazon stock, they are losing money on every sale so the better they do in sales the more their margins suffer and it’s not like they have much in margin to give up.  Not a good short candidate, but at some point the P/E has got to collapse into a realistic range.  The kindle fire is a good enough device at $200 but what is the strategy to make money.

         
  • Avatar

    Posted: 28 September 2011 04:48 PM #13

    pats - 28 September 2011 07:46 PM

    The kindle fire is a good enough device at $200 but what is the strategy to make money.

    Amazing how so many companies and commentators don’t think much about that “making money” part.

    Signature

    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
  • Avatar

    Posted: 28 September 2011 04:54 PM #14

    Some important missing components required for wide range consumption:
    Camera, microphone (no FaceTime, dictation, voice control).
    GPS, aceelerometers
    I believe Amazon stores are largely US-centric. i.e., would need to open up International stores to compete internationally.

         
  • Avatar

    Posted: 28 September 2011 04:56 PM #15

    You mean to tell me the Fire doesn’t even have an accelerometer?

    No, I’m pretty sure it must, even if it wasn’t mentioned.

    [ Edited: 28 September 2011 05:30 PM by Mav ]

    Signature

    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.