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?
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.