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peter

October 15th 2012 3:16 pm

Amazon's second tablet strategy

It's well-established by now that Amazon doesn't make any money from selling tablets. Instead their model is to break-even on the hardware and make money by selling access to content and services (which is partly why we described the Kindle Fire HD as being more of a "content appliance" than a proper tablet).

While it's a different approach than that of pretty much every other hardware maker, it is a relatively straightforward strategy. However I think there's an even more subtle aspect to it that I think has been largely overlooked, which is that Amazon is doing this not just to sell content and services on its own tablets -- they're using aggressively-priced tablets as way to lure consumers into its ecosystem, betting that once there they'll pay for Amazon content and services on whatever devices they use.

What's smart about this strategy is that it can succeed even if the iPad continues to be the dominant tablet for the foreseeable future. (Despite Bezos's insistence that they have the "best tablet at any price", I don't think he harbors any illusions that they're going to displace the iPad as the best-selling tablet in the world anytime soon.) Why? Because they're assuming that, just as it's now common for families to own multiple PCs (especially after the advent of the netbook), eventually most households are going to own more than one tablet, and that by pricing their line-up cheaply there's a good chance that even if someone already owns an iPad they'll consider one of Amazon's various Kindle Fire tablets as a compelling and affordable option.

Normally I'd argue that aiming to be somebody's second choice is risky, but in this case I don't think it's crazy. Think about it like this: if you own both an iPad and a Kindle e-ink reader, you most likely don't buy your e-books via iBooks, you probably buy them from Amazon since the Kindle app for iPad means you can read your books on both devices. Similarly, Amazon is hoping is that if you own both a Kindle Fire and an iPad, when it comes time to investing in a content and services ecosystem you're going to pick the one that's available across all (or at least most) of the devices you use. In this case it'd be Amazon's ecosystem, since you can access Amazon apps on the iPad, but you can't access Apple content on a Kindle Fire.

Now there's no question that Amazon's ecosystem has a long way to go -- Amazon Instant Video is clearly not as good as Netflix, for starters -- but they are clearly investing in expanding. Losing money by getting Amazon tablets into as many people's hands as possible really only makes sense if you can get people using Amazon services not just on their Kindle Fire, but on whatever else it is they're using for content consumption. Whether it'll work is too early to know, but you can bet that this is at least one of the reasons why Apple is introducing a smaller iPad later this month.

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7 replies
KenEsq

I think you're missing out on part of the strategy. It's not just the traditional content and services that Amazon is getting out there with its tablets, but the hard goods as well. Remember, Apple isn't really Amazon's major competitor...Wal-Mart is. Having an easy to use catalog in the hands of people is not a bad thing...especially if you flip the Prime model and say the video service costs $80/year and includes free 2-day shipping.

The other question when you compare a Kindle Fire HD and an iPad. What does the iPad really do for that 90% of the tablet marketplace? I can see some iPad owners purchasing Kindle Fires and using both...but I can see a lot more non-tablet owners purchasing Kindle Fires and never having the need to purchase an iPad. Apple will continue to sell a lot of tablets...and if the iPad mini rolls out at a ~$399 they'll sell even more...but with the quality difference between the Kindle Fire and the iPad closing I believe the units sold figures will move (dollars, however won't).
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peter

You're misreading my post. This is just one part of their strategy, not their exclusive strategy. Physical goods sales is definitely part of what they're doing, what I'm arguing is that there is a subtle benefit to their tablet strategy, which is that it will help them with content and services sales on non-Amazon tablets as well.
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KenEsq

Fair enough...I guess what I was stating was that your thoughts while probably true come down the list a bit.
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ssstraub

iPad mini is expected to be much less than $399. Not sure where you are getting that number from.
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Avi

I agree, up to a point. If Amazon wants to fully build out this value proposition, though, it will need its iOS and Android apps to do more than just read books.
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peter

I have the Instant Video and Cloud Music apps on my iPad.
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btate0121

I think you've nailed it. I own a kindle, an android phone and 2 android tablets. I wouldn't think for half a second about buying books from Google despite being a fan for 2 reasons. 1) I already have money invested in kindle and it works WELL on all platforms I use. 2) I have a great ereader that couldn't use books from google. No go for me.

They seem to be going the opposite direction from Apple. THIS is why I LOVE the open and free market. It inspires creativity for businesses to stay competitive and in the end consumers win. I've always seen Apple as the bad guy for pricing they're devices so high. Then a high quality alternative appeared and boom. I win. Amazon has found a way to offer users MORE while making MORE without giving out services or content no one wants. They're doing great.
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