Kindle Strategy Fires Amazon's Future
Amazon is willing to sell its core tablet device at a loss (one-quarter its list price) and at painfully low margins because it is an efficient point-of-sale storefront in its expansive connected e-retail ecosystem. Its inventory of 18 million songs, books, movies and television programs -- as well as a healthy dose of Android apps -- are hook offerings that lead to everything else.
That overriding dynamic makes Amazon's entry into the e-tablet wars a very different value proposition than its competitors, including Apple. The surprisingly low $199 price point will especially undercut smaller competitors and force more affordable hardware and software economics-even at Apple. (Best Buy immediately discounted Research in Motion's PlayBook by $200.)
But that's not the only or smartest way to assess what's going on.
Amazon founding CEO Jeff Bezos, one of the most understated visionaries of our time, said it best in an interview. The Kindle Fire is "a service" that provides "seamless integration" to all things Amazon for the world's largest online retailer. That all-encompassing connection is secured by Silk, Amazon's new proprietary Web browser, which delivers instant EC2 cloud computing Internet access to all media and communications on its tablet devices.
That represents a unique pipeline for marketers, as well as content providers, wanting to connect with consumers on very specific fronts, or any interest, subject or location that can be parsed by the magic of algorithms. Some of these connections are also being facilitated by Amazon's rollout of diverse new "revenue growth runways," such as verticals in consumer staples, international expansion, Amazon Web Services, and digital media offerings.
Marketers and content providers can follow consumers from their point of entry into the Amazon ecosystem, where valuable viral connections do all the heavy lifting. Those that create a new interactive presence in that richly assimilated setting can take advantage of Amazon's intricate support Web.
Amazon's Kindle Fire strategy is designed to bring consumers closer to the bigger, most important play: everything that Amazon sells and does to support those sales. Pre-loading the Kindle Fire and its other devices with its new AmazonLocal daily deals and services stimulates connections between buyers and sellers in all corners of its $65 billion annual sales marketplace.
That massive proposition dwarfs Apple on many fronts, including the ROI for consumers and merchants. While Apple's commanding lead is secure, Amazon's options eventually will prompt some consumers and content providers to question whether they want to pay a 30% premium just to use its closed iTunes service on iPad and other brand hardware.
To be sure, the Kindle Fire strategy clearly helps to protect the media-related sales that generate more than 30% of Amazon's revenue. That, in turn, helps to bolster Amazon revenues against recessionary hits, although Amazon's online e-tailing is on a growth trajectory that appears more insulated from economic pressure than traditional brick and motor retailers.
Amazon's accelerated partnerships with NBC Universal, Twentieth Century Fox, CBS and others position it to become a de facto Netflix. If it acquired Hulu, it could easily bundle it with other content services and leave it under the capable administration of Jason Kilar, Hulu CEO and former Amazon executive.
Kindle Fire's alignment with the Android operating system also puts Amazon in line to do more with Google and its YouTube video service to become a dominant video streaming player.
But, unlike Apple, that is hardly Amazon's only game.
Amazon's latest push across interactive silos and conventions with a core tablet that covers all of the most important functions -- Web surfing, e-reading and video streaming -- will make venturing into its sticky interactive consumer vortex a much more lucrative endeavor.
CitiGroup analyst Mark Mahaney forecasts 75 million in global tablet shipments in 2012, up 50% from 2011. Taking 10% market share would generate about $2 billion or only about 3% of overall revenues for Amazon, which underscores the other more lucrative business considerations at stake. For starters, the Online Publishers Assn. recently reported half of all tablet users respond to relevant advertising, more than one-quarter pay for the apps they download, and more than one-third seek bundled deals.
Barclays Capital analyst Anthony DiClemente expects Amazon's ubiquitous cross-platform, cross-device strategy with the Kindle, which accounts for $4.3 billion in sales, or 9% of total revenues this year, is key. It will eventually be applied to its new tablet, transitioning focus from physical to digital media products.
He expects digital media sales to eventually contribute a larger percentage of revenues than the actual Amazon tablet sales. That is good news for any company seeking to use media sales as a springboard to connecting and transacting with consumers on other fronts. For instance, Kindle's share of dedicated e-reader market will grow to 70% in 2013 from a current 68%. Kindle unit e-book sales will grow to 1.5 billion in 2013 from 376 million in 2011, according to DiClemente. That will boost total Kindle book revenues across all platforms and devices to $6.8 billion in 2013 from $1.9 billion this year.
A postscript to all the brouhaha: initial focus on the long-term impact of Amazon's tablet strategy, both for the company and multiple industries, has been wildly oversimplified and misunderstood. The press and some analysts are still gnashing teeth over the absence of a camera, microphone and cellular connections on the Kindle Fire. So what?! The Kindle Fire delivers the key activities consumers most want.
There is plenty of room for diversity of product and service offerings to meet consumers' varied interests and needs. The days of one-size-fits all or even most are gone. That is indicative of the myopic thinking that could be a huge impediment to monetizing the new dynamics and opportunities presented by Amazon's Kind Fire strategy.