Kindle Fire Poised For No. 2 Spot Behind iPad

Kindle-Fire-Just two weeks after its launch, the Kindle Fire is already racing ahead of other iPad rivals to become second in worldwide media tablet sales in the fourth quarter, according to a new study. Research firm IHS (formerly iSuppli) estimates Amazon will ship 3.9 million Kindle Fire units in the last three months of 2011, making it second in market share only to the dominant Apple tablet. 

The Kindle Fire's projected 13.8% share of tablet shipments in the quarter would push it past Samsung’s 4.8%, though still trailing Apple’s commanding 65.6% share with the iPad. IHS projects the rapid rise of the Kindle Fire will fuel expansion of the overall tablet market, with the added shipments contributing to a 7.7% increase in its table forecast for 2011.

It now predicts media tablet shipments will reach 64.7 million units this year, compared to the previous forecast of 60 million. That estimate reflects nearly fourfold growth from 17.4 million units in 2010. IHS also increased its long-term outlook, estimating shipments will rise to 287.2 million in 2015, up from the prior estimate of 275.3 million.

“Nearly two years after Apple Inc. rolled out the iPad, a competitor has finally developed an alternative which looks like it might have enough of Apple’s secret sauce to succeed,” said Rhoda Alexander, senior manager, tablet and monitor research for IHS, in a statement. She added that Amazon had found the right combination of pricing, astute marketing and accessible content to take on Apple in the tablet wars. 

Amazon has been characteristically tight-lipped about the $199 Kindle Fire sales. But it has said sales of its Kindle devices on Black Friday quadrupled the number sold last year on the day after Thanksgiving. Some Wall Street and industry analysts have predicted Amazon could ship as many as 5 million Kindle Fire tablets in the fourth quarter. 

If the Amazon tablet isn’t an immediate threat to the iPad’s supremacy, it’s already a problem for other Android-powered tablets, including Samsung’s Galaxy Tab.

“Most other Android tablet makers must earn a profit based on hardware sales alone,” said Alexander. “In contrast, Amazon plans to use the Kindle Fire to drive sales of physical goods that comprise the majority of the company’s business.” 

As long as that strategy works, Amazon can afford to take a loss on its hardware, while other Android competitors can’t. A recent IHS “teardown” analysis found it cost the online retail giant $201.70 to build the Kindle Fire, slightly more than its selling price.

Amazon, of course, also aims to make money by offering a range of digital content through its new tablet, including books, magazines, movies and TV shows. To promote e-commerce activity, each Kindle Fire ships with a one-month trial subscription to Amazon Prime, the company’s membership service providing free two-day shipping and free access to movies and TV show rentals. 

This week, the company announced Amazon Santa, a free tablet app that allows users to create Christmas wish lists of items sold through its site.

But Amazon’s push to sell more goods through Amazon Prime has caused concern on Wall Street, given the program’s impact on margins. In a research note released Friday, however, Macquarie Group analyst Ben Schachter concluded the free-shipping program was not “broken.” “Overall, we believe Prime dramatically increases AMZN’s revenue and gross profit dollars, but that it also negatively impacts overall gross and net margins,” he wrote.

The investment firm is pursuing a study of Amazon users in relation to Prime to learn more about its effect on the company's business.

A broader question IHS takes up is how Apple will respond to the emergence of a credible tablet rival in the Kindle Fire. There has already been widespread speculation that Apple will seek to blunt Amazon’s aggressive pricing with a lower-cost version of the $499 iPad. But HIS surmises the company may simply reduce pricing on the iPad 2 when the iPad 3 is released.

“This approach would allow Apple to maintain its target profit margins on both the iPad 3 and the iPad 2, while offering end-users an ever-expanding family of products,” the report concludes, similar to the company's approach when rolling out new iPhone models. IHS does not venture a guess on how much Apple might cut the price of the iPad 2.

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