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Is Hardware’s Loss Retail’s Gain?

So far, it looks like the strategy of selling hardware at a loss is working for {complink 11480|Amazon.com}. (See: IHS iSuppli: Amazon Kindle Fire Costs $201.70 to Manufacture.)

According to the market research firm IHS iSuppli, the $199 Kindle Fire's global marketshare will move from zero in the third quarter to about 13.8 percent by the end of the year. It isn't yet threatening the iPad's dominance — {complink 379|Apple Inc.} still holds more than 65 percent of the tablet market — but Amazon has already eclipsed {complink 4750|Samsung Corp.}

Rhoda Alexander, senior manager of tablet and monitor research for IHS iSuppli, put it this way in a press release:

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. Initial market response strongly suggests that Amazon, with the Kindle Fire, has found the right combination of savvy pricing, astute marketing, accessible content, and an appropriate business model, positioning the Kindle Fire to appeal to a brand-new set of media tablet buyers. The production plans make it clear that Amazon is betting big on the product.

Part of Amazon's “secret sauce,” according to IHS iSuppli, is initially offering some content for free. With each purchase of a Kindle Fire, buyers get a one-month membership to the Amazon Prime service. In addition to offering free access to movies and TV shows and allowing consumers to use the Kindle ebook lending library, Amazon Prime includes free two-day shipping on millions of items on the company’s site. This, in turn, promotes sales of physical goods on Amazon.com, says IHS iSuppli.

Amazon's timing is perfect — the Kindle Fire was released right before the holidays, and Amazon Prime is a good reason to shop at Amazon.com. But once the holidays are over, will users stick with the Kindle Fire? Personally, I buy hardware for its attributes. Free subscriptions are a nice incentive, but I usually let them expire once they've run their course. For example, our Honda Accord came with a free subscription to Sirius radio, which was not compelling enough to renew once the subscription had lapsed. Obviously, we are talking about a much higher investment in a car than in a tablet, and Honda doesn't own Sirius. It has nothing to lose by giving buyers a free peek.

But you have to wonder what would happen to the Kindle Fire if Apple lowered the price of the iPad — as IHS iSuppli thinks it will do. From the press release:

While Apple remains dominant in the media tablet market, speculation is rife that the company will respond to the Kindle Fire’s aggressive pricing with a lower-cost version of the iPad.
A far more likely scenario is that Apple also may reduce the pricing on the iPad 2 when the company introduces the iPad 3. This will provide a value alternative for entry-level users in the same way that the company continued to offer the iPhone 3 when it rolled out the iPhone 4. 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.

Either way, it's good news for the electronics supply chain. IHS iSuppli now predicts that 64.7 million media tablets will ship worldwide in 2011, compared with the 60 million forecast it issued in August. The new total would represent 273 percent growth from 17.4 million units in 2010. Sales of the Kindle Fire alone will account for much of the growth in sales, the research firm says.

19 comments on “Is Hardware’s Loss Retail’s Gain?

  1. Nemos
    December 2, 2011

    Amazon sell books and to sell also devices like e readers it is a great move. With i pad can you read e books from Amazon ? The answer is No you can't so even if Apple reduces the price of the ipad doesn't mean that has a competitive product. Also one question which company produces the Kindle for Amazon?

  2. DataCrunch
    December 2, 2011

    The fact that Kindle’s new tablet has created such buzz and sales volumes is a great testament to Amazon’s staying power and innovative thinking within the company.                      

  3. _hm
    December 2, 2011

    To keep up the pace of innovation, Amazon will have to invest more in R and D. With no profit from Kindle Fire, how Amazon will sustain its future innovation in products?

     

  4. elctrnx_lyf
    December 4, 2011

    Even I do not understand how Amazon can make up the losses in seeling the tablets. Is there something really on Kindle fire or is there any huge set of applications that can earn money for Amazon?

  5. _hm
    December 4, 2011

    Perhaps someone at Amazon do not understand the price of R & D and takes myopic view for it. It may be that they outsource design to someone like TI or someone in India/China at firm and fixed price contract – a very low value. But is this a correct way of looking at future of company and its product?

     

  6. DataCrunch
    December 4, 2011

    @elctrnx_lyf – Here is an article that should shed some insight: How Amazon Makes Money From The Kindle

  7. bolaji ojo
    December 4, 2011

    Dave, Interesting article. Thank you for suggesting it and posting the link. It provides some insight into Amazon's strategy and goals. There's still more to the strategy, though, and it may not all be clear until later in 2012 when the company posts its 10K filing with the SEC. Then, we'll be able to offer more information on its strategy. We'll be on the watch.

  8. bolaji ojo
    December 4, 2011

    _Hm, Amazon's strategy is not as baffling as it may seem. As Dave Sasson pointed out, the Kindle is helping the company develop a system to be more competitive. I'll be focusing on this in a coming blog on how Amazon wants to take on established OEMs.

  9. SunitaT
    December 5, 2011

    Also one question which company produces the Kindle for Amazon?

    @Nemos, I am not sure who exactly is assembling Kindle. But the processor used in Kindle is manufactured by TI. Here is the detailed teardown report of Kindle by UBM :

    http://www.ubmtechinsights.com/teardowns/amazon-kindle-fire-teardown/

  10. SunitaT
    December 5, 2011

    how Amazon will sustain its future innovation in products?

    @_hm, I dont think Amazon needs to be serious about innovation because it never said its competiting with Apple. Infact real benefit of the Kindle Fire to Amazon will not be in selling hardware or digital content. Rather, the Kindle Fire, and the content demand it stimulates, will serve to promote sales of the kinds of physical goods that comprise the majority of Amazon's business.

  11. Nemos
    December 5, 2011

    Thanks for the link , I will check it , “The Kindle Fire was listed at $199 USD” it looks very nice. But still doesnt say who is the assembler.

  12. Eldredge
    December 5, 2011

    @tirlapur – good point – the Kindle is a means for Amazon to markewt their key competency, which is content, not electronics.

  13. JADEN
    December 5, 2011

    One thing is sure in the market, other apple's competitors would definitely working out strategies to have their own market share if they can't beat apple, I think that's what Amazon is doing.

  14. Barbara Jorgensen
    December 5, 2011

    Dave, thanks for pointing us toward the article on how Amazon makes money.

     I can't help but think the Fire is just a $199 shopping cart. I understand both Apple and Amazon have developed the ecosystems for their products and that is the key to their strategy. Yet I can shop at the iStore and Amazon.com on my PC. For me, the question is still PC vs tablet rather than Apple vs Amazon.

    But that's just me…

  15. bolaji ojo
    December 5, 2011

    Nemos, Amazon did not itself disclose the contract manufacturer that makes the Kindle but reports indicate the Kindle Fire is being produced for the company by Quanta Computer.

  16. Barbara Jorgensen
    December 14, 2011

    I've read several articles lately that blast the Kindle Fire. Apparently, users are having problems with the size (small screen/buttons) and speed (too slow) of the Fire. Amazon is going to offer a software upgrade pretty soon. One article suggests Amazon made browsing on others sites more difficult so they won't navigate away from Amazon.com. Interesting theory.

  17. Ashu001
    December 15, 2011

    Barbara,

    I won't be surprised if Amazon actually did this-After all,they are selling a subsidised gadget.

    And somebody has to pay for the subsidies right?Whether its implicit or explicit is immaterial.

    This subsidy is an implicit bargain that Amazon is making with its consumers.

    Take it or leave it.

    Regards

    Ashish.

  18. Ashu001
    December 15, 2011

    Barbara,

    This is the traditional way of looking at Devices.

    A Better way to  look at is from a usability issue- Are there places where you can use a Tablet and not a Laptop/PC ?

    Yes a Tablet has some interesting/unique uses and especially as you so clearly pointed out an- Excellent Extended Shopping cart!!!

    Also,how connected do you want to be to the Internet?If you want to do connected 24/7 u want a quality tablet/smartphone.

    What about cannibalising on existing devices??? Ah,well that is most definitely a strong possibility.

    Regards

    Ashish.

  19. Ashu001
    December 15, 2011

    Elderedge,

    Amazon's key competency is not its content but rather its marketplace.

    You really can't do better than that marketplace today,can You?

    Regards

    Ashish.

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