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The case against the Kindle as a low end tablet disruption

In an Harvard Business Review post Rob Wheeler makes the case for the Kindle Fire as a disruptive innovation. I believe that it is but crucially I disagree that the Kindle Fire is a low end disruption.

My assessment of the Kindle Fire is based on the two attributes which Amazon highlights as the key selling points which offer a basis of differentiation and potential for asymmetric competition: a low price and a new browsing model. I believe that these two attributes result in two opportunities: one for low end disruption and another of new market disruption. I reject the first and tentatively support the second.[1]

The price

It’s immediately obvious that the price point of the Kindle Fire is well below alternatives. That forms the basis of disruptive potential, but before we jump to analyzing the disruption hypothesis we should determine whether and to what extent Amazon profits from the device directly. Profitability gives us a clue to where Amazon will apply resources and thus establish its trajectory of improvement.

We know the margin on the Fire is low because we can calculate the bill of materials for 7″ tablets. Gene Munster of Piper Jaffray estimates that Amazon “loses” $50 for each unit sold. We also know that the design Amazon used is essentially very similar to the RIM PlayBook and was sourced from the same ODM. RIM priced the product at $499 but has struggled to find buyers and is reluctantly dropping the price. We also can estimate that Apple with a product having more than twice the screen size is keeping modest (~30%) gross margins for at a price point approximately double that of the Fire. It does seem that Amazon does not have much or any margin to dip into.[2]

So the Fire can be classified as a low price product. Does that make it a low end disruption?

Disruption requires asymmetry but it also requires the ability to go up a trajectory of improvement along the basis of performance that a majority of users demand. The first condition is met, but what of the second? In a combined system where one asset is used to leverage another–the subsidized being sacrificed to benefit the profitable–success is conditional on one element being “good enough” while the other “needing improvement”. Investment follows accordingly.

But investment decisions have consequences. The subsidized device is starved of investment while the profitable service is nurtured. We see evidence of short cuts in investment in the off-the-shelf nature of Kindle products: from a second-hand (unsanctioned) OS to a second-hand (ex-RIM) hardware. Meanwhile, Amazon spends heavily on capex for the infrastructure that delivers the profitable content.

If the hardware is indeed commoditized and cannot be usefully improved, then this model works. If, on the other hand, the hardware and systems software can benefit from dramatic improvements in technology then the model fails. The very asymmetry of a service vs. a product turns into the latter having all the advantages and the former failing to gain traction.

I’ll give three examples of this how service model creates limitations which lead to a failure to disrupt a product model.

The Game Consoles

The first is the game console business. In consoles, the vendors maintain long hardware product life-cycles to recover their hardware investment and subsidy by maximizing the number of games attached to each console. If you plot product cycles you realize that the bigger the subsidy, the longer the hardware lifecycle. The result is a very wide turning circle which prevents innovation in new dimensions.

Consider that the Playstation or the Xbox could have been a low end computing disruption. The original Xbox was in fact a PC. It was supposed to bring PC dynamism to the console business and create a cottage industry of new developers building games on commoditized hardware. However by the second generation the Xbox was a locked down, custom architecture, pure gaming machine. Gone was Intel, gone was the PC architecture and gone was any dream of cheap development.

This is entirely due to the economics of subsidized hardware. It compelled Microsoft, the world’s greatest software company, built on the open and cheap PC architecture to make closed, expensive hardware. Sony followed in kind as did Nintendo. Each generation of consoles was a sustaining improvement on gaming and had no ambition beyond gaming[3]. The subsidy and the dependence on an integrated content value network led to a distinct lack of disruption and an insular industry which continues to seek out increasingly immersive experiences for increasingly demanding customers while itself being disrupted by casual, mobile gaming.

The Set-top boxes

The second example is the TV set-top box business. There again, the vendors maintain long hardware cycles in order to recover subsides. There too, the main value driver is the content and its distribution which stipulates the architecture, and through subsidy, defines its evolution. This offers the vendor no motivation to improve the user experience[4], secondary uses or the absorption of new streams of content (like those the internet can offer.)

Again, the set-top box could have been a budding disruptive opportunity for Microsoft. They invested billions in the 1990s to acquire placement of software on set-top boxes in an attempt to penetrate the living room. And again Microsoft was not alone. Since then Tivo, Google and Apple and many others tried to attach cheap hardware to video streams. They all failed to get on a disruptive trajectory. And again, the blame can be placed on the stifling effect of subsidies and dependencies on services or content which dictate where the value and hence the investments should go.

The Blackberry

The third example is the RIM Blackberry. Although RIM made most of its money on hardware and was by no means subsidizing it, the differentiation of their product was undoubtedly its service value. Both as a corporate device with BES and as a consumer device with BBS, customers “hired” the product as a service. By being committed to this model RIM management became blind to the hardware and client OS software innovations coming down the pike.

Through their own admission, they could not accept a touch screen because it would make the messaging experience too slow and it is messaging that sells Blackberries. They could not accept apps (and hence platform orchestration) as a differentiation because their customers did not hire Blackberries for “lifestyle apps”. Merely being differentiated as a service leads to blindness and enough hesitation that you run off the disruptive rails.

People ascribe myopia or incredible absence of mind to RIM’s management but the opposite is true. They were deeply committed and observant of the things which made the Blackberry successful. It just happened to be something that stopped being relevant.

The iPhone

I’ll add one more “bonus” example on this. The iPhone is also a subsidized product and it seems very successful. How come it won? The answer is in details. As I mentioned, the other products ended up in poor life cycles or incorrect motivations. The iPhone differs in that the lifecycle of the product is much shorter (2 years ownership with 1 year for product updates). The shorter lifecycle works for the iPhone because it has a very high service revenue base to dip into to offset the subsidy. Something none of the content models above could count on.

Consider that each game console subsidy needs to paid off by a handful of game titles whose royalties to the console maker are modest. Or that the TV box needs to ride on top a service that also has thin margins from a stable or slightly shrinking user base. In contrast, the iPhone enables vast new consumption worth thousands of dollars to the operator. This is the famous ARPU uplift that smart phones enable. Users are doubling their telecom spending when they move to smartphones.

The margins for Kindle content are thin. Very thin. Apple runs its content business at break even though it transacts billions of items per month. The amount of content that needs to pass through the Kindle ecosystem (with lower prices than Apple charges) will need to be astronomical to make it profitable on the shortened cycle time the iPhone enjoys. Thus the Kindle is likely to languish in a leisurely update cycle with users encouraged to hang on to their devices for years. This is the case at least with the original e-Ink Kindles. How eagerly awaited are new generations? How many users stampede to update the hardware or even upgrade the software? How many users have owned every version of the Kindle?

Service Scale

Finally one last point about services. As Amazon asserts, they see Kindle as a service, which, I concede, is asymmetric to a product business. The problem is that services don’t scale as well as products. Consider that none of the content streams that Amazon will depend on are available outside the US. The Kindle has not been a strong seller internationally. This is because book rights are limited to national boundaries as are movie rights and song rights. Apple has only this week finally completed the rollout of iTunes music to all of Europe! A process that took almost a decade. And they are still unable to sell music in most of Asia and forget about movies or TV shows.[5]

The reality is that there are no global service brands. Not in telecommunications (operators are, at best, regional), not in Media (TV, radio, publishing are a local businesses), not in Banking (not even in commercial banking) and not in Retail (even Wal-Mart was humbled trying to export its disruption). The internet has not broken down any of these boundaries and even Amazon has modest reach outside the US for any of their franchises. Services are local but products can be global.[6]

To wrap up, this discussion on the asymmetry of device-based services to product models leads me to conclude that the Fire will not have the opportunity to disrupt the iPad or tablets in general. Amazon sees the hardware and software of a device as a commodity and the content and its distribution as valuable. This assumes that the device is “good enough” and will not require deep re-architecting or that new input methods can be easily absorbed. In short, they see the tablet as at the end of its evolutionary path. Apple sees the exact opposite. The iPad is 18 months old, and as they say in the ads, they see it as only the beginning.

Notes:

  1. Due to length of discussion, in this post I will make the case against the low end disruptive potential and use a second post to make the case for it being a new market disruption.
  2. Presumably, Amazon will also distribute only through Amazon.com and thus not incur channel mark-ups. This means that comparisons with other tablets should be at a price nearer to 70% of retail.
  3. Gaming networks and video streaming are extensions but neither leveraged open architectures.
  4. See also discussion from June 2010 on the challenges to Apple TV that Steve Jobs enumerated.
  5. Apps are another story. Because it controls the medium, Apple can and does sell apps in every country where the iPhone or iPad or iPod touch is available.
  6. Note also that because of distribution through Amazon.com, the Kindle cannot reach as many buyers as a tablet selling through the tens of thousands of points of purchase that operators and retail shops offer.

 

  • http://pulse.yahoo.com/_5BHLNE6HC75ETNMNDKEEKLMF3M Steve Pederson

    When MS introduced the Zune, part of its strategy was to undercut iPod in price. But this wasn’t the Apple of the 90s and Apple helped spoil the launch by pricing its new generation more aggressively than MS expected. MS suffered low margins without a price advantage.

    Kindle Fire has an advantage in that Apple doesn’t have a product in the exact form factor. But Amazon is far more vulnerable to a price war than MS was… Amazon doesn’t have a high margin monopoly product to subsidize its follies.

    This isn’t the mac business or the iphone business. This is, essentially, the iPod business. As John Gruber would say, “popcorn please.”

    • rashomon

      Others have already said it, but I think emphasis should be added: The Kindle Fire is an iPod Touch, not an iPad competitor. Understanding that will help understand where Apple will retaliate. Even with subsidies, Amazon is going to find the 10″ tablet market much tougher competition — I don’t think Apple will let them get substantially under them in price, and with the mother of all economies of scales (they must be consuming close to half the world’s flash memory production), they certainly have room to price the iPad2 lower when the iPad 3 Retina ships.

  • Ben Rosengart

    I know this post is about Fire, so I apologize for focusing on your iPhone digression.

    I’m intrigued by your comment to the effect that iPhone profits are enabled by high service revenue. High service revenue implies limited competition/commoditization in the network market. But the smart-terminal/dumb-network model seems to tend in the other direction. Under what circumstances will these constraints collide?

    I understand that the networks are defended from commoditization so long as they are not “good enough”. However, it seems to me that the iPhone, and the smart-terminal trend it represents, encourage them only to add value through sustaining investment, not through innovation.

    • http://www.asymco.com Horace Dediu

      The huge profitability of the iPhone (50% gross margin or more) is due to a very high price point ($630 or about the same as the iPad which is a far more expensive product to produce). The reason Apple is able to get this huge margin on the iPhone (and not on the iPad) is because the product benefits from subsidy. But that subsidy could not happen if the ARPU uplift was not there to compel operators to pay the price.

      The operators which have the iPhone are enjoying increased competitiveness as well. Since not all operators have the phone, there is increased churn into those who do.

      The iPhone encourages network upgrades (sustaining as you point out) but it will eventually lead them to innovate on something other than technology: pricing or service plans. But the point remains that operators are not in a position to create disruptive growth.

      • Ben Rosengart

        When the operators begin to compete on pricing, they will no longer generate the high ARPU which enables them to pay Apple so much for phones. That’s my point. iPhone profits depend on high ARPU, but technologically, iPhone moves the locus of innovation (and thus of profit) out of the network and into the terminal. It seems to me that this creates a time limit for those fat iPhone margins.

      • http://www.asymco.com Horace Dediu

        I agree. I don’t think the iPhone price point will be as sustainable after most of the market is penetrated. The business will have to shift to a higher volume, lower price point model in a year or so.

      • Matt Gunson

        iPhone nano.

      • Anonymous

        iPod WATCH strikes me as a more interesting direction.

        IPod nano is a frustrating product because it’s not quite there. If it could me made more like a watch (waterproof, charges from body motion, can fully operate via WiFi/Bluetooth) it’s much more desirable. As an iPod, it can debug the various issues without requiring full iOS and everything that entails.

        Beyond that, the sensible solution is not a stand-alone phone watch, it is that the watch is essentially a secondary screen for the phone. When the phone rings, your watch can ring, and you can answer the call or dismiss it by tapping your watch, but all the smarts (CPU and cell radio) still live in the phone.

        I think (or at least hope) that Apple are aware that what makes them special is producing a quality product at a reasonable price, and they gain nothing by trying to compete in the “not quite quality product at a slightly cheaper price” market. We have seen, for example, that they abandoned the Bluetooth headset market (too early IMHO), conceding it to commodity producers rather than spending money to make a headset that was qualitatively different.

        Apple’s advantage going forward is, ever more, a suite of devices that work together, enabled by iCloud, rather than single knock-out devices. As long as they continue to fill in the gaps in their product line (which may require the introduction of a 7″ iPad — I’ve no idea how strong demand for 7″ really is); and as long as they can ensure everything works seamlessly together (and they can do this a lot better than Amazon, and somewhat better than Google) they can abandon the low-end $1/phone profit market to Nokia et al.

      • JDT

        I think that the iPhone is already too big of a disruptor to be dropped by any carrier regardless of ARPU (unless it went incredibly low). It would be one thing if a carrier never had it, but to have it and drop it, seems like a terrible idea. Imagine if AT&T dropped the iPhone. Maybe Verizon could get away with it for a while but after a couple of years, customers would be used to the idea of the iPhone and would either switch carriers or create a massive uproar. On top of that:
        1- Operators’ cost reduction may help keep ARPU high.
        2- I think we can see this sort of competition in EU markets to no detriment to iPhone sales or price.
        3- I think the unsustainability (is that a word?) of the iPhone will happen gradually. A few operators may be forced to drop the iPhone but this will only give others a huge competitive advantage. Those carriers who lose the iPhone will probably lose a ton of customers are well. Because the iPhone is increasingly become the most sought-out phone (and I think it will be so much more so after Tuesday – I can’t wait!), it will be very dangerous for a carrier to simply drop it or even charge more for the handset than other operators.
        4- When the iPhone becomes unsustainable, won’t will most other high-end phones as well? And if that is the case, what will the carriers sell that uses their more expensive networks and plans to recuperate their ARPU?
        5- I don’t think the iPhone moves the locus of profit from the network to the terminal. I think it simply makes them share more of that profit with the terminal. A terminal that in turn brings more customers to the higher tiers.

      • Ben Rosengart

        I agree that operators might drop the iPhone, but if ARPU drops too low to recoup subsidies, I don’t see how Apple avoids price concessions.

        I’m not sure of this, but I think EU operators keep prices high despite competition because mobile networks aren’t good enough. My original question above was, what happens to iPhone prices when mobile networks reach sufficiency. If I understand Horace’s answer correctly, he is implying that it’s moot because loss of exclusivity will undermine operator pricing (hence iPhone pricing) before we reach that point. Is that right, Horace?

      • Ben Rosengart

        I meant *won’t*, not “might”. Doh.

      • Ben Rosengart

        How will market penetration break the iPhone pricing model? Because carriers won’t be able to sustain ARPU without exclusivity? Or because Apple will want to add customers who can’t afford such high-priced service plans?

      • http://www.asymco.com Horace Dediu

        I should have said the _average_ price will have to drop. I think it will make sense for Apple to keep a portfolio of iPhones that span a wider price range. I think iOS has the potential to be in use by 1 billion users and that will not happen with a single price point.

      • Ben Rosengart

        So the current pricing model won’t be disrupted, so much as abandoned in search of a larger market. Makes sense.

        Thanks for your clarification.

      • chandra2

        Ben, I do not understand what you say above, especially as to how the ‘abnadonment’ follows from what Horace said. Please clarify.

      • Zunguri

        Wouldn’t it make more sense for them to continue with their phased EOL approach? This has so many benefits for them in supply chain management, minimization of support and R&D costs, etc. Adding additional devices will diminish their ability to stay ahead on the UX metric.

        BTW, if you take into account the pricing of older gen product, you could say that average price has already begun to drop. If it were any other company I’d agree with you that saturation will bring about price drops; it’s economics. However, when I look at historic trends in Mac pricing I’m still impressed that they’ve been able to hold onto their premium in that market. So perhaps a smaller share of the overall market (that top-end share) is what they will settle for in the mobile device market while they move on to CE.

      • Anonymous

        Operators won’t really compete on pricing (as Horace observes) until all operators have access to a competitive handset offering. But the transition to that world might be very interesting if Apple can create a differentiated subset of the networks that works on its own pricing — say, that Apple buys data access wholesale and resells it at retail with differentiation that voice commands, app, iTunes, ad and other Apple-proprietary data transfers come at zero cost.

        So I think your little digression is exactly to the point of this fine piece illustrating an important business-analysis model. It helps us look over the horizon a bit.

  • http://www.facebook.com/people/Manish-Bansal/1331915958 Manish Bansal

    Excellent analysis, as always. I am surprised by your ability to keep coming up with these kind of new ideas (much like Apple).

    Kindle Fire is going to fail, in my opinion. In addition to all the points mentioned by you, Fire lacks the very qualities which made Kindle famous in the first place. It doesn’t have the “infinite” battery life or the ridiculously low weight or the distraction-free environment for reading books. I think they made a mistake by calling it Kindle. They should have named it Amazon Fire or something like that.

    A lot of people are going to be quite disappointed this Christmas season.

    • Canucker

      Define fail. The Kindle Fire will succeed in the sense that it will generate sales from people who do not see the value proposition in the iPad or other $500 tablets, but who want a tablet nonetheless (you can call these people the “Fire Sale” segment as illustrated by the TouchPad liquidation). There are a lot of these people and they are not looking for perfection but are willing to compromise for the right price. This is as pure a “consumer” device as you can get. Amazon is investing in the Fire as a custom-built hyper-convenient portal to Amazon.com. It’s Amazon Windows. It will succeed in selling millions (at least in the US) and in decimating the other Android tablets (which were already struggling) but will it succeed in recouping its investment? In the short term, maybe not but Amazon is playing a long game (the nub of Horace’s argument). This is both an aggressive move by Amazon (I’d say it was opportunistic as they have applied a very different business model to the field than Samsung, RIM, Motorola, etc) and a defensive move. It’s the latter because Amazon is protecting its core business through the Kindle series. These are razors. It’s threats are Wallmart, Target and even Group-On.

      By the way, anyone feel that Bezos trying to channel Steve Jobs (in the way that Aston Kutcher is trying to channel Charlie Sheen)?

      • Anonymous

        I think you’re on to several important points here.

        But I’ll quibble: you can’t “decimate” essentially non-existent sales of other Android tablets. Archos, Acer, Dell et al. were going nowhere already.

    • Tatil

      A tablet with a small feature sold at a low price, but supplied by a trustworthy company will be very attractive for many people in the US. It may leave the buyers hungry for more before next Christmas, but that is life in burgeoning technology for the price conscious.

  • http://twitter.com/adriancjr Adrian Constantin

    Not directly related to the Fire case, more related to the general methodology: “… we should determine whether and to what extent Amazon profits from the device directly”. I don’t think that disruption and profits are always related directly.

    IBM lead the PC disruption wave, but it was MS and Intel which profited in the end. Napster was a big disruptor without profiting from their own work. Wikipedia is disruptive and it is a not-for profit organization, same for Linux, GNU, Mozilla, etc. I would argue that Android is disruptive, although Google does not seem to profit. Facebook – no profits yet. And how much did Gutenberg profit from the printing press? :-)

    I know it is hard to include non-profitable disruption under business theory, but the phenomenon still exists.

    • http://www.asymco.com Horace Dediu

      The reason profitability needs to be assessed is to determine where investment is likely. Notice the “directly” in the quote. Disruption is often at the expense of profits and I am trying to make sure that there is indeed a strategy by Amazon to keep the device cheap while benefiting indirectly from its use.

      • Zunguri

        While in general I’d agree that there is diminished investment in the loss-leader component of a system, in this case we know that the tablet is targeting superior, simplified media consumption. The Amazon team knows that if they fail to meet/beat other tablets in this, they will quickly fall by the wayside.

        I’d be curious to see your valuation of the
        1) software sales
        2) general merchandise sales
        3) enhancement of relevance search

        What is your estimate of ARPU for Kindle users and then Kindle Fire users?

  • Pavelovitch

    I’m afraid I just don’t get the 7″ form factor. I have an iPad which I love (as most users do) for casual browsing, games, late-night email check, Twitter (w/ excellent Twitterific) and movies. Apart from email and Twitter, none of these activities works well on the smaller screen. There is a small benefit in the lower weight but the iPad2 is now so lightweight the tradeoff is negligible. Still, at $200 I see a real market for the Fire for people who want something (or a gift) who can’t afford the iPad price. (There’s also a niche market in e.g. hospitals for people who need data entry/display at that size point but the Amazon Fire isn’t designed for that.)

    • Ravi

      Besides cost, I think there are two main advantages of the 7″ form factor:

      1. Traditional e-reading customers love it
      2. Portability. To take Amazon’s example, a Kindle Fire will fit into my wife’s purse. An iPad (or even a Kindle DX) doesn’t. In other words, there’s a large slice of people who will take a Kindle Fire “everywhere” that wouldn’t do that with a larger device.

    • R_

      I read with my iPad2 a lot and after using a relatives 7 inch e-ink device I’m now in the market for one. I realised that the iPad2 is still not thin or light enough.
      I was thinking I could skip a generation or two with my iPad2 but if 3 is lighter and/or slimmer then I’ll get one.

    • Canucker

      It’s also about component supply and the Fire has a weird aspect ratio (1024 x 600) that means that apps developed for it will be less than optimal on other Android devices (its also running Android 2.3 which means apps developed for the Fire will be maladapted for Honeycomb and higher devices – twisting the knife Jeff Bezos?).

      • Anonymous

        Android’s “Fragment Manager,” which I understand helps developers deal with multiple screen sizes, is a Honeycomb (v3.0) feature. Developers who work out a solution for Fire tablets will need to significantly re-write it for Google Android.

        So your point about twisting the knife is doubly rich: Oracle is suing Google for “fragmenting” the mobile java space even as Amazon is doing it to them.

        It sure does raise the question of how Amazon will deal with the seven patents in Oracle’s suit against Google. It’d seem all those (patent, not copyright) claims apply equally to Amazon. Perhaps Amazon is as reckless as Google was about using IP that others claim, but somehow I doubt it.

      • KernelBuddy

        Significantly re-write? Only if they are poor coders. Minor changes in display parameters are trivial to deal with if you plan ahead.

        In this case, given the volume of this one particular device any developer with half a brain will make a special Kindle Fire version anyway. (Also to get around the annoying issues of submissions to both Android and Amazon stores.)

      • Anonymous

        I guess some apps can be slammed into a different format while others, perhaps games that were originally written for 800X600, might need a re-think. My own programming is mostly scientific stuff so I haven’t much had to budget time between logic and design. The iOS coders I follow on Twitter seem to think that layout for significantly different screens is a Big Deal.

        I actually think that the different format, plus the likelihood that Fire sells well, means that the Fire version will become the “baseline” version. Devs will use Amazon APIs for in-app purchases, etc., and only rewrite for other tablets later, if at all. This will be a challenge for Google to keep their OHA members happy with tablet support while not releasing updates to OASP that will help Amazon even more.

  • Ravi

    Interesting analysis, but I think you missed Amazon’s trick. They don’t need to make substantial investments in the Kindle Fire itself in order to follow a competitive improvement path, even if the hardware and system software require substantial improvements.

    As you note, Amazon is going to invest in the services and not the product. But what does investing in the services mean for Amazon? Partially it means servers and other content-delivery infrastructure, acquiring the rights to sell more content in more countries, but it also means one other thing: Investing in the native and web apps to deliver their services to “everyone’s” mobile devices, not just theirs. This is a logical consequence of their “Kindle Everywhere” marketing, which they seem to be extending to “Amazon Everywhere”. After all, with the possible exception of Silk, none of Amazon’s services are going to be exclusive to the Kindle Fire.

    How does that change the game? Amazon is going to always have deep, first-hand experience with delivering their services to every class of popular mobile (and fixed, for that matter) device. So if they want to make a best-in-class “Amazon delivery” device (or devices) every year, they’re going to know exactly what they want and they’ll be able to figure out the best/easiest ways of getting there.

    It looks like that’s exactly what they did this time. They took an “off-the-shelf” version of Android and an existing device and applied a limited set of customizations to make the Kindle Fire. It wouldn’t surprise me to find out that Amazon’s experience working on the Kindle PlayBook app (even though they seem to have shelved it) helped pull together the Kindle Fire. And there’s no reason to expect that this strategy will fail in the future. Google’s not likely to cut them cut them off from Android updates (better an successful “unsanctioned” alternative to the iPad than none at all), Microsoft would embrace them if they wanted to try a Windows-based alternative, and, aside from Apple, who is going to say no to an Amazon device order?

    • http://www.asymco.com Horace Dediu

      You are leading into the next post (see footnote 1). This discussion was meant to dispute the notion of the Kindle as a low end hardware disruption. As I pointed out in the intro, I believe it is disruptive but in a completely new dimension, one enabled by Silk. This is what I meant about new market disruption. The discussion ran too long to combine the two posts.

  • Anonymous

    I think searchengineland had the best analysis I’ve seen on the subject http://searchengineland.com/amazon-android-tablet-undermines-google-94664. I don’t buy the argument that a 7″ tablet is too small, the question is, too small for what. I use an even smaller device, my iPhone for a certain amount of consumption and creation and I can deal with it. It serves the purpose of a pocket computer. Too small or large enough is determined by what you want to do with a device.

    The 7″ Fire’s primary purpose IMO is to be a portal into Amazon content, reading books, magazines, listening to music and watching videos and tv shows and to a lesser extent shopping on Amazon and shopping at the Amazon “app” store. Because of its (subsidised) price and large content availability it has significant advantages over any other 7″ tablet on the market (see searchengineland article on that) and IMO will quickly dominate that space. This space includes the tablet curious & tablet newbies, the must have every new toy geeks, the Apple anti-fanboys and those who need a 7″ tablet but don’t want a 10″er. Anyway several million potential sales in the USA alone since the Fire is only on sale there. Amazon may lose $50 on each sale of the HW but they hope to make that up through a) content sales, b) the amazing amount of marketing information that their Silk browser is designed to gather (this far exceeds what Google is able to track) and has real monetary value (ask Google) and c) recurring Amazon Prime proceeds from millions of users.

    That the forked Android 2.x OS has a limited number of specific tablet apps is not too critical because phone apps scale reasonably to 7″ devices and anyway the target markets for this device has apps as a peripheral issue. Nonetheless there are games, 3rd party email apps and social networking apps which form the bulk of what many people need. At least initially

    So due to price and content the 7″ Kindle Fire will kill off competing 7″ devices. In that sense its disruptive.

    But the 10″ market i different. Here we have consumers who expect a much broader set of potentials: a wide variety of excellent and sophisticated tablet apps ranging from office applications to music to high end games, etc, business applications, video conferencing, etc. A Kindle Fire 10″ machine faces the same problem all Android tablets face, a dearth of apps specifically able to make use of the bigger screen real estate, memory, etc. And worse, because the OS is a fork of 2.x Android, it won’t run any 3.0 tablet apps that may come out. I wonder if Amazon has a strategy for getting developers to develop for the 2.x Android OS as a tablet when Google has already said that the OS is not really good for tablets. As anyone who uses an iPad knows. while in one sense it’s only a giant iPod touch, in another sense, that size makes a huge difference in the sophistication of the apps that it can run. I don’t see the Fire 10″er strategy that will get interesting tablet apps that can compete with good iPad apps. Definitely a challenge for Amazon.

    What Amazon has done is create a new market, a meaningful market, for 7″ devices which it will dominate. IMO that’s all it will do. Apple will continue to dominate the larger tablet market. In fact the 7″ Fire may well convince even more people that tablets are desirable and thus be a gateway to Apple’s 10″ iPad.

  • http://michaelkdawson.com/ TrendRida

    When the news leaked out a few weeks ago that the Kindle Fire was going to be a 7″ low cost tablet – I thought that was a brilliant strategy for a few reasons. First, the Kindle has a huge installed base that is anxiously awaiting to upgrade to a device with more capabilities. After the announcement, tweets were flowing I just pre-ordered 2, 4, etc. The demand for their tablet will be unlike any tablets other than the iPad. Secondly, the competitors in the 7″ space do not have the eco-systems to compete. I expect the RIM Playbook to be discontinued by no later than Christmas. Third at that price point the big guys will chose not compete. HP has thrown in the towel. I don’t that Samsung will have much interest in a $199 device. Finally, Apple has no interest in making a 7″ tablet. So, not having one of the few companies that can match your eco-system not participate is a win. I imagine Google will eventually have something in this space.

    In my mind, the strategy remains brilliant as long as Amazon defers building a 10″ tablet indefinitely. Losses on a 10″ would be hundreds of dollars per device vs $50 – which is definitely not sustainable. Why would they build a 10″ device anyway? Their goal isn’t to enter the tablet market it is to sell additional services. Bezos has claimed that the Kindle and iPad are not competitors – why change that mantra now. However, the threat of building a 10″ device will keep Apple on its toes.

    So, I agree the Fire does not disrupt the iPad – but it does segment the market. This actually benefits Apple, since I believe it will slow the price descent on the 10″ devices. Now there is a clear distinction between what is expected at the $200 and $400 price points.

    • Anonymous

      “Apple has no interest in making a 7″ tablet”

      … unless it would defend iOS from a downscale competitor.

      I have *NO* idea how Apple will respond to the Fire. It might be a change in terms to allow Macy’s, Sears, WalMart et. al. to bypass the 30% in-app purchases on every iPad they sell or promote. It might be a 7″ “iPod Touch.” It might be even more features in iCloud than we’ve imagined yet, or the Apple Wireless Network that I’ve been speculating about.

      Or all sorts of other ideas: you know that Apple evaluates dozens of ideas for every product move they make. The one response I am certain of, though: it will not be “not.”

      • http://michaelkdawson.com/ TrendRida

        For certain this is a scenario that’s been on their competitive strategy board for awhile. I wish that they would strike fast as opposed to allowing Amazon to have free reign over Christmas…

      • Anonymous

        I have been thinking about this even before the rumors of KF arose. It’s very likely that Apple may come up with a 6″-7″ iPod Touch, mainly for gaming and pure consumption, I thought. With KF, I feel there is more of an impetus for them.

        And I don’t think Apple will call anything below 9.7″ an iPad.

  • http://twitter.com/MacsFuture MacsFuture

    I agree with you Horace. Note Amazon is supposedly losing $50 per Kindle Fire, and historically Amazon, despite high revenues, has very low and minuscule profit margins. Bezos even acknowledged in the Kindle Fire presentation that Amazon is not shy about having low profit margins. Amazon is counting on getting profits from its services, like ebooks, video and apps. But its doubtful that Amazon will every get serious profits from those services. Digitalization is necessarily results on lower prices and smaller profit margins. That is why Apple’s model is not to rely on profits from digital content but instead to rely on profits from high end, innovating hardware. Amazon is not only doomed not to be be able to meaningfully upgrade the Kindle Fire, but in the end of the day, I predict Amazon will collapse. Endlessly growing revenue without building substantial profit margins is a doomed business model. Amazon is very vulnerable when its profit margins are so low. If Amazon loses the tax collecting advantage that it has enjoyed agains land-based stores, Amazon’s revenue and profits could take a hit. Look at how Dell and HP are floundering in the generic pc market. HP is leaving that business Amazon came out with the original Kindle yet let Barnes and Noble leapfrog it with better hardware in the recent color and touch Nook. Amazon is essentially playing catch up with the Nook. Apple would never allow a competitor to leapfrog its devices in quality. Amazon allows the Nook to surpass the Kindle in quality because as Horace pointed out Amazon’s business model relies on the service, not the hardware, being profitable.

    Also, as other commenters pointed out, the Kindle Fire lacks allot of the features that made the Kindle popular: It does have free 3G data access or any 3G. It doesn’t have a long battery life. It isn’t super light. And it doesn’t have an eInk screen that you can see clearly in direct sunlight. What the Fire has is a low price compared to the iPad. But the services Amazon adds to the strength of its ebook library or not strong themselves. Yes, Amazon Prime offers free movies and video for $79 per year (as well as free 2 day shipping), but Amazon’s movie library is puny, and nothing compared to Netflix or other services. If Amazon doesn’t maintain its closed platform on the Kindle Fire, and allows Netflix and other movies streaming apps, than Amazon kills its business model.

    I write more about it on my blog at

    http://macsfuture.com/post/10815570468/with-the-the-kindle-fire-and-silk-browser-amazon

    • Anonymous

      Low profit margins are characteristic of retail, because there is relatively little differentiation in who has a better service when you’re buying 12-packs of Diet Coke. Amazon is merely the latest in a long line of retailers who’ve disrupted the business: in its day, the Great A&P turned US food stores upside-down, but succumbed to others following in their footsteps. WalMart grew explosively with the same approximate model, as Amazon is now doing in turn.

      Amazon has been moving away from pure retail to branded services for some time now. I’m looking forward to Horace’s Part 2 with bated breath.

      • Anonymous

        Amazon is exactly trying to be the Walmart of digital content but that’s an awfully dumb idea because there’s a fundamental difference: Walmart can import the goods it sells (notably from China) and leverage economy of scale resulting in savings on purchase price. On top of that, Walmart delivers value by providing a brick and mortar network of outlets.
        Amazon, on the other hand has little to no control on the components of its gross margin, especially since Apple forced it into the Agency Model by launching iBooks; and Amazon’s digital distribution infrastructure is far more easily replicable than Walmart’s physical stores.
        As a result Walmart’s bottom line keeps growing while Amazon’s declines despite a strong increase in revenue.
        The more I think about it, the more I believe this Fire thingy doesn’t make a lot of sense. It’s more of an emotional knee-jerk reaction from a butt-hurt Bezos feeling bullied by Apple and trying desperately to get his revenge.

  • Anonymous

    The problem I have with this is the same one I’ve had with all Kindles. It cannot show the full fidelity of the book store.

    A key thing with iPod is it runs the same 16-bit 44.1kHz stereo audio from the CD. You can convert a CD into Apple Lossless format or AIFF and put it on an iPod and you will be hearing the exact same bitstream from the CD, the exact same 1′s and 0′s being converted into music by the same process from the CD player. That means you can convert all your CD’s. Not just the short ones, or the ones where sound quality is not that important, or whatever subset.

    With Kindle, it is only physically capable of showing a small subset of the bookstore. Most magazines are too large, most books are too large. They are all too high-res. And Kindle Fire has no color management, it will always show you the wrong colors.

    Paperbacks lead the way in eBooks, but that has only made the publishers of magazines and photo books and so on hungry. With the coming high-resolution screens, book and magazine publishers could “print” the canonical version of their work to say, an iPad 3 with Retina Display, and it would be higher quality than any print version. And they can add CocoaTouch interactivity and animations and create something that makes punters reach for their wallets. There is a potential renaissance in graphic arts and typography coming that has been bubbling under for a while as print waned and the Web continued to suck at anything related to the arts. And App Store can pump money into these endeavors, make it worth a publisher’s while to create really great original content, not just some stock photos or other garbage. There will likely be books that people buy iPads for. There are photo books that sell for hundreds of dollars in print that could be sold for much cheaper on iPad. But a Retina iPad would be the minimum quality that is necessary for this, just like CD-quality audio was the minimum quality necessary for an iPod. If publishers have to laboriously redesign all their content to fit it in a quarter of a page, this all doesn’t happen.

    How does Kindle’s proprietary ePub-like format compete with CocoaTouch magazines on a 10 inch Retina Display? eBooks looks like a Web page’s ass. How does Kindle run the same titles? Run the phone version? The Web version? How do they go to 10 inches later to accommodate publishers’ needs when there is a best-selling 10 inch tablet PC selling in the low-end PC market with much, much higher quality content on it that Apple could price war down to $350 and still make a $50 profit? How does Kindle go to Retina when there is very little money to invest in the hardware?

    Also, we have seen that iPad is not the “3rd device,” it is being purchased instead of a PC by 90% of users. Once these users have Retina, they won’t be able to look at Kindle Fire without retching. Once they have run one interactive all-singing, all-dancing high-res book or magazine on iPad they won’t want to read ePub again.

    So even though Kindle Fire doesn’t compete directly with iPad or vice versa, Kindle Fire has to be able to run content that is created for iPad, at least making it easy to port over. Music and movies are no problem, but I don’t see how (ironically) they can ultimately beat iPad at books, and they certainly can’t at apps with baby phone apps. Even if you are just into books with text in them, no color, no illustrations, no diagrams, a Retina Display is going to make you run to buy it, because you will get a true print experience, you will see the sharpest text, you will see something that looks as good or better than the printed book. I think book people are going to be easy pickings for that.

    And the argument that not everybody can afford an iPad is not convincing to me, because there are very few users for whom Kindle Fire can be their only device. So the built-in assumption is that you already have a notebook PC and will always have a notebook PC in addition to your Kindle Fire. Well, notebook PC plus Kindle Fire is more expensive than iPad. People will go to one device just like they combined their phones and iPods. They will go so that they only have 1 device to plug in at night, and so they always have everything available to them on the 1 device.

    So basically I’m saying I think the iPod/Kindle era is over. Or at least we are right at the end of it.

    And Silk is a liability magnet. If you think Facebook is bad at privacy, Silk is like an X-ray suit you put on when you’re on the Web so that you can’t hide a single thing. You are using Amazon’s servers to browse the Web, not your local system. That means Jeff Bezos is looking over your shoulder the whole time, and he has a video camera pointed at your screen. There are lawyers studying Silk with dollar signs in their eyes.

    • Anonymous

      “There are photo books that sell for hundreds of dollars in print that could be sold for much cheaper on iPad.”

      I’d not thought about this before, but I suspect there is actually an incredible future here. I could imagine someone like Andy Goldsworthy (Google the name if you don’t know it) releasing the equivalent of a CD box set for iPad — all the photos he’s ever released, video of making the compositions, rights to use the photos as screensaver/background image, etc etc. Obvious problems are
      - existing rights holders and their insane stuck-in-the-20th-century policies
      - lack of computer experience (and thus the vision and desire)

      But I could see an Andy Goldsworthy wanna-be in time concluding that self-publishing is the way forward, and that the best way he/she can present his/her artistic vision is via an iPad app — which gives a whole lot more control than an Amazon self-published book, while also allowing for bypassing the publishing world and its gatekeepers.

      Of course things like this happen on a human, not a techno time-scale. It may take ten years, for some budding iPad-using artist wannabe today to graduate school, learn their skills, and finally have something worth publishing.

      • http://pulse.yahoo.com/_KEVQDCIMSOI6AFXXFFS5ZFFWBA PeterK

        “Been There. Done that.”

        Bill Atkinson’s iOS PhotoCard is the coffee book you’re looking for.

        (BTW, Bill created HyperCard on the Mac in the 80s AND he’s the design guru behind Google+’s UI.)

  • Rob Scott

    7 inch tablets have all without exception failed and there is nothing to suggest that they will ever be in demand.
    Losing 50 USDs on each device means if Amazon were to sell 10 million of these devices they will lose 5 Billion USDs or ~10% of their revenues. That sounds like disruption of Amazon not the industry.
    This money losing ponzi scheme will fail. Google with >150 million Android phones is still to make 5 Billion USDs from Android.
    Amazon cannot afford a successful Kindle Fire.

    • Anonymous

      Your maths is out by a factor of 10. They would lose 500million, furthermore even if they lose $50 per device, that is recovered if they can sell 20 extra ebooks per device, or some other mix of content and advertising.

      • Anonymous

        They need to sell a lot more than 20 eBooks per device, remember it’s the net margin which counts, not the gross margin.

        A loss-leader is only a good idea, when it’s promoting other sales with fat profit margins. Amazon has low margins everywhere.

        Also, their new tables will not sell as many books per device as the old pure eBook reading devices.

      • Anonymous

        The Fire might sell videos though.
        But I agree with the general idea that the move makes little sense.

    • No Body

      You can’t look at the hardware sale in isolation. You must consider:
      1. The software multiplier.
      2. The merchandise sales Amazon will gain from the close customer access and tie in.
      3. The value Silk adds to its relevance technology.

      Also, 10m * $50 = $500M, not $5B. Look at their media sales trend over the last 12 quarters. It’s pretty clear they’ll make it up.

      – The REAL Rob Scott

    • Anonymous

      7 inch eBook Readers have NOT failed. Fire is a Kindle color, it is not an iPad lite; it is not TRYING to be an iPad lite.

      Will consumers PERCEIVE it as an iPad lite? I’m not sure, but I suspect not. Given that it’s only being sold at Amazon, and given that Amazon (apparently) loses money on the sale and only makes it back on sale of content, it is not in Amazon’s interest to try to bait-and-switch buyers who, having spent their $200 are disgusted by the device and never use it after the first week.

    • Michael

      If Google hasn’t made $5B from Android (have a link for that, BTW?), the Oracle lawsuit would put Google into the red on this whole Android adventure.

  • Canucker

    The Kindle Fire is disruptive in one additional sense. It will gobble up the low end of the market. The higher end is already owned by Apple. This will leave the crowded middle slice to a bunch of vendors to duke it out for a sliver of the sales. Moreover, Apple is lapping up the profits from high margin hardware/break-even content and Amazon is taking the inverse approach with break-even (I don’t think they are losing money) hardware and margin on the content. These are proven, sustainable and successful business models. What is the business model for the middle territory?

    • Tatil

      Amazon’s margin on content cannot be larger than Apple’s. Amazon is simply living with lower profit per device even when calculated over the lifetime of the device. They might add some more income due to more blatant advertising on the home page (easy to replicate by other competitors and Apple already has iAds) or through the analytics of Silk browsing. There is nothing wrong with being happy with low margins and gobbling up the low end market, but there is no point in imagining magically fat margins ingeniously hidden in any business model. If Amazon manages to drive some competitors out, it may be able to increase its margins in the future, but that is a long term bet and the results are uncertain.

  • Anonymous

    The most interesting thing I’ve read about the Fire is something I saw in a comment on TIMN. A guy there pointed out that the Silk browser with its cloud based proxying back end is in a position to cut Google out of advertising analytics that they’ve previously been able to get with cookies.

    As a result there’s a significant possibility that once Amazon has a critical mass of US consumers, say 5 or10 million, it may be able to begin winning advertising revenues from Google’s doubleclick operation, and potentially demand a larger share of their revenues from search.

    Consumers won’t care that they’re being used as products by Amazon, any more than they cared when it was done by Google, so long as they’re getting something for it – in this case faster page rendering.

  • Anonymous

    For posterity, the Silk approach to browsing is not new.

    There have been multiple generations of innovation in that space for over 10 years. For example, OmniSky (first nationwide wireless ISP and portal) used a split architecture to accelerate the web browsing experience and tailor it for mobile devices with smaller screen real estate in the late 1990′s.

    • Anonymous

      What is new about Silk is not that it is a “split” browser…it is that Amazon is using it’s back end to track usage. They are building a death star to take on Google and Facebook in the world of personal information. “Social” mines personal discussions, “Search” makes itself the launchpad to internet usage, while “Silk” tracks every single keystroke and click of the entire web based experience.

      If AMZN weren’t trading at an astronomical valuation, I’d jump in right now. The company is, much like Google and Amazon before it, building a trojan horse that consumers value. The big difference is that Amazon doesn’t have to sell the information to monetize it. Instead, Amazon can use anything they glean from Silk to optimize its own retail experience – prices, products, placement, etc.

      • chandra2

        Joe: I agree that they do not have to sell the info to “others” to monetize it. Recall that they are going to have millions of ad supported kindles out there. I think this silk strategy provides Amazon with valuable information to put relevant ads on those low end kindles even if those low end kindles are not owned by the fire owners. I do not know how exactly now, but when I read Horace’s statement ‘The new Kindle reads you’, this is the thing that came to my mind.

    • GeorgeS

      If I recall correctly, AOL had ways to speed up “browsing,” way back when. For example, they would transmit only half the pixels in an image and the AOL software would dither the remaining pixels to a fair approximation of the image. To do this, they had to decode the GIF or JPEG image, strip it down, and recode it for the AOL user in a proprietary, AOL-only format.

  • zeno

    Horace, can you explain the following?

    Normally, you’d expect X to have high margin products and low margin content/services, and get into a war with Y who has the opposite. (Netflix invests in cheap Roku boxes to enable its profitable content/services.) You’re supposed to commoditize your complements.

    But in this case, why aren’t Amazon’s and Apple’s content the *same* price, thus offering similar margins? (They deliver similar content at similar prices.) What makes Amazon’s strategy puzzling to me is that they’re acting as if cheap hardware was the entre to expensive content, but their content doesn’t make much money either! So what are they doing? Is it that what Apple regards as “about break even” is a great business for AMZ?

    • http://www.asymco.com Horace Dediu

      The answer, I think, is partly belief that volumes will eventually be high enough but also partly in the knowledge about consumer behavior that Amazon gains by tracking every action on their devices. The way I put on twitter was that “You don’t read the new Kindle. The new Kindle reads you.”

      • http://www.linkedin.com/in/decisionscience Rick Mueller

        That’s really all you need to know, isn’t it?

    • Ian Ollmann

      I think their strategy is a little broken because they are still focussed on just being invited to the game in the first place. Amazon is the leading bookseller, but can’t sell books for iOS. They are important for movies and music but are shut out there too. If iOS was an open marketplace, I’m sure that Amazon would be entirely content to market all this stuff through their Amazon app and forgo the $50/u loss on the fire. It would be a better user experience, and they would have access to an installed base of tens of millions. $50 * 10M is a fair chunk of change!

      Android exists because Google feels it is in the same boat.

      • http://twitter.com/watersb Boyd Waters

        I’m not sure I understand when you say that Amazon “can’t sell books for iOS”. My 2007 iPhone can’t be upgraded to iOS 4, hence no iBooks. But I’ve purchased dozens of books via Amazon, as their Kindle app works great on my old device. I only know the US market, and perhaps it is different elsewhere.

        (Amazon’s DRM-free MP3 store content works fine with my iPhone, although I’m not able to purchase Amazon music directly on the phone.)

      • Kizedek

        Maybe he meant, “can’t sell books for iOS”…”without paying 30% to Apple”.

  • poke

    Amazon does not see itself as a retailer, it sees itself as a technology platform company. For a long time now, Amazon has been migrating away from retail. Instead, new product categories are sold by other retailers through Amazon’s Marketplace. It has also been migrating towards digital content. I think this is all part of a strategy for Amazon to migrate away from retail entirely and towards selling services (Amazon Web Services) that include aspects of retail (such as being a marketplace for retailers, handling payments, hosting and selling digital content) and selling devices.

    I think that while it’s true that the Kindle Fire isn’t innovative, the original Kindles have been both innovative and on a relatively fast upgrade cycle. The rumour is that Amazon couldn’t produce a ‘real’ tablet in time and the Kindle Fire is a stopgap and the real deal will be coming later. I do not believe these devices exist to sell content. I think quite the opposite is true; Amazon is leveraging its ecosystem to sell devices. The margins on the devices are surely thin compared to Apple’s but they’re better than what Amazon is used to. I’m very doubtful that Amazon is using its zero-margin content business to subsidise its devices.

    • chandra2

      >I’m very doubtful that Amazon is using its zero-margin content business to subsidise its devices.

      2.4% is low but not zero. They made a billion dollars in the trailing twelve months

  • Martin

    Thanks as always Horace. I agree with your perspective … and would add some firepower to it.

    Bottom line … Amazon will build an ecosystem, BUT … one limited to the US … to consuming media categories which can prosper on small format screens supported by minimal feature sets … and a business with permanent low margins as a result of aggregating content owned by others on top of a device they must subsidize, not just for launch, but quite possibly long term. Yes … they will “innovate” … to 10 inch screens and beyond … but No, they will not succeed against Apple.

    If Amazon wants to inherit the advantages of supreme disruptor, they must upend an array of assets of the incumbent which go well beyond their beachhead with a low end 7 inch tablet. Full discussion of this will take another discussion, but my conclusion is:

    Amazon is not trying to disrupt an incumbent … they are trying to disrupt an incumbent which is itself the world’s best disruptor.

    Clay Christensen didn’t reallt have the benefit of such a case when he initially enlightened us. And as the course assistant for entrepreneurship at the same institution from which Clay hails … I never saw an example, in all the cases I prepared for class discussion, of a disruptor challenging a disruptor. Most disruptors also have the benefit of first mover. Amazon will likely be a follower.

    By the time Amazon gets beyond their beachhead … Apple will have moved the puck again. Not just within devices called iPads … but within the larger iOS family. Anybody else expecting an “iPod Pro” as the great disruption to Amazon’s troops still on the beach ?

    Regards
    Martin

    • GeorgeS

      Good comment. One thing: “Anybody else expecting an “iPod Pro” as the great disruption to Amazon’s troops still on the beach ?”

      What would that have? Faster CPU? Larger screen? Keyboard? More RAM? More storage? More interfaces? Able to run business & professional software? All in a lightweight device with good battery life at a reasonable price, perhaps about double the cheapest iPad?

      If that’s what you mean, check out this device:

      http://www.apple.com/macbookair/

      I think John Gruber may have made that point : the MacBook Air IS the iPad Pro. (One can add an external 3G modem, if one needs to, or just tether to an iPhone.)

  • Kit

    An excellent article, even by your own high standards.

    I think Amazon has come up with an interesting model, although I have no idea of how many customers might take the jump. Up till now, tablet makers have been in a race to offer increasing power, but perhaps many people are happy with music, video, books, shopping and light surfing. Amazon will offer this at a price others cannot (or will not) match. By constantly cobbling together yesterday’s hardware, they can offer relatively more powerful models tomorrow if the market demands them, or ever-cheaper models if not.

    Is there a US market for this? My off-the-cuff prediction is that Amazon will sell all they can produce for the holiday season, but most will be gathering dust by the spring, at least among the younger crowd.

    You seem spot-on concerning the lack of global service brands, with one glaring exception: Google! They developed Android precisely to make money off of services, and not just in the States but all over the world. Perhaps now that they have bought Motorola they might consider following Amazon’s lead. If the developing world were to forgo traditional PCs for tablets, as they did landlines for mobiles, whatever standard wins there would exert a tremendous influence everywhere, rich world to poor, high end to low.

    • http://www.asymco.com Horace Dediu

      Google is indeed an anomaly. It might be a service brand but it would be quite a novel one. They don’t sell anything that amounts to intellectual or physical property. They sell access to users. It is a powerful concept.

      • http://twitter.com/zzbar Joe Zou

        Google fits in either as a business service provider (as IBM) or as a product company depending on how you look at it: 
        1) Google is a service provider for Business customers. Although billions of people use google, only tens of thousand of business actually pay google. Google provides a service for business everywhere. 2) Google is a product company. its product is people everywhere and it sells people information to advertisers. the cost of its product is almost zero. well, not exactly zero, they do need bandwidth for Youtube, and gas for street view mapping….

         

  • http://pulse.yahoo.com/_M43WMR7GRAI34ID33H45UP7WPQ CS

    “The reality is that there are no global service brands.”

    That is not fully accurate – think fast food: McDonald’s, KFC, etc. However the basic premise is correct, much fewer services vs. products are global.

    • http://www.asymco.com Horace Dediu

      I stand corrected insofar as we believe fast food is a service rather than a product.

    • http://www.asymco.com Horace Dediu

      I stand corrected insofar as we believe fast food is a service rather than a product.

      • Petteri

        Some of the telco operators are quite global; Vodafone, O2 et al. Similar trend might apply to gas stations – which is clearly a service as the product they’re selling clearly is not diffetentiating.

        It seems that service brands have better chance of globalization in areas where the service itself a) has gone through s significant commoditization process and b) is not subject to divergent national / regional legislation.

      • Petteri

        Oh, or c) the service does not a have a local regulated equivalent. Many internet based services (including but not limited to Google) fall into this category.

      • Tatil

        I agree with telcos, but Just because a product is a commodity, it does not mean it is not a product. Service from gas stations is not differentiating, either. No need to strain definitions.

      • Petteri

        I personally do see gas stations as service providers, as see the service as “filling my gas tank + assorted needs like using the toilet and buying some coffee”. As a consumer I don’t even think about gas sold at the station as a product any more than I see electricity as a product sold by electricity companies.

      • http://twitter.com/franksting franksting

        International Telco brands, along with Fast food and others can certainly apply the same service values (or try to), but the products are often substantially different for reasons such as local tastes, local regulations etc.

      • http://www.asymco.com Horace Dediu

        I would say those examples are trans-national or multinational or regional but not global. Truly global means present in all major markets and most of the emerging ones. And it has to be presence with their own brand not just by ownership of equity in another brand.

        Many car brands are global (Mercedes, BMW, Toyota, Ford and even GM via affiliates). Service stations less so. I don’t see many Exxon stations in Finland or even in Europe. That may seem strange since gasoline is simple stuff compared to cars.

        Same analogy between phone brands and operator brands.

        Why? Services may be tangled up in different regulatory and operational complexities. I can’t say I quite have my finger on why this is but it’s something I find remarkable.

      • Laurent Giroud

        > That may seem strange since gasoline is simple stuff compared to cars.

        This is precisely why the operator does not matter.

        Customers are not buying Exxon or BP gas, they’re just buying gas at the closest/cheapest station they can find when they need some since the end product is the same for all vendors. The equivalent in the mobile industry would be to buy 3G access from the closest tower at an agreed upon rate per transfer size and/or bandwidth (I can’t wait until this happens but won’t hold my breath).

        To penetrate such a saturated market you need to make a huge initial capital investment and build enough stations and distribution networks that you’ll rake in a substantial proportion of sales in that market. In most developed countries this is probably not worth attempting, hence the dominance of local players. Moreover, the entry point in most developed countries for gas is likely to be refineries, which also represent substantial capital investments.

        A BMW on the other hand is quite differentiated from a GM, Chrysler or Ford: it brings an additional value which is priced similarly all over the world and that product is moreover easily transportable without requiring any additional infrastructure: no pipelines nor refineries nor stations to build, just a few boats and trains to rent.

        Iconic products such as Coca-Cola, Heinz Ketchup, only need a distribution contract to penetrate new markets (I’m simplifying but this probably isn’t very far from the truth).

        Who cares about AT&T, Vodafone or Orange? They’re companies, not brands, and their core products are not differentiated enough that they’ll ever reach brand status – despite their best efforts.
        Unless they build the initial mobile infrastructure of a country (which Vodafone and Orange have been actively doing in emerging countries), it seems unlikely to me that they can penetrate its market significantly if the existing infrastructure already allows to reach all customers and only require iterative improvements as technology progresses.

      • Petteri Laakso

        Agreed, even the biggest service brands are at best multinational by that definition.

        My hypothesis would be that if you look at the issue through “job-hired-to-do” model, products by their nature are more adaptable to multiple uses and contexts, some intended by the product developer and some not. Services on the other hand are more context specific in their job-hired-to-do and thus are more difficult to adapt to different regulatory and cultural environments.

        So, products allow for greater versatility in use than services. Services need to be specifically designed to fit each cultural and regulatory context, while the adaptation of products can be left (more) to the end consumers.

        The need to adapt the service to each cultural and regulatory environment creates a significant barrier to entry for global serivce brands as well as limits the level of economics of scale that can be leveraged across the regions.

  • http://www.facebook.com/people/Jean-Louis-Gassée/505720190 Jean-Louis Gassée

    Can’t wait for Horace’s discussion of the Silk disruption. In the meantime, I’ll re-read this one for the services analysis. As other posters do, I like the insight in the global limitations.

    • http://twitter.com/PaulMaxime Paul Franceus

      Silk is actually the big deal here. If it works the way it’s supposed to, it will allow much less powerful devices on much smaller pipes perform much better than they do. And for Amazon, they get to understand the browsing behavior of users in a way that cookies only hint at. They probably have enough scale to cache most of the web in RAM so it should be fast fast fast.

      I have to wonder if Amazon will make silk browsers for Mac and Windows at some point. It will also be interesting to see how Apple and Google respond to this themselves.

      • Canucker

        You are buying into the cool-aid… The performance enhancement is relatively trivial (albeit real) given we are talking WiFi here. It masks the real intention which you do recognize. It is a direct threat to Google akin to not only “stealing” their “free” operating system but turning around and unplugging the primary means by which it is “free”. Basically, it cuts out Google. It’s a confident and unabashed move by Bezos who is pulling no punches. He has made it clear that Amazon is indebted to and dependent upon no one (aside from maybe Microsoft patent attorneys…).

      • http://twitter.com/PaulMaxime Paul Franceus

        I wouldn’t call it Kool-aid – things like resizing large images down to device size and allowing the device to multiplex all the data onto one connection – and preventing extra network round trips will be big wins on slow devices, wifi or no. Prefetching expected content is pretty big too – Chrome has started doing this as well.

        You are right that the business strategy here is a big deal.

      • Anonymous

        The technology behind silk raises rightful concerns (suspicions?) about privacy.

      • http://twitter.com/franksting franksting

        How well did that work for Opera Mini in the end?

      • Laurent Giroud

        This is a very good point.

        The technique used by Silk has the potential to make the Fire stay relevant as its hardware becomes more and more obsolete and thus increase the product life – of which Horace mentioned the importance.

        I don’t know if Amazon does it already but it doesn’t seem too far fetched to think that they can/could compile Javascript to extremely efficient native code before sending it to the browser, not only would the page be quicker to load but it would also perform better than many JIT compilations done on better powered platforms (such as the iPad).

    • Kit

      I agree that Silk sounds promising. However, this is an under-the-hood technology and will not directly help sell Fire to consumers. It might allow Amazon to peddle low-end hardware, but can they leverage all that data in some other way? Google, on the other hand…

    • davel

      What do you think of silk? The description is very vague. Since it is a split browser what architectural issues do they have to deal with?

  • Matt Ward

    First – Nintendo makes a profit on hardware. I do not think they have ever fallen into the subsidy trap that very much defines Sony and Microsoft. This probably allowed them to survive to launch the Wii. To a degree the complexity of authoring for modern console systems means developers cannot cope with more rapid product introductions with game development only paying serious dividends late in the product life cycle.

    Second – I can use the Kindle App on the iPad. I can buy items from Amazon on the iPad. It would be easy enough to strip Flash out so I can watch movies. Isn’t the content business about getting to the widest addressable market? Why does Amazon need to launch a tablet at this point? Perhaps because Amazon can suck the oxygen out of the bottom of the market and keep the content purchasing directed at Amazon.com while they steadily incrementally work the price down. I guess they think the current hardware spec is good enough that they can follow the price curve they set on the EBRs. I suspect they are a couple years early and that means some additional quarters selling the product at a loss. But it does sew up the econo box tablet market.

    • Tatil

      The profit, instead of loss, on Wii hardware would supposedly allow Nintendo to refresh its hardware much sooner. Well, here we are almost 5 years later and no console follow-up, yet. They failed to use that weapon. I don’t know whether it was due to lower game sale revenue on Wii, which over the long run made it impractical to refresh sooner than MS and Sony could do.

      It has also lost a good chunk of the handheld market to smartphones and iPod touches, with 3DS sales rumored to be disappointing. Future is not looking very bright for Nintendo.

  • Brian Gillespie

    Over the next few weeks I’m sure well here about Microsft seeking an Android OS license agreement, while both Apple and Oracle seek an injunction. This may considerably raise the cost of manufacturing the Fire. Is this product a doomed idea, or a throwaway to get a tablet out there in the near term?

    • Anonymous

      Apple seeks an injunction upon Samsung, not Android as a whole. Apple has no legal claims against Android the software.

      • Brian Gillespie

        Not true, they just choose to sue the OEMs instead of Google directly.

      • http://www.asymco.com Horace Dediu

        Apple has not asserted any claims against Google because, typically, infringements are in the application of an invention which is typically embodied in a product. Unlike Microsoft, who also supplies software that might enable infringement, Google does not indemnify its licensees (and often does not license anything in the first place). Indemnification means that Microsoft will stand in place of the licensee if there is a claim against them.

        Oracle’s claims against Google are direct but I believe they deal with copyrights related to Java and not patents.

        Apple chooses its targets carefully and will contemplate Amazon strategically. The decision to sue Amazon will depend more on whether Amazon strengthens Google or the Android ecosystem (which I don’t think they do.)

        As they say: “It’s complicated.”

    • http://twitter.com/franksting franksting

      Samsung have just done a deal directly with Microsoft,haven’t they?

  • Anonymous

    There is a rumor that Amazon is considering purchase of WebOS… for the Fire…

    Ahh…step back a bit and think about it!

    What is Amazon selling? They aren’t selling tablets or eReaders — Amazon is selling Access to their services and their store.

    What if Amazon were to buy WebOS and offer it to to the smart phone and tablet manufacturers?

    1) The manufacturers would get access to all the Amazon content!

    2) The manufacturers would get an unencumbered OS.

    3) The manufacturers would get an OS with a level playing field (no favorite treatment like Moogle).

    4) Amazon would get sales, traffic, marketing info — all the things it really wants.

    Along with the cached web browser, Amazon could out-Google Google!

    • MK

      Amazon would be ill advised to buy WebOS. The game in smartphone OS is no longer about the OS alone, it is about the OS+ecosystem. That is why HP failed as did Palm (before), they did not have the ecosystem. Amazon will have the same struggle.

      Fact is Smartphone OS mass market is crowded (hate to say that)….at the top end (or so) is iOS and at the lower end is Android. Not much room left and thats why Windows Phone 7 has struggled and RIM is on the decline.

      • Anonymous

        Consider that Android has several disadvantages:

        1) a So-So ecosystem

        2) it is an encumbered OS

        3) Android hasn’t released a viable Tablet OS

        4) Google/Motorola has the probability/potential of competing directly with Google’s Android customers — the manufacturers.

        5) In order to recover the cost of MMI, Google will, likely, need to begin charging for Android

        6) Many phone manufacturers are already paying Microsoft a fee to allow them to use Android

        Wouldn’t it be a better option for the phone/tablet manufacturers to use WebOS:

        – to get access to the Amazon ecosystem and content
        – to sell their devices through the Amazon store
        – to eliminate all the Android unknowns and potential downsides
        – to compete on a level OS playing field
        – to eliminate any fees paid to MS to use Android

        According to rumor, some of the manufactures are already considering or per suing alternatives to Android.

      • http://twitter.com/franksting franksting

        Amazon’s struggle surely won’t be in the ecosystem – the one they care most about is surely their store which is already chock full of potential purchases. If they struggle with that, it is in relation to making that ecosystem compelling globally considering the licence restrictions on content which Horace mentions.

    • Anonymous

      That’s the most interesting take I’ve heard yet on the Amazon buying Palm story. Hopefully, Horace will post about this soon.

    • davel

      I do not understand this.

      Amazon allows anyone with a browser to access the store. They make money on volume not margin, So why would they restrict access?

      Since they want to sell to anyone selling an OS to others makes no sense unless they want to be an OS vendor.

      Providing a new low cost tablet to access their store makes sense as it expands opportunities to use the store, especially if they feel the current experience is less than optimal,

      • Anonymous

        They are not restricting access. Any current device can visit the Amazon store as they currently do. Even a Fire user can use Silk to browse the Amazon store — Amazon loses nothing,

        What they have is a device/OS that goes to the Amazon store first — where most customers will find what they want at a reasonable price and buy. In addition, Amazon can gather marketing information to refine its store offerings (and that of its suppliers).

        This gives Amazon a tremendous advantage with its Fire customers.

        Now, how can Amazon offer that advantage on millions of phones and tablets that are used for shopping online?

        One way is to offer the silk browser as an alternate to Apple, Google, MS, etc. browsers — probably not too much traction there.

        Another approach is to offer the smart phone/tablet manufactures:

        1) A superior OS (they can’t offer their forked Android)

        2) An OS unencumbered with patent issues

        3) An OS that doesn’t treat one manufacturer, MMI, better than the others

        4) A store to resell their devices

        The manufacturers are faced with:

        1) Paying MS $5 per device to use Free Android which violates MS patents

        2) Unfair competition from Google/MMI

        3) Developing their own OS (as some are doing)

        4) Waiting for MS Windows 8 ARM — probably a year away, and with a per device charge

        Or, going with the suggested Amazon/WebOS approach…

        Looks pretty attractive to me…

    • deV

      Amazon is not competing with Google. In fact Amazon runs an AppStore for Android! They also have a Kindle App for Android (it’s quite popular). The Kindle Fire is an Android tablet.

      Assuming Horace is right that the Fire is a loss leader for Amazon, they actually make more money when you use the Kindle App on Android devices.

      I fail to see the draw of buying a dying WebOS.

  • Anonymous

    Apple has acknowledged that they need a lower priced iPhone that can compete in lower price markets such as prepaid.

    I think they should stop calling the iPod Touch an iPod and call it what it really is: a small form factor WiFi only tablet. Also, adding a 7 inch tablet would fill a gap in between and kill the Kindle Fire.

    By the way Horace, I think your blog articles are really great including this one. Not only do you provide excellent analyses but you also attract an outstanding group of readers and commenters. I learn as much from reading the comments as I do from the articles.

    • http://twitter.com/franksting franksting

      Have you a reference to where Apple Acknowledges they need a lower price iPhone? I’m curious to read it

      • Adult Supervisor

        Refer to the Q&A section of Apple’s second quarter earnings call posted here: http://is.gd/6IyXCx.

        Tim Cook strongly implied that Apple will take action to address the international prepaid market. This most likely would mean a cheaper version of the iPhone. Here is the relevant excerpt:

        Charles Munster – Piper Jaffray Companies

        And a question first on the iPhone. Demand, obviously, has been phenomenal. And if we look down the road at the opportunity in the post- versus the prepaid markets, are there any considerations that you can share in terms of — that you weigh, in terms of price or subsidies or growing market share in this large prepaid market?

        Timothy Cook

        Gene, it’s Tim. Our focus has very much been on China. We wanted to understand that market and understand the levers there. And as I said before, we’re — iPhone sales were up over 3x during the quarter. And in the first half, we did over 5 — just slightly under $5 billion in Greater China in revenue, which is about 10% of Apple, to put it in perspective. And it wasn’t but a couple of years ago that, that number would have been less than 2. And so it’s a sea change. And that’s certainly not, what I would call, a classic post-pay market by any means of the imagination. And so we have some ideas about other countries as well. I’m not in a position that I want to share those today. But we purposely put the bulk of our emphasis from an emerging market point of view on China to really learn, and then we’re going to take that learning to other markets.

        Charles Munster – Piper Jaffray Companies

        Would you know if China, if more than half of — do you know if more than half of China is prepaid?

        Timothy Cook

        I think considerably more than half of China’s prepaid, Gene. I think the first digit would start with a 9.

      • http://www.asymco.com Horace Dediu

        Tim Cook has stated (more than once) that they will address prepaid markets “creatively”. I would not jump to conclude that implies just a lower price but something will be done. Probably in cooperation with operators. I expect they will look at the whole picture and try to bring the package of iPhone + service to a larger audience.

    • Anonymous

      A 7 inch iPod Touch with 3G at below $300 would be a true low-end disruptor imo.

  • Anonymous

    I don’t know if it’s technically an “innovation”.

    The Fire does cements the case for those opposed to the premise of the “post-PC era”. As long as Apple is not sucked into a race to the bottom on price points and quality, complexity and innovation, that premise survives.. at least in the heads of Microsoft executives

  • Anonymous

    No one has mentioned used or refurbished iPad 1′s which are still available at near the same price as the Fire and don’t have any of it limitations. Also, before long the same will be true with iPad 2′s.
    There is just no good reason to settle for much much less.

  • http://www.facebook.com/bthathaway3 BT Hathaway

    If you define the Fire as a “tablet” in the low-end computing device sense, then no, the Kindle fire does not compete.

    However, if you define it as a “consumption screen” (aka, Steve Job’s famous “third screen” described during his iPad introduction) then at $199.00 the Fire competes very aggressively and diminishes (though it does not eclipse) the iPad’s value proposition.

    I for one have already decided to stop buying iBooks, and I will most likely own more than one Fire. This way I can access multiple resources or multiple pages of the same resource simultaneously (wow, just like a real books!). I could never afford to think that way with iPads.

    Will I browse the internet using a Fire the way I do on my iPad? I really don’t know for sure, but my gut is telling me that seven inches will be good enough most of the time. If so my iPad’s utility will diminish further. Time will tell.

    Does this put Apple out of business? No. Does it nonetheless skew the third-fourth-fifth screen marketplace in a remarkably disruptive and unexpected way? Absolutely. Amazon won’t be able to keep up as people learn to work differently because content viewing has all of a sudden become so affordable–essentially three screens for the price of one, what a bargain!.

    I wonder who will be the first to own a dozen Fires? 100? And libraries will purchase them by the case load.

    As long as Amazon can keep their cloud up and running smoothly, the rest will be a landslide.

    • Anonymous

      3 screens for the price of one. Agreed.
      But not three times the content purchasing that Amazon must achieve to keep the Fire burning. A fast track to failure if all Fire customers go large and buy them in threes.
      Aye, there’s the rub!

    • davel

      I do not follow? Why buy more than one?

  • Z Kariv

    A great article.
    Few points to consider:
    What are the demographic slice that is going to buy a very low end device? Can they afford to purchase enoght contebt to recoop lose on hardware?
    What is the “slice” that fit economically into buying this but can”t afford it socially/professionaly?
    Excluding Google, most companies are counting on profit assuming short repurchasing cycle because of very fast advances in technology–this model, it seems, required a much longer cycle to gain profibility–do they have this time?
    It seems as this device is a part of some future–unanounced–steps in addition to existing content/services and not only existing ones

  • http://www.thenetworkgarden.com hypermark

    Great piece, and XLNT point on the dearth of global service brands. I will say, though, that publishers in the print universe are confronting this reality through their new licenses with authors (they have the same dilemma with extending rights to post-pc devices).

    A trend to watch is that as Amazon does more end-run deals with authors (i.e., dis-intermediating publishers), they will de facto these terms into their licenses with them. Music and Video are entirely different animals, though.

    Also, while it’s tempting to reach conclusions about Amazon’s hardware subsidy plans given their first-gen hardware, I am not sure how much we can infer here since all indications are that they plugged into a legacy platform for expediency to meet the holiday season. What they do with the next gen hardware will be the real ‘tell,’ although I guess that you can argue that their willingness to make this compromise on the front end is indicative of seeing hardware as the tail versus the dog, something Amazon’s messaging supports.

  • deV

    “Gene Munster of Piper Jaffray estimates that Amazon “loses” $50 for each unit sold.”

    Why does the word “bookstore” not even appear *once* in your article about Amazon? Do you really think that people buy Kindles without a somewhat fanatical intent to buy lots of books? It may not look pretty with simplistic methods of business analysis, and without doing any research into how these companies that do things like practically give away hardware because their business is actually selling books, the analysis isn’t very meaningful.

    “However by the second generation the Xbox was a locked down, custom architecture, pure gaming machine. Gone was Intel, gone was the PC architecture and gone was any dream of cheap development.”

    I don’t know if you noticed, but gaming PCs are very expensive. The market these consoles are competing in has been $200-$400. Think “budget PC” aka “incapable of gaming.” It made much more sense to use specialized CPUs that bear more resemblance to GPUs than general-purpose CPUs. Like the Playstation 3 Cell processor. Optimized code that runs fast on cheap hardware using shortcuts that don’t work on abstracted general purpose CPUs.

    Basically, you expect the impossible. Yet there are some basic things available now like watching Netflix (which again, relies mostly on GPU). But you won’t see programs compiled for general purpose CPUs running on optimized game consoles without some effort in porting. Maybe Microsoft’s development tools will eventually make that simpler like they have for games.

    “Since then Tivo, Google and Apple and many others tried to attach cheap hardware to video streams.”

    The consistently top rated set-top box is Roku, who you didn’t mention. The reason these products did not succeed in the past was lack of broadband adoption. It should finally get interesting now. The part about Apple TV not gaining much adoption deserved greater emphasis, considering how much attention Apple gets in every single other sentence, paragraph, and article on this site. But that wouldn’t fit with the “theme” I suppose.

    “Thus the Kindle is likely to languish in a leisurely update cycle with users encouraged to hang on to their devices for years. This is the case at least with the original e-Ink Kindles. How eagerly awaited are new generations? How many users stampede to update the hardware or even upgrade the software? How many users have owned every version of the Kindle?”

    Well, let’s see. Everyone I’ve known who has owned a Kindle has owned 2 or 3 models. I know a couple people who upgraded immediately. I honestly couldn’t tell you the draw, but b&w e-ink and such really isn’t my thing.

    “The iPhone is also a subsidized product and it seems very successful. How come it won?”(citation needed)

    The iPhone has neither won nor is it winning. Such a strange, out-of-place claim in an article on a different topic entirely. More importantly, the numbers don’t back it up.

    As and aside, I saw the numbers in brackets and got all excited you actually started citing references for something you posted for once. Alas, I was wrong.

    “The iPad is 18 months old, and as they say in the ads, they see it as only the beginning.”

    Bravo.

    • Tatil

      - Tivo does not depend on broadband at all. Very little internet data is required for it.
      - Broadband has been widespread for many years in the target population for every one of these devices. The limitation has been the content, not broadband.
      - Ratings from geeky publications that weighs feature sets rather than quality or ease of use does not matter. GoogleTV had raving coverage, it turned out to be an utter failure in the market. They are all marginal products even though almost every household has a TV.
      - iPhone takes about 65% of all phone profits worldwide. What is your definition of winning?
      - Your anecdotes aside, the observation that the passionate following evident in upgrades, people waiting in lines etc. is not as strong for Kindles compared to smartphones or iPads. No need for a condescending tone…

      • deV

        TiVo is more of a fancy VCR than a modern set-top box. It’s great at what it does, but the real devices that will eventually catch on (with universal 10+ Mbps broadband adoption are all the other devices mentioned). Is that difference not obvious to you?

        “Ratings from geeky publications that weighs feature sets rather than quality or ease of use does not matter.”

        I didn’t know plugging in a mini device and having instant access to TV shows and movies from many major networks in addition to services such as Hulu and Netflix was so geeky. Do you think your opinion would be the same if it had an Apple logo on it, such as the iTunes store-centric/dependent Apple TV?

        Ever consider your opinion that every Apple product is intrinsically more intuitive than every other device known to man is perhaps just a bias with no basis in reality? Apple TV is currently a failure, just as the “revolutionary” Newton MessagePad PDAs were, and the G4 Cube. Actually, I wouldn’t be at all surprised to see many of you defending those failures.

        “What is your definition of winning?”

        2 and a half times the marketshare

      • Afh100

        For someone who clearly hates every sentient being on this comment forum you really do put the hours in! I recommend a long glass of water and a run about outside! (PS I’m writing this on a Mac Pro. Irritating, isn’t it!)

      • davel

        also the top phones on usa telcos with apple is always apple.

        I call that winning.

    • Michael

      > Do you really think that people buy Kindles without a somewhat fanatical intent to buy lots of books?

      I plan to buy one to turn my 90 minute commute into catch-up time on my market research, keeping up on compliance, studies for re-certification, etc. Sure beats the raft of binders I’ve got now.

    • davel

      eReaders have a market because they are cheap and have a long battery. Also they can be used in sunlight.

      As for your set top box, you still need high speed broadband which in the USA is controlled by the cable companies, Do you really think they will allow a competitor to walk in and use their infrastructure?

      • deV

        Um, yep, I’m pretty sure I can go to the store and buy one right now.

        Comcast doesn’t block my Hulu. Do they block yours?

      • GeorgeS

        Better check with Comcast. They’ve put limits on downloading specifically to target and throttle TV & movies via the web.

      • deV

        Right…..that’s why my download meter stays pegged at 12 Mbps roughly 99% of the time, exactly the amount I’m paying for.

        Except for the first 30 seconds of downloads. With PowerBoost, those are boosted to 20 Mbps. A nice touch for smaller downloads. The majority of what people actually download on a regular basis is much quicker than the advertised speed. Bonus!

        So since it is not firsthand experience, where are you getting your information?

      • GeorgeS

        I’ve been using Comcast broadband for at least 7 years, so it is firsthand experience. Comcast now has a 250GB monthly data usage limit. You can read about this on their FAQs under “Excessive use.” About 100 hours of high quality video would do it, though Netflix and other sources often have other quality options.

  • Soma

    Excellent analysis.
    But based on what you said, Android should not be a disruption and should not be a sustainable business to Google. But it looks otherwise. Google is giving away android for free, with faster lifecycles than Apple and it still sustains.

    how does this fit in?

    • Anonymous

      Not sure it is the case that it has reached critical mass. There are a lot of Android devices, that is true, but Google doesn’t benefit from the sale of those devices but rather from the ad impressions those devices generate. Per recent Google testimony to Congress, iOS accounts for two thirds of mobile ad impressions (I realize that in this comment on its own that’s unsubstantiated; I will continue to look for the article in which I read this). If Android users don’t use data, and don’t tend to get ad impressions, then that reduces the value of Android to Google. And if the rumblings of dissatisfaction over Android (paying licenses to Microsoft; Google and Motorola; OEMs diversifying mobile OSes) continue, then the situation *might* get worse for Android and not better.

      EDIT: Here is the link on the ad impression percentage: http://9to5mac.com/2011/09/21/google-23rds-of-our-mobile-search-comes-from-apples-ios/

      • deV

        The title says of your article from that mac fan site says “mobile search”. Why are you reading those two words as “ad impressions”?

        Stating the obvious, people do more searching on computers than phones. If you lead the mobile market in tablets (which is also many times bigger a market than phones), you lead the market in generating search traffic. Why so much analysis and so little representation of these basic truths?

      • Anonymous

        You’re correct, and that’s my oversight. I still feel that it is an indicator that Google is not getting what it wants out of Android, though with a weaker correlation as you point out. It is reasonable to extrapolate that mobile search correlates well against mobile data usage, which would correlate well against ad impressions.

        Whether people search on PCs more than they do on mobile devices is irrelevant to the discussion, which involves iOS and Android. Google’s revenue from Android comes from ad impressions, and according to this Google exec two thirds of searches come from iOS, and I’m suggesting that that would indicate that iOS is getting most ad impressions, as well. Google would get the revenue from those ad impressions, too, but the question is whether Google is getting its value from the incremental impressions it gets from Android. Perhaps many of those Android ad impressions would have happened anyway via iOS (if many Android users would have purchased an iOS device if Android didn’t exist). I feel that it’s unclear that, financially, Google is getting out of its investment what it’s put into it.

    • http://www.asymco.com Horace Dediu

      I mentioned that coupled systems, where something is given away and something is valuable, are challenging as disruptive models. In the cases where hardware is being subsidized then the dynamics are particularly difficult. But in the case where what is being subsidized is software then the economics are different.

      Software has no variable costs with high fixed costs. As a strategy, once you commit to those fixed costs (engineers) then you can keep them generating new code at a reasonable pace and give it away in infinite quantity at no additional cost. On the other hand, Hardware has high variable costs and low fixed costs so the more devices you subsidize, the higher your burden. You cannot scale the business of giving away hardware.

      Therefore the closely-coupled model is more effective with software. Another example is Microsoft. Their unprofitable online and entertainment businesses are subsidized by their Windows and Office franchises. This can go on indefinitely (or at least as long as the core businesses are healthy.)

  • Anonymous

    Ah, so is that why Bjork sold an album in an app, so she could get instant, hassle-free, global distribution?

    • http://www.asymco.com Horace Dediu

      I’m still surprised this is not common with more artists. Whereas many authors now self-publish e-books I wonder why more musicians don’t do the same with their work. Perhaps they do. I am just not aware of any data.

      • Bernard Sangil

        Probably because it’s tough to gain visibility through that channel. Artists that are already famous prefer letting their label handle the distribution and marketing; while unknown ones can’t afford to pay for the App development nor the necessary publicity to get people looking for their work in a cluttered AppStore.

    • Guest

      Apps are just as country restricted as music. There are thousands of apps you can’t install if you country is not the US. I have no idea as to why.

      • http://www.asymco.com Horace Dediu

        Decisions on where apps can be sold are made by the developer.

  • Anonymous

    “Note also that because of distribution through Amazon.com, the Kindle cannot reach as many buyers as a tablet selling through the tens of thousands of points of purchase that operators and retail shops offer.”

    In australia, the kindle is on display in every major electronics store in the country. It’s almost as wide spread as the iPad.

    Still, I only know a single person who owns a kindle. And the iPad 1 was continuously out of stock all the way from it’s launch to the day the iPad 2 started shipping. The iPad 2 is doing better, but probably only because Apple has finally caught up with demand.

    • http://twitter.com/franksting franksting

      I see plenty of people with Kindles while commuting in Sydney. Not as many as I see iPads though and certainly not much more than I see Sony eBook readers.
      The Kindle is the virtual, anywhere accessible storefront to Amazon.com. Australian Bookseller agreements on top of the global distribution referred to in this article for other media effectively limits the penetration of the Kindle in Australia.
      So, the difference, as Horace notes, is the lack of a COMPELLING Amazon storefront in Australia.

      • Nursegirl

        It’s a similar situation in Canada. The Kobo reader has a better selection of ebooks (sold through Indigo/Chapters) than the Kindle does. With an iPad, I could buy books through Amazon, Indigo/Chapters and iBook. So, the Kindle would be the 3rd choice for many who’ve done their homework about ebooks around here.

        Luckily for Amazon, we’re so close to the US that people often don’t realize the problems with different distribution deals until they’ve already bought devices on sale in the US.

    • Al

      Yep the Kindle is available in the Uk at the likes of Tesco etc
      very popular with commuters and an incredibly high attach rate of official cases.

    • GeorgeS

      The current Kindle 3, which Amazon now calls “Kindle Keyboard,” is on sale in the US at various retailers, as is the iPad. However, that does NOT mean that Amazon will sell the Kindle Fire through other retailers right away. Why should they? The retailers will sell the Kindle Fire at the same price as Amazon, so Amazon will make less from each sale. Do you have any evidence that the Fire will be sold by third parties?

      (For what it’s worth, it took Amazon a few years to start selling the ereader Kindle through retailers.)

      • Mzehner

        I do – I got an email from Best Buy saying I could pre-order the new Kindle family from them – including the Fire.

  • http://kitizaidimai.lt dainiusblynas

    Amazon’s Kindle Fire is one more reaction from a company that feels threatened by huge threat of iPad. But why fear? Embrace it:

    1. Amazon is prime seller of ebooks, iBooks is not serious threat.
    2. Acept iPad as the tablet, try to be the best there (which Amazon in retail and books already is)

    Don’t fight Apple, it’s too big. It’s like fighting GUI in the 80s.

    • Anonymous

      I believe that Amazon would be foolish to rely heavily on the Apple ecosystem, just as Apple would be foolish to rely on Google for all of its key apps.
      Control over most of your ecosystem provides a measure of security.

  • kevin

    Amazon has pretty low margins on everything it sells, but it makes a good profit due to its scale and volume, like WalMart and Costco. It acquires goods at low prices and gets lots of inventory turns in its warehouses.

    So although the Kindle Fire aims to help Amazon dominate digital sales, its real goal is to help Amazon dominate all online sales. Kindle Fire and Silk are intended to make it easier (frictionless) for consumers to get to Amazon.com and its non-digital goods. No slow-to-start, harder-to-maintain, sit-at-a-desk PC involved. Note that Amazon pairs video streaming with Amazon Prime (free two-day shipping).

    So both Apple and Amazon are using low-priced, low-margin digital content to sell something else; for Apple, it is its devices, for Amazon, it is its non-digital goods. The disruption Amazon is focused on is in retail.

    Amazon will continue to make its storefront available on all mobile and PC devices. But the Kindle Fire and Silk slows (or even blocks) expansion into the retail commerce space by Apple and Google from the device and advertising/search businesses, respectively. For that’s where NFC, digital money, and iTunes/Checkout accounts are leading them into.

    • Anonymous

      Is Amazon making a “good profit”?
      Their numbers are not too compelling and the trend is ugly on profitability.

    • davel

      But Apple and Google don’t have the infrastructure to deliver third part goods.

      • Althegeo

        Apple certainly does have the infrastructure to deliver third party goods. They sell software online through The Mac Store and software, music, movies and TV shows through iTunes. They also sell third party hardware and peripherals along with software as well as their own hardware and software through their worldwide chain of Apple Stores.

    • GeorgeS

      I’m not so sure that Amazon makes a good profit or is doing all that well. Consider that their quarterly revenue growth is (from Yahoo Finance) 51%, year-over-year, yet their quarterly earnings year-over-year “growth” is negative at -7.7%. Thus, they sold more stuff but made less money doing it. Their net income (trailing twelve months) was $1.04B on revenue of $40.28B. Apple’s revenue was about 2.5 times higher at $100.32B, but their net income was *27 times* higher at $28.4B.

      For some reason, despite Amazon’s low earnings and the drop in their earnings, they still have a trailing P/E of over 98.

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  • http://twitter.com/jmacdonald Jonathan MacDonald

    Yet again I feel as if I’m spoiling the party by even commenting but to be honest I find the entire premise astounding.

    The arguments of disruption, low end or otherwise, seem to get caught in hyperbole so as to circumvent the very definition.

    Yes, the original Kindle was an example of a company, Amazon, disrupting itself to some extent.

    But no, the Kindle Fire is surely nothing other than incremental innovation.

    Moving away from semantics, what we have here is, surprisingly, a claim of market re-definition on something that, at best, is a progression of a trend.

    • http://www.asymco.com Horace Dediu

      Low price has a disruptive value in itself _if_ it provokes incumbents to abandon the low end and flee up-market. You can’t get lower in price than giving the product away, which, in a way, is what Amazon seems to be doing.

      The argument I made against this is that to be disruptive, the product also has to improve rapidly so that eventually it becomes better for most users than even the best the incumbents have to offer. I challenge the premise that it can get on that trajectory if (a) it can’t iterate quickly due to subsidy (b) that it assumes that the technology is mature and (c) that it can scale to the degree needed to make a global impact.

      • davel

        There are rumors Amazon will buy Palm. If true this gives them a path to upgrade,

      • DevStar

        Horace you miss key part of why this is disruptive — the Web. You’re looking at the device as if Amazon must make huge strides to improve it. When in fact they simply need to continue to supply a good web browser (and they seem to have an emphasis on the browsing experience) — and the web itself will get better.

        The question then becomes native apps vs web apps. When the difference is $199 for web apps vs $499 for incrementally better native apps then I think you’ll see that the disruption comes from the web.

        The Kindle isn’t about the hardware per se. It’s about making tablets a commodity so that no one else can control content via their tablet.

  • MD

    Horace, more excellent posts like this please. Great read.

  • http://twitter.com/DCWoods David Woods

    Would you consider IBM a global service brand?

    • http://www.asymco.com Horace Dediu

      That is a good example of a global service brand. But it is not for consumers. It is one thing to have thousands customers (as IBM does) but quite another to have millions or even billions. Enterprise service brands do also exist in the form of investment banks who can and do advise globally.

      • Raphael

        If you want global consumer services brands: Visa, Western Union, Hertz, FedEx, Holiday Inn, Skype, …

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  • Anonymous

    I’m not convinced with your console assessment. Microsoft ditched a common PC architecture because they didn’t own any of the tech and could not bring costs down over time like they could with the 360. As in, they went a custom architecture route because relying on ownership of parts by nvidia and Intel was far more expensive. The 360 is still arguably the least expensive console to develop on because of Microsofts superior development tools – moving from PC to 360 is very easy, and it’s likely that the custom hardware (onto PowerPC which many developers were familiar with from the GameCube – and also useful because the Wii and PS3 also benefit from the knowledge) has not added a whole lot of overhead. The real cost increase with games is the price of producing very high detail game assets and production values that the hardware enables.

    Additionally, I’m not sure when the last time you used a console was, but I game, play movies, rent movies, use NHL GameCenter and Netflix services, stream music from my Mac to my living room all on my PS3. You can do similar on the 360 including upcoming TV deals with Comcast and Verizon. Claiming they haven’t moved the devices beyond games just sounds very misinformed. Hell you can run Folding@Home on PS3.

    • Nursegirl

      Have you seen advertising by the console makers that highlights these features? What percent of PS3 buyers bought it to run Folding@Home. Just like you *can* buy apps on Blackberries, but that ability doesn’t help their bottom line, you can do other things on the consoles. This will become relevant when people start en masse buying based on what were once secondary services.

      • Anonymous

        I know a fair amount of people who primarily watch Netflix and use Xbox Live to chat while doing so.

        Regarding marketing, PS3′s motto is “It Only Does Everything”

        Nobody buys for folding, but plenty of people buy machines because they do many set top box functions, and avoid buying others because what they have already does “X”

    • http://twitter.com/itzabitza Margaret – CEO, Sabi

      Hey Jeff, I too share your concern on Microsoft’s ditching of commodity PC hardware. Horace rightly points out Microsoft is a *SOFTWARE* company. Yes, there is a hardware division (mice, keyboards, etc.) that does great stuff…yet imagine the monumental effort to piece together “off the shelf” components for the first XBox. AND was the NVidia off the shelf? :-). My head hurts every time I think of all the different vendors Microsoft must have had to work with! As you note, the key to being a “PC” to Microsoft is more in the APIs and the Tools. In that respect, XBox is familiar territory for PC game developers!

      The article should also take into consideration the company’s strategy at the time (circa 2000) and what was going on. Sony was getting into the home (Vaio) and the living room (PlayStation). Microsoft as Horace points out could not get into the living room via set top boxes. So take a strategy of getting into the living room via gaming (i.e.: direct competition to Sony in the living room), add a very impressive XBox Live, and also add more and more streaming media for a one-stop living room box solution (now if it only got the Speed channel my husband would let me drop cable TV….but alas seems Formula One races will stay on Cable for now…).

      Horace – your articles are absolutely worth reading. I look forward to each one. You are terrific with numbers. Perhaps adding the company’s strategy, historical (hysterical?) perspective and peopletics (?) into the discussion will further enhance your terrific work. Thank you very much for passionately sharing your knowledge!

      • Anonymous

        Well, unless I’m misunderstanding “concern”, my concern wasn’t really with them going off commodity hardware. I actually think that was a good thing and I imagine looking back that much is very clearly vindicated. nVidia and Intel were huge sticklers for the first Xbox because all the chips were essentially PC parts and they didn’t have incentive to lower prices like MS did (or Sony, who owned the large majority of all their hardware designs). MS had little leeway and no IP clout to drive prices down. Now they own the chip design and merely contract out to fabricate them at IBM. There is no nVidia or Intel trying to squeeze them for profit margin.

        MS used commodity PC parts only because the Xbox took about 18 months to go from conception to market which is incredibly fast and likely impossible to do with custom chips.

        The only anger about the 360 hardware for the most part was reliability due to rushing to market in 2005, but I think they’ve learned an expensive lesson from that.

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  • Sander Bos

    “because we can calculate the bill of materials for 7″ tablets”.
    You never say how one would actually calculate that. Don’t you mean to say here ‘pundits can randomly guess the costs of anything if you give them 5 seconds to pull a number out of their *ss’?
    P.S.: I am guessing that the kindle fires cost them about 17 dollar per unit (excluding shipping costs), so they actually make a nice profit on them. Proof me wrong…

    • http://twitter.com/#!/weiphi weiphi

      This is how you calculate a bill of materials: iSuppli has a pretty solid methodology for assessing BoMs. Their preliminary analysis (preliminary because they can only guess the actual built-in components without being able to take a Fire apart) comes to $191 for material alone and $209 including manufacturing costs.
      http://www.isuppli.com/Teardowns/News/Pages/Amazon-Sells-Kindle-Fire-at-Low-Profit-Margin-to-Promote-Online-Merchandize-Sales.aspx

      • http://www.asymco.com Horace Dediu

        Having been exposed to both the iSupply analysis and the actual costs for some products I can say that there is a margin of error in their estimates. The margin is typically due to economies of scale in sourcing (terms which iSupply cannot be privy to.)

        Having said that, the error is not enough to cast doubt on the order of magnitude of costs. I would say typically the error is about 10%. I would further guess that most competitors use the data internally to assess each others’ products. Some companies used to have internal teams that did the same work but now outsource teardowns to iSupply and others.

        iSupply publishes openly their Apple product estimates because it’s great publicity and if leads to sales of detailed reports for other, less famous products.

      • Sander Bos

        Your wikipedia link speaks of disassembling a product, neither iSupply nor Piper Jaffray did that. In fact, I googled Piper Jaffray Kindle Fire and could not find any thing about how he came to his number. Do you have any further information, probably not since you linked to a blog that mentions an analyst without a further link. Also, your wikipedia link mentions neither cost not price, it is just about breaking stuff open.
        That analysts cite these reports was actually my original point, that it is a bad idea that analysts and bloggers like yourself to cite these reports made up of totally fabricated numbers, and then base entire paragraphs on nothing.

        You say that the typical error is 10%, do you have a link to support that claim? Or is that more numbers thought up on the spot (you should have picked 16% then, since that is the difference between iSupply’s and Piper Jaffray’s fabrications). Would you say the numbers in all your Apple financials graphs are more, less, or equally accurate as the Piper Jaffray number??

        What is interesting about the iSupply breakdown is that they say the memory is $25.00 (a nice round number) and the battery is $18.25 (not $18.24, not $18.26). That is interesting, since I do not think that either the amount of memory (apparently 512MB costs the same as 1GB) or the battery size (1200mWh or 2400mWh, doesn’t matter what company you get it from it will always set you back $18.25) is known at this point (question marks in all tablet comparisons I found.

        Then Piper Jaffray and me are a lot smarter, just throw one number into the room does not allow for further criticism on the details. So I am still going with $17, throw in an additional $5 for marketing, $20 for logistics, and 2 million unit sales would lead to 314 million dollars of profit before the end of the year. Unfortunately that does not include the software costs, the Android sources came in a free download but Microsoft actually charges 500 dollars per unit for its patent portefolio, not $5 as citi analyst Walter Pritchard thought up on the spot and is still being widely quoted on).

      • http://www.asymco.com Horace Dediu

        The error of 10% I cite is based on personal experience. It comes from reading reports from teardown specialists and knowing what the actual cost of a product was to build (because I worked for the device manufacturer.)

        I’m guessing that the estimate from iSupply is based on their experience (and perhaps the knowledge that the product is primarily the same as the Quanta-built PlayBook) and I am guessing that Piper’s are as well. I cannot cite Piper’s quote because their work is not public so I have to trust that Appleinsider is not making it up.

        Generally speaking, almost everything in business analysis is an estimate so you need to use judgement and trust in the source in deciding whether you agree with it or not.

        I would caution however that the figure you suggest for marketing would not be part of the bill of materials or a variable cost. Marketing is a fixed expense. Software, on the other hand, is a variable cost when licensed (but not when internally developed).

      • Sander Bos

        See, I made the mistake of mentioning too many details, and you could immediately point me out on errors.

        Okay, I just spoke to my reliable sources at Amazon that have never let me down, and the marketing budget is actually 10 million dollars (my source actually put his pinky to to his mouth as he said it), then I think I don’t have to change any of the other numbers.
        So still a loss of 686 million dollars for Amazon, and (pinky to the mouth) 1 billion dollars profit for Microsoft. That is based on 2 million units activated (oh sorry, this is not *Google’s* Android, then units shipped I guess).

      • No Body

        You must be replying for the amusement value.

        BTW, I’ve found iSuppli to be consistently high by 11.38977%. My concrete-headed buddies and I are arguing about that last 7 though.

      • deV

        Precisely why if you look through several articles at a time on this site, you won’t find a citation or link to a credible source anywhere.

        It’s safer to pretend you are credible that way, when your only sources when asked are random, unrelated wikipedia articles and sites called iSuppli, or with Apple or Mac in the name.

    • http://www.asymco.com Horace Dediu

      Sorry, I thought that teardown analysis is commonly cited as a methodology.

      http://en.wikipedia.org/wiki/Teardown_(equipment)

      You can search “teardown name” for product names to get an idea of what the cost is. Analysts often cite these reports.

      • http://michaelkdawson.com/ TrendRida

        I find it interesting in these discussions on costs that R&D, Marketing and sales are not considered. I understand there is no standard methodology to use, but to assume that AMZN is losing $10-50 simply based on a BOM is not correct. Also I guarantee that AAPL is paying a different component cost than AMZN, RIMM or anyone else based on volume and relationships. So even these BOM estimates are off. AMZN is the king of low margins, so it is expected that they can pull this off at this price point. However, if demand is too high before it can come down the cost curve it could be problematic.

      • http://www.asymco.com Horace Dediu

        R&D, Marketing and Sales should not be considered because they are fixed costs and do not vary directly with the number of units sold.

        Volume discounts are not easy to forecast but there are estimates.

        What’s really tricky is direct labor which is process dependent, logistics which varies depending on channel and warranty expense which varies on the quality of the product. These are all part of the direct cost and impact the gross margin.

        In the case of phones, most of these costs also go down with time over the life of a product. The longer it can be kept in production, the more profitable it can be.

      • Laurent Giroud

        At the risk of sounding pedantic, teardown analysis is a method, not a methodology.

        Methodology is the science which studies methods, just like technology is the science which studies techniques and suffers from the same verbal abuse than its peer (ie, “new technologies” when one means “new techniques”).

      • http://www.asymco.com Horace Dediu

        Methodology is also defined as: a system of methods used in a particular area of study or activity. See also http://en.wikipedia.org/wiki/Methodology

  • http://www.facebook.com/people/Matt-Bancroft/100002893172086 Matt Bancroft

    according to this article Amazon makes a good profit due to its scale and volume, regardless the fact whether this tablet will slash the popularity of iPad or not you never know, as to how far this tablet could run http://tablettechtoday.com/blogposts/how-far-will-the-kindle-fire-go.html

  • http://ARMdevices.net/ Charbax

    Android tablets are about to cross 50% of worldwide daily tablets sold. Android tablets are growing in market share vs the iPad much faster than Android smartphones grew against the iPhone since a year previously.

    Amazon Fire only accelerates that Android tablet growth vs the iPad. The cheaper prices is exactly what makes Android better than Apple. Price, price, price.

    Amazon Fire costs $150 to manufacture in China, as Amazon is manufacturing millions of the exact same hardware, the cost is lowered. Amazon can sell it at near-cost price cause they have no reseller margins to consider, they are selling it themselves on their own website.

    I believe with Ice Cream Sandwich, Amazon will quickly realize it makes no sense of them to lock down functionality on their Fire tablet, so it’ll soon have a firmware update that allows users to install Google Maps, Google Marketplace, Google Voice, Google Gmail and let people run the Google Browser also if people want, no reason to block any of that. It does not lower their content sales to open up the device and let their users do whatever they want, also let users change the Android Home Replacement if they want the tablet to look like a vanilla Android experience.

    Android tablets are sold starting at $99, see the Archos 10 G2 at philly.com or http://armdevices.net/2011/09/28/review-n5zero-tablet-sub-100-5-capacitive-android-tablet/

    Android tablets have better features than the iPad and sold for 40% cheaper, see the Archos 80 and 101 G9 series starting at $299 with a more powerful dual-core processor, kick-stand, HDMI output, full video codecs support, 3G USB stick fits in the design, and a processor upwards 50% faster http://armdevices.net/2011/07/13/best-tablet-in-the-world-archos-80-and-101-g9-my-first-hands-on/

    The reason Android dominates smartphones and now is about to dominate in tablets, is because of the ecosystem, it’s about features, but most importantly it’s about enabling more competition which LOWERS THE PRICE.

    • http://pulse.yahoo.com/_OVRSLDBFGSKI2T6RUYSUNWV7FA Jérôme

      Android tablets are not even close to representing 50% of all tablets sold. They are at best representing 35% and more likely 30% if my memory is correct.

      • http://pulse.yahoo.com/_OVRSLDBFGSKI2T6RUYSUNWV7FA Jérôme
      • http://ARMdevices.net/ Charbax

        IDC is bollocks at numbers, Android is going to be over 50% of daily tablet shipments before the end of the year. Supposedly RIM and WedOS have 10% of the worldwide tablet market? This is ridiculous, try again IDC.

      • http://pulse.yahoo.com/_OVRSLDBFGSKI2T6RUYSUNWV7FA Jérôme

        Right, my crystall ball is also telling that I will be a billionaire before christmas, I don’t really have facts to back that assertion, but trust me, it’s a sure thing!

      • http://ARMdevices.net/ Charbax

        The facts are the 250 Android tablets on my http://armdevices.net/category/tablets/ them selling like hotcakes for as little as $60 all over China, Russia, Brazil, India and the rest of the developing world, the better value in cheaper faster better featured tablets like Archos and Amazon Fire, the avalanche of high end Android tablets coming out before Christmas and the actual shipment numbers published by all the Android tablet makers that actually do announce numbers sold.

  • Anonymous

    > “The iPhone is also a subsidized product and it seems very successful. How come it won? The answer is in details.”

    One of the other relevant details is that any subsidies that are provided are done so by the wireless carriers, not Apple. Apple gets paid in full for each iOS device sold, either by the carrier (iPhones), or by the customer direct (the other iOS devices). By being immediately profitable on each iOS device, Apple has no “subsidy variables” to factor into its profitability -v- product lifecycle calculations.

    Excellent analysis, as usual, Horace.

  • Anonymous

    rampant verbosity!

  • Albeesure

    Initially I thought that amazon had a real winner here and that this device will sell by the truckload. However, having read the Horace’s analysis and had a check in with “reality” I am starting to have my doubts as to whether this really is a game changer.

    Apple said at the initial launch of the ipad that they had tried various screen sizes and had come to the conclusion that 9.7 inches was the magic form factor. Apple always put alot of engineering and thought into how their devices look and feel. They wouldnt have taken that decison lightly. My take on that is that its all about the USP of the device. What does the device do that warrants you using it, taking it with you over others?

    The Kindle’s USP is that it uses e-ink, is light, cheap (it can be purchased on impulse) and you dont have to worry much about the battery. It does this all better than its competitors and if you read books there is nothing else like it. 

    So what does the Kindle Fire do better than other devices? Nothing! It isnt a better reading / music playing / app consuming / film watching device than its competitors. The screen is smaller so it doesnt adequately replace an a4 size magazine or textbook. It will never have any app with the wow factor of flipboard or real racing hd. All it has is a cheap price. At the moment I dont think 199 dollars is in impulse territory at all. The Kindle fire really has to justify its price to consumers in the mass market and I’m not sure it can.

    There is nothing about it that will wow customers compared to what they have already seen with the ipad. Furthermore, anyone who has a 4inch mobile phone can do pretty much anything the kindle tablet can do. The 7inch size doesnt really solve more problems in displaying content than the 4inch phone does. Whic is precisely why apple went for the 9.7 inch screen. That screen size is the USP, 7inches is a fudge. It is quite possible for someone to have a mobile phone and an ipad because the 2 devices solve different problems well. Or for someone to have a phone, kindle and an ipad would be quite normal as well (that combination solves 3 distinct problems). But to have a phone and a kindle fire? I think the 2 devices are too similar and dont provide enough USP to justify using both of them. 

    I think users will start to see that and the kindle fire wont be the blockbuster hit they expect.

    • Anonymous

      10″ tablets require 2 hands, ie stationnary at least, sitted at best, use. Even in bed, they’re a pain to use.
      7″ tablets can be used one-handed, hence on the move. 1024×600 sucks though, both as a resolution and a ratio.

      They address different markets.

      Of the 3 tablets I’ve owned, the better form factor by far was the Ainol novo8 8″, with 1280×768 resolution. One-handed use OK, full web page view OK. Too bad that chinese thingy failed on other aspects, battery life especially, lack of CM7 too.

  • Pingback: Can the Kindle Fire disrupt the tablet market? Not so fast | Freedom Developers

  • http://twitter.com/zacharyeinzig zachary

    “The margins for Kindle content are thin. Very thin.” Please explain a bit more.
    Kindle content is books, I buy lots of books.

    I have an iPhone too and hardly spend on content.

    • Mark

      Apple model doesn’t require you to spend on content. The iPhone has a nice margin as a device. The money Apple makes on the content is almost zero.

      Kindle contents its books now but with Fire it will also be music, movies, apps and TV shows but looking at how Apple, Google or Microsoft barely make money from selling these type of content its difficult to imagine Amazon doing otherwise, esp. if they have to recoup the money they lose with each Fire sale.

    • GeorgeS

      For Kindle books, Amazon now apparently uses the “agency” model, like Apple does for iBooks. The publishers usually set the selling price and Amazon gets a portion. (It may be 30%, like Apple.) Initially, Amazon used a “wholesale” model, where the publisher charged Amazon a wholesale price for each copy of a Kindle book and Amazon set the selling prince. Apparently, the Kindle book price (usually $9.99) was often LESS than the wholesale price, so Amazon lost money selling Kindle books. However, that was when the Kindle was $399, not $99 (with “special offers”), so the hardware subsidized the content. Now, it’s the other way around.

      Out of that 30% cut, Amazon has to pay all its fixed and variable costs associated with the sale of eBooks: infrastructure (e.g., storage & bandwidth), credit card fees, marketing, customer service, corporate overhead, etc. Apple has said that the iTunes music store essentially pays for itself, with little net income. (That may or may not be true for iBooks, movies, TV shows, etc.) It’s unlikely that Amazon does a great deal better.

      Overall, Amazon’s most recent reported profit margin was 2.58%. If we assume (with little justification, but we have to start somewhere) that the profit margin on eBooks, movies and TV shows is 3%–a bit higher than their other business–and that some analysts are correct in guessing that Amazon loses about $50 on each Fire, Amazon will have to sell $50/0.03 = $1667 in eBooks, movies, TV shows, and the like that it would not have otherwise sold to pay for each Fire it sells. (Put in your own numbers.) Only then will Amazon satart actually making money from the Fire.

      To put this into context, while Amazon’s revenue for the last quarter was up 51% from the same period last year, their earnings were DOWN 7.7%. They sold more stuff but made less profit doing it. (Apple’s revenue was up 82% and their earnings were up 125%.)

      • deV

        Rule of thumb around here: anything that Apple sells makes $1 million a pop, while anything anyone else sells exactly the same way they lose $1 million each. An interesting form of an analysis, but whatever floats your boat.

        Why would Amazon’s profit be 3% on a digital product where they take a 30% cut? Where exactly did that other 27% go? Are you serious? Do you think they manufactured each bit of the *digital copy* somewhere in a China sweatshop for $0.27 on every dollar? Do you see Amazon spending anything on TV advertisements or any other major expenses like Apple does a lot of? Seriously, do you?

        You think Amazon makes $50 for every $1667 in digital products they sell. Wow.

      • GeorgeS

        “Why would Amazon’s profit be 3% on a digital product where they take a 30% cut?”

        Because that has to pay for all their other costs, as I mentioned. 1-1.5% or so goes just to credit card fees, for example. Customer service can add quite a bit, as well. Storage and data transmission (bandwidth) aren’t trivial, as that also has to support shopping, as well as actually buying.

        You might want to check Amazon’s last 10Q (Quarterly statement to the SEC). Comparing the first 6 months of 2011 with the same period in 2010, Amazon’s revenue* went up 44.3%, but its operating costs went up faster, at 47.7%. (The big culprits were Fulfillment and especially Marketing and Technology & Content. The latter two when up 61.9% and 65.3%, respectively.) Amazon’s income before taxes went DOWN 24%–despite the huge increase in revenue. The diluted earnings per share also went down by 23.4%. As I said before, Amazon sold a lot more stuff but made a lot less money doing it.

        To get an idea of Amazon’s “profit margin,” look at the income BEFORE taxes divided by revenue. In 2010, the margin was 5.1%. In 2011, it had dropped to 2.7%. In the last quarter, it was only 2.3%.

        If you look at income AFTER taxes divided by revenue, it was only 2.0% for the first 6 months, down from 3.7% the year before, a huge drop. For the last quarter alone, it was only 1.9%. It is after-tax money that Amazon would be able to use to subsidize the cost of the Fire, so my 3% may have been high.

        During that period compared to the previous year, Amazon’s sales of digital media went up, but their profits went down. I’ll have to read through the 10Q to see what they attribute the change to, but it certainly looks as if digital sales aren’t any more profitable than material good sales.

        Compare Amazon to other big retailers. Wal-Mart’s profit margin for the last year was 3.87%, Target 4.33%. Costco was lower than Amazon at 1.67%. (All numbers from Yahoo Finance.) So, Amazon is less profitable than either Wal-Mart or Target.

        I’ve read speculation that the Fire might “compress margins” for other tablet manufacturers. (RIM has apparently already lowered the price of the PlayBook in response, as the Fire is very much like the PlayBook.) Unfortunately, it might also compress Amazon’s margins.

        *One note: Amazon counts sales by third parties at net–what Amazon keeps. The amount paid to the third parties does not show up in revenue.

      • deV

        Thank you for the detailed analysis George.

        Do you think Amazon’s dropping profits could be a result of investment in new products and services, such as the Amazon AppStore, AmazonFresh (groceries), Kindle development (including Android development), Cloud Player/Cloud Drive, S3/EC2, etc?

        Amazon seems to be currently fighting battles on many fronts. I’m not sure how that might factor in to it.

      • Tatil

        Investments in long term infrastructure does not count as expense (aside from depreciation over 3, 5, 7 years etc.), so profits do not take a dive just because the company buys some servers. The cashflow should be affected, as it needs to pay for them.

        Retailers generally has very low margins, but sometimes this can be misleading. Sometimes they do not pay for the items until they are sold, they are allowed to return unsold products and in some cases, they do not even take delivery of a product. For example, an online retailer may just tell the distributors to just ship some products directly to a customer, so retailing can also be thought of working on commissions, so the low margin may reflect the low risk and low investment per item on sale.

    • http://www.asymco.com Horace Dediu

      Retail margins are thin. Amazon is at around 2.5% now though it used to get 5%. http://www.wikinvest.com/stock/Amazon.com_(AMZN)/Data/Operating_Margin

  • Steven Harris

    Every time I use my iPad as an ereader, I realize that, for me (and many others, I presume), the iPad is the wrong form factor for comfortable, sustained reading. The Fire will not likely disrupt the tablet market. Agreed. It is a Kindle. Not an iPad.

    • GeorgeS

      It may not even be a good Kindle (ereader). The Fire’s screen is the same as the PlayBook’s–1024 x 600 pixels, vs the iPad’s 1024 x 768. How will that work as an eReader?

      1. Screen proportions
      The Kindle Keyboard, the new low-cost Kindle and the Kindle Touch have the same 6″ display. From measuring a flat-on photo on Amazon’s site, the screen proportions look like about 1.34. The Fire’s screen is 1.71:1. Either the Kindle pages will look considerably different (taller & narrower) on the Fire or there will be unused space on the Fire’s display. The iPad’s display is 1.33:1, almost exactly the same as the Kindles, so the pages can look the same.

      2. Text size
      It’s hard to directly compare Kindle eInk screens with an LCD, though eInk has higher resolution. We can compare the Fire to the iPad. The Fire’s screen is 169 ppi; the iPad’s is 132 ppi. The same characters (in pixels) will be smaller on the Fire than on the iPad–78% as high/wide. That means that reading a 12-point font on the Fire would be like reading a 9-point font on the iPad. To have equivalent character size, the Fire would have to use a 15+ point font.

      3. Characters per line and page
      For the same character size, the Fire can display 78% as many characters per line as the iPad. To display the same characters/line as the iPad, it would have to use a font 78% as large, e.g., a 9-point instead of 12-point. That 9-point font on the Fire would look like a 7+ point font on the iPad and would probably be unreadable. To have the same readability, the Fire will have to use a larger font resulting in even fewer characters per line.

      A retina display on the iPad wouldn’t affect this, as the display would show 12-point fonts the same physical size as the current display, but they would be a lot sharper.

      (I’m very aware of the limitations of 1024 x 768, as that is the size of the display on my antique 12″ PowerBook G4, though its pixels are larger than the iPad’s.)

      Illustrations on the Fire may have to be scaled down (in pixels) vs the Ipad or Kindle 3 to fit on the screen. (One can apparently zoom them, however.)

      Look at other potential “consumption” uses.

      - Photos: Images from most point-and-shoot cameras are 4:3, the same as the iPad’s display, so it shows them at 1024 x 768. The Fire will show them at 800 x 600 (like the PlayBook), which is considerably worse, or it will crop the photos to fit, losing 22% of the image. (Try it on your computer.) That won’t go over well with most users.

      - Videos/HDTV: The Fire will show HDTV at 1024 x 576 (16:9). So can the iPad. The only differences will be that the black bars on the top and bottom of the screen will be wider on the iPad than the Fire and the Fire’s picture will be physically smaller.

      - Web browser: The Fire will show less of the page in landscape mode and a much skinnier page in portrait mode compared to the iPad.

      So far, no 7″ tablet has sold very well, though many have had access to Kindle books, Netflix movies, etc.

      • deV

        “The Fire’s screen is 169 ppi; the iPad’s is 132 ppi. The same characters (in pixels) will be smaller on the Fire than on the iPad–78% as high/wide.”

        Weird. If this were the iPhone we were talking about instead of the Kindle Fire, you would be praising the awesomely amazing smoothness resulting from the 28% greater ppi of the Kindle Fire.

        You always have an angle, don’t you?

      • GeorgeS

        No. In the first place, there’s no “smoothness” from smaller pixels if the characters use the same number of pixels–they’re just smaller and harder to read. They can be “smoother” if they use MORE pixels, as the iPhone 4 retina display does. The iPhone renders characters at the physical size they would be if the screen were 480 x 320. (that’s why the text looks the same size on the iPhone 4 & 3GS.) As it is really 960 x 640, each character uses 4 times as many pixels as it would on a regular display, so it’s smoother and sharper. Also, the iOS Kindle app reduces the number of characters per line for the iPhone to maintain readability.

        More important, the Kindle Fire is INTENDED to be a reader; the iPhone isn’t. I was comparing it to the iPad for its intended uses: ebooks, video, photos, web.

      • deV

        Regardless of what a given *software* app or OS chooses to do, with regards to hardware, a greater pixel density (ppi) results in smoother graphics, text, everything. This is pretty basic. A shape with more pixels has smoother curves. That applies to fonts as well.

        Built on top of this basic fact of screen hardware, the OS has the ability to choose the number of pixels they wish to use to represent a given font size, regardless of the pt count (i.e. 12 point). This is called the dpi on Windows, and a similar setting exists on Android. Every OS makes this decision one way or another. Apps also include zooming features on top of that, which affects the way websites are viewed.

        Again, none of that representation alters the smoothness caused by hardware which is capable of fitting more pixels in a given screen size. Using those available pixels, the OS and apps can display fonts and graphics at *whatever size they wish*.

        I still don’t get the disconnect you have between recognizing the Retina has a smoother display (but smaller too) than most smartphones and recognizing the fact that the Kindle has a smoother display (but smaller too) than the iPad.

        I don’t think there is any way you can convince anyone that higher ppi density is not better. The question is really for any given purpose, is a bigger display better for that individual?

        For example, would someone prefer a 4.3″ display than the 3.5″ (smoother) iPhone 4? I’d wager yes because 3.5″ is pretty pathetic to use as a touchscreen, especially because that results in such a tiny on-screen keyboard. And would they prefer the larger 9.7″ iPad 2 than the 7″ (smoother) Kindle Fire? Not quite as clear. 7 inches is plenty of usable space, but 9.7″ is very roomy to use on a table. It would really depend on what size someone wants to carry, hold, etc. One additional advantage of the 7″ size is the ability to use your thumbs to type when held in profile orientation. 7″ is about the biggest that is comfortable to use lying down. So what’s more important–size or pixel density? Completely depends on the application.

        What’s clear is that for any given size, increased pixel density is better. This all ignores other factors such as the dark blacks (battery saving), great contrast and beautifully vibrant colors of Super AMOLED Plus versus overall brighter (better readability in sunlight) Super LCD screens. The Retina display, contrary to its marketing at the time, is not the best-looking smartphone display (it looks washed out compared to Super AMOLED Plus), though by that one measure you would expect it to be.

  • Anonymous

    To be a disruptor, a product should shelve most of the functionality of the disrupted product, but then truly excel in a smaller set of its key functions. Doesn’t appear that the Kindle Fire is a must-have device because it fails this criterion, particularly since without a mic the Fire can’t use rad audio apps like TINYVOX ;D But so, it doesn’t change the game. However, if Bezos decides to GIVE a free Fire to long-time Prime members like myself, then expanding this giveaway to anyone who signs up to Prime, the Free pricepoint would then qualify as a “feature” of the CORE and incredibly disruptive Amazon e-book and e-commerce operations. WalMart would have nothing on this, which would be a better target for Amazon than Apple. Excellent analysis, this is a rad blog !!!

  • http://michaelkdawson.com/ TrendRida

    The 7″ category is simply going to be a pricing blood bath. “HTC follows BlackBerry to $299 tablet bargain bin”

    http://cnet.co/qfn8hM

    I find it amazing that these companies can drop their prices from $499 to $299 so easily. I’m fairly certain they are losing money at those price points. Unless the Kindle Fire proves to be woeful under powered – I expect many of these competitors to drop out after Christmas.

    • deV

      How can you guys see Apple’s massive profits on these devices compared to their competitors, yet fail to comprehend that means, by definition, that Apple’s products are ridiculously overpriced relative to what they cost to build? Explain to me how *you* think profit works, please.

      Instead your assumption is their competitors must be giving away their products or losing money on them when they sell them for what they’re actually worth.

      Does not compute.

      • Anonymous

        Read the article. Really. Read the article.

      • deV

        Let’s see. The article mentions things like Apple breaking even on content sales. At no place do I see any mention of any way in which Apple has lower expenses than other manufacturers.

        They sell gobs and gobs of under-spec’d hardware made in China by Foxconn for luxury prices. That is how they have higher profit. They save some money by having very few product options in their lineup, and refusing to refresh their hardware as often as their competitors. But they also spend far more on advertising and marketing.

        And yeah, 30% margins in consumer electronics hardware is excessive. Has been for a long time.

      • Tatil

        Article estimates iPad margins at around 30%. That is not “ridiculous”, just decent. For example, the subsidiary I work for (I am not sure about our parent company) targets around 48%, even though we do not have much advertising expenses that needs to be paid from these margins. (We spend a lot on R&D that is paid out of the margins.) Our share price used to get hammered if we fell anything close to 40%.

      • unhinged

        If the cost of manufacture were the total value of a device, why would new ones be invented? There would be no rational reason for spending the time and effort coming up with something new.

        Apple profits by selling product at a price competitors struggle to match without losing money. Customers find the sale price to be good value for the product. Apple’s investment in their own operational efficiency has resulted in great profit margins; the resulting profit is further invested in the company and creates a positive feedback cycle.

        Hope this allows you to understand.

  • http://twitter.com/teyc Chui Tey

    I wouldn’t be surprised if locked down device that uses cloud storage to at least achieve the same valuations as DropBox for the storage service alone.

    Furthermore, the Kindle’s store will enjoy front page billing, and a $199 spend is an upfront commitment from a buyer that they will fill it out with content.

  • Laurent Giroud

    Horace,

    in your paragraph about set top boxes you say:

    “Since then Tivo, Google and Apple and many others tried to attach cheap hardware to video streams. They all failed to get on a disruptive trajectory. And again, the blame can be placed on the stifling effect of subsidies and dependencies on services or content which dictate where the value and hence the investments should go.”

    This seems to imply that the Apple TV (relative) failure is also due to subsidies and misdirection of investments due to restrictions on content. I would argue that it does not lie in the same camp as the other attempts (Tivo, Google) for two reasons:

    First of all, it looks like Apple is not selling them at a loss (http://www.isuppli.com/Teardowns/News/Pages/iSuppli-Teardown-Reveals-Apple-TV-Inner-iPad.aspx) but rather at the 30% margin which is usual for Apple hardware, and second I strongly doubt that Apple is dumb enough to fall into the trap of investing in content rather than in the device at the risk of losing any possibility of differentiation against its competitors.

    I think it’s actually quite notable that even an experimentation like the Apple TV can be profitable even though they are using it to test the waters of computer-less to-TV-and-Stereo content distribution with the clear – to me at least – objective to figure out what feature would be the key differentiator for such a product

    • http://www.asymco.com Horace Dediu

      Indeed Apple TV is not subsidized. I should have been more specific. Apple TV is unsuccessful because it competes with a subsidized product–the set-top box from the cable provider.

      Steve Jobs explained this better than I can in the link in footnote 4.

      • deV

        That’s a cop out. The cable company’s set-top box does not compete with any of the features of the Apple TV or any of it’s competitors. Apple TV does not even attempt to provide any sort of pause or fast-forward or any other PVR type features. TiVo competes directly with the cable box. Apple TV doesn’t.

        Apple TV is a “hobby” because it’s simply a way to give die-hard iTunes Store fanatics more of what they want. iTunes DRM-encumbered TV shows and movies in their living room for $2 or $3 a pop, extending the iTunes lock-in a little deeper. None of Apple TV’s competitors attempt quite the same feat. It’s just Apple’s way of catching some of the money being thrown their way, without truly getting actively involved in improving the product. Apple doesn’t work with other companies very well. Never has, never will. Unfortunately, that’s what this type of product requires.

        The widespread use of these online services on the TV will come through the TV itself. Sony and Samsung are building “Smart TVs” that don’t need a separate box. They’re on sale now. One hindrance will be that some sites like Hulu block these devices. Even though you can hook an HDMI cable from your computer to your TV and accomplish the same thing (as I do), for whatever reason, the TV networks consider the online-enabled set-top boxes a threat. At least Crackle, Netflix, and many other services work. But it will probably take some really compelling online service to gain momentum.

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  • James_w_Myers

    Horace,

    Is the objective of the Fire not to increase the subscriptions to Amazon Prime. At a cost of $79 a year, this sets up a nice reoccuring revenue stream for them. Amazon Prime add real value to the Fire, with “free” streaming and use of the cloud music services. The other thing, although smaller is they control the app store as I believe most of the content in the Amazon App Store is sourced directly from developers, thus another source of revenue to close the gap on hardware

  • http://twitter.com/djmorituri Azizi Jennis

    We shouldn’t compare the Kindle to consoles, or any direct razor/blade models. The first thing that Amazon added to the Fire is a custom Amazon store. Coupled with a month’s free access to Amazon Prime, the Amazon Store on Fire will be a gateway drug to easy holiday buying. Instead of calculating the Fire’s ROI via tiny ebook margins, think about that next laptop, big screen TV or next few months groceries all bought through this 7inch device.

  • Anonymous

    We await Apple’s response. (Did it hold off on its fall announcements until Amazon placed its bet?) Will it react with a larger iPod Touch? a cheaper iPhone? a scaled down iPad? a new set of killer features in iOS? a new set of iCloud services? I like the bloggers who say Apple would not put Tim Cooke on stage unless it had some special to offer, to inaugurate his incumbency.

    • Anonymous

      Just adding my preference here. I want a wee bit bigger iPod Touch. Long overdue. Apple needs to give the Touch a life of its own. Give it eyes: include a decent camera. And parallaxial sight: GPS. And speech: 3G. And memory: 32Gs. At $299 with iOS5, it would quickly put out the Fire. And we all know fires are best put out asap.

  • Anonymous

    We never hear about what a closed garden Amazon’s Kindle is. Not a peep when Amazon was taking 70 percent on books. When Apple asked for 30 percent, the media came a screaming halt and Apple was the bad guy. Anyone can buy anything on an iPad using web apps, without a cent going the Apple. Compare: Nobody but Amazon retailing on Kindles 24/365. Why does Amazon get a pass?

    • Tatil

      Not only a 70% cut, but apparently Amazon was forcing periodicals to sign contracts that assigned it at least some copyrights, so that it could republish some of that content in other maybe not yet baked ways. However, I disagree about “not a peep”, as I would not know about these if the press did not cover it. Apple related headlines attract more viewers, so the coverage may have been more prominent, but that is more of a fault with consumers of news rather than the suppliers.

  • http://twitter.com/RadicalLib Stephen W. Carson

    I shared this article with a friend and thought his comments were interesting. I share them with his permission:

    There are a lot of holes in that article. The entire starting point of comparing the Fire to the iPad and Playbook to guess the price missed some big points. Fire has no camera, weaker (presumably cheaper) processor, less memory and few ports than the Playbook. All of those make the comparisons nearly impossible. Amazon may be losing on every sale but I haven’t seen hard evidence. I think it is more likely that they worked out a break-even price assuming a certain minimum number of sales.

    The “second hand” comments also make no sense. The did use a style similar to the Playbook but this is not recycled hardware. And calling Amazon’s fork of Android a second-hand OS and implying they took the cheap way out is showing ignorance of how hard it is to customize software, especially something as complex as an OS. I am pretty certain all hardware used in modern tablets can be made better and cheaper as technology improves. What looks like commodity hardware today may seem ridiculously expensive in hindsight five years from now.

    Another claim I have trouble accepting is that the “margins for Kindle content are thin”. That may be true for books, movies and apps but Amazon is putting their entire ‘online Walmart’ in the Fire and that is a different type of market. Even the claim that eInk Kindle owners are reluctant to upgrade seems weak to me after seeing online discussions among Kindle owners who couldn’t get their Kindle 2 fast enough. I realize that is an audience filtered for serious fans of the product but my own family may be a better guide – we keep buying Kindles as replacements or to cycle through to the next recipient and I am the only one in the family who had any interest in them at first. We didn’t stampede for the newest model but we just keep buying them.

    Even with those dubious arguments I agree with his conclusion – the Fire is not disruptive, at least not to the iPad. Other Android tablets might suffer but even in that space there is lots of room for competition. If someone (like me) is happy to read on eInk and prefers a more powerful tablet the Fire is not a good choice. The best audience for the Fire is probably people who don’t know if they want a tablet but keep hearing it is the new thing they must have. That should be good enough for Amazon since a lot of those people are probably not Amazon Prime customers and the real win is to hook more Prime subscribers. And that last point is why I think Amazon seriously messed up by not making the free subscription longer than a month – it takes longer than that to develop the habit of looking first at Amazon for any shopping.

    • http://www.asymco.com Horace Dediu

      Regarding the idea that Amazon is working on break-even assumptions for hardware I’m reminded of this article from February: http://www.pcworld.com/article/220980/will_amazons_kindle_be_free_by_november.html

      “Kelly acknowledges that pundits before him have spotted the Kindle’s consistent price decline. Blogger John Walkenbach, for instance, predicted the e-reader would be free by November 2011. When Kelly asked Amazon CEO Jeff Bezos about the Kindle’s southward march, Bezos reportedly smiled and said, “Oh, you noticed that!””

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  • Dajhilton

    Very interesting discussion, but I think the final point regarding services versus products is probably correct, but not for the reason given. It is not in fact accurate to say that “book rights are limited to national boundaries as are movie rights and song rights”. An author’s right exist virtually worldwide now, and though they are very often marketed territorially that result is chosen, by the marketer for their own advantage, and is not compelled by any legal regime or other outside determining factor. As an international copyright lawyer this is my specialty, and I can say that with the exception of only about 10 countries, book rights (and most other copyrights) are not in fact limited to national boundaries. An author, or film studio, enjoys virtually worldwide rights in their creation, even if they usually do choose to market them nationally. And the rights appertaining the work are remarkably harmonized around the world as a result of the 1998 World Trade Organization’s decision to mandate that all WTO countries implement the Bern Copyright Convention. (And virtually all countries now belong to the WTO).

    So it is necessary to probe the actual reasons why rights in creative works are still so often exploited on a national or regional basis. I suspect that inertia and overly-detailed media corporate structures (particularly those that encourage different divisions to compete with each other) play their part. There are probably other reasons why services are harder to exploit internationally than are products. But I am pretty confident that the reason this is so is not because rights are in any way limited by national governments. They are limited by the rightsowners, for their own reasons, wise or not.

    • http://www.asymco.com Horace Dediu

      Very good points. I perhaps mis-spoke. I did say “book” rights to imply marketing and did not mean author’s rights. I meant that a publisher tends to operate locally and needs to transfer rights to other publishers if they want to sell a book internationally (usually with additional rights for translations).

      To put it plainly, unless I self-publish and sell e-books, my publisher will work to find ways to sell my book internationally by negotiating distribution with other publishers. This means that if the publisher does not do this, it’s unlikely that my book will be sold internationally. I have the rights, but I don’t have the distribution. It’s distribution which makes content feel local regardless of rights.

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  • Joshua J. Slone

    There are some things that seem incomplete or not backed up.

    The bit about the price. An estimate is brought up where Amazon loses $50 per model. Fair enough. But there have also been estimates saying they’re losing $10, gaining $20, or gaining $50. Which is accurate? I don’t know, but having a reason to believe one over the other would make a big difference for an article like this.

    The section on home console gaming gaming. The shift from Xbox to Xbox 360 is talked about like it was some big change of strategy, when the only change was that it was less off-the-shelf-PC-like because it wasn’t so rushed. It didn’t make it less open, or terribly difficult to develop for (beyond the unavoidable need for higher quality in-game assets), and it certainly wasn’t some new shift that Sony and Nintendo followed on. I’d also say the Wii sounds a lot like a cheap-to-produce low-cost disruption with popular uses outside of standard gaming.

    “Thus the Kindle is likely to languish in a leisurely update cycle with users encouraged to hang on to their devices for years. This is the case at least with the original e-Ink Kindles. How eagerly awaited are new generations? How many users stampede to update the hardware or even upgrade the software? How many users have owned every version of the Kindle?”

    To quote Wikipedia, citation needed. Are these things the case? I know there are plenty who like to upgrade to the latest model, but I don’t know any stats on how common or uncommon it is. The one that’s easiest to look at is the leisurely update cycle. We’re on the fourth generation within 4 years of the original model’s launch–not so far behind the iPhone.

    “Note also that because of distribution through Amazon.com, the Kindle cannot reach as many buyers as a tablet selling through the tens of thousands of points of purchase that operators and retail shops offer.” Kindle 3 has been available at some of the notables like Wal-Mart and Target. Do we know whether or not Fire will follow in its footsteps?

    • http://www.asymco.com Horace Dediu

      The thesis I’m evaluating is that of Rob Wheeler, that the Fire is a potentially disruptive product. I think it unlikely as a low end disruption.

      But there is a simple test for the Fire’s potential. If the product will indeed be sold through a vast number of points of sale (at 200,000) in all markets world-wide then I’ll re-consider my view on this. A low end disruption needs to address a billion consumers. That cannot happen though Amazon’s own store-front as it is today. Perhaps Amazon will one day serve the world 5 billion consumers who are the targets for all the major mobile platforms vying for relevance, but I don’t see how they do that without offering a margin to distributors. The Kindle’s history is one of steady movement toward a zero price point and that does not lend itself to distribution through channels.

  • Anonymous

    While your attempt at disguising the basic flaws of your argument in long worded expressions is commendable your post is hardly worth it’s length. Here are the basic flaws that I see;

    Yes, Kindle Fire is probably being sold at a small loss but more likely it is priced at a break even point (judging by what I personally know about the Amazon leadership).

    Contrary to popular belief, Fire is NOT competing against the iPad. Fire as a tablet is competing agains other Android devices and since competition on features there is hard, they compete on price. On that aspect alone, Kindle is a very good competitor.

    There is a very straightforward and simple reason why Amazon needs Kindle. It’s called Magazines. You cannot sell subscriptions to most periodicals (non scientific) if all you can display are 16 shades of gray. Therefore Amazon needed a full color screen and due to simple technological restrictions, it is in the shape and form of Kindle Fire. That’s it! No more complicated than that!

    You are right that the product being sold here is not really a tablet. In the greater scheme of things it is actually the book store and the Android App Store that are being sold here. However, you should not forget that Amazon runs all of it’s divisions as separate and more or less independent enterprises and as such, they do have separate strategies for Fire and the eBook/App store.

    In the general scheme of things, Fire would take a relatively small percentage of the market however, it is most certainly a precursor of what is to come for the Android tablet market. In the coming year you will see a very fierce competition on price since the Android tablets pretty much skipped over all of the other 3 stages of competition and unfortunately, at the end Apple will be the only winner. Well maybe that is fortunate for everyone already using an iPad …

  • http://jmmxtech.wordpress.com/ jmmx

    I agree with much of what is written here, but I have my own analysis of the Kindle Fire, including reasoning as to why Amazon is willing to lose money on it in the short term…
    http://jmmxkindlepage.wordpress.com/analysis-kindle-fire/

  • Anonymous

    “The reality is that there are no global service brands. ”
    Horace – wouldn’t you say that Google is a global service brand?

    Also, hypothetically speaking if Apple were to stop charging 30% commission on ebooks, how much do you think it would impact Amazon? Subsidized hardware vs. subsidized content model? I don’t believe Apple will be making much money from selling ebooks anyway and it looks like it could become a good feature to have people stick with iCloud and Apple ecosystem.

  • Guest

    “But investment decisions have consequences. The subsidized device is starved of investment while the profitable service is nurtured. We see evidence of short cuts in investment in the off-the-shelf nature of Kindle products: from a second-hand (unsanctioned) OS to a second-hand (ex-RIM) hardware. Meanwhile, Amazon spends heavily on capex for the infrastructure that delivers the profitable content.”

    Consider it as the free hotel shuttle from /to the airport. It loses money but not really. Also, Bezos did invest for years in a losing business, er Amazon. He expanded and build an amazing distribution network to handle the load for possibly decades later instead of focusing on short term profits. Yes, he needed warehouses but the extra capacity is a different story.

    The problem for Apple is that maybe not Fire but Fire II will be more than “good enough” to read and browse /what 95% of people do anyway. Chips will get faster, cheaper, the screen better, memory cheaper so $200 will give an amazign piece of harware. Apps? How many does one need, 500,000K? It’s more marketing than anything else, probably 90% of people uses 10-20 apps and almost all are for Gmail, FB and the likes that will be there day one. So iPad might become a luxury item, not really a must to conveniently read CNN.com or check your mail.

    • Jeff

      One of the apps those 90% use is probably iTunes. Also the synching ease of Apple devices for things like family pics…iCloud and the whole Apple environment seems to be a major draw, not just using gmail and FB.

      For 10 years there’s always been some boogie man product that was about to bring apple down. Now it’s Fire. I’m sure there’s a lot of room for both products in the market, but the idea of iPad being a luxury item only is laughable, in my view.

      • Jeff

        I just thought of a way these other devices may have a real crack at unseating apple. If they can get the Apple Store and Verizon to distribute them that would really help their cause.

        focus only on the devices and some kind of over simplified analysis totally misses the value of the brand, customer loyalty, the underlying reasons behind the loyalty, marketing, distribution. And yes even feeling and emotion. Apple is going to be around and doing well for a long time.

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