1. Thank book publishers for the Kindle Fire.
AMZN’s initial strategy for e-books was to compete on price. In fact, it started out offering e-books as a loss leader. It was paying the publishers $12.50 for a new release and selling it as an e-book for $10.
The book industry didn’t like this one bit, however, because it feared the tactic would destroy the independent bookstore distribution channel. So it forced AMZN, by threatening not to sell books to the company, to charge $13-$15 an e-book for new releases and keep 30% for itself (see my posts on Kindle economics for more details). Take that, AMZN!
As I pointed out then–nothing requiring much insight, only having watched Jeff Bezos operate over the years, I thought AMZN would likely shift to using its hardware as a loss leader to build up sales volume. The process took a little longer than I anticipated, but the Kindle Fire is the result.
According to iSuppli, the components in the Fire and their assembly cost AMZN about $210 a unit, meaning the company gets no recovery of its research and development costs, and loses $10+ for each unit sold, to boot. If AMZN marked up the Fire the way AAPL does the iPad, it would sell for $275-$300. Vintage Bezos.
Presumably, though, the early devices have a lot of redundancy built in (what a disaster if the first ones broke a lot). But component prices will fall, and the device will gradually be simplified. My guess is that AMZN will cross the breakeven line in the second half of next year.
2. Fire is the star, but there’s a mini-explosion of regular Kindles as well.
Along with the 7″ color-screen Fire, AMZN is introducing a new 6″ e-ink Kindle with audio and text-to-speech. The latter comes in touch screen and physical keyboard models. With 3G connectivity, they cost $189. They’re $40-$50 less with wi-fi only (which is what the Fire has). You can knock another $30-$40 off is you’re willing to accept advertising.
And, of course, there’s still the original 6″ Kindle at $109 and the jumbo-size 9.7″ Kindle DX at $379.
3. AMZN is already offering Fire extras.
For example, there’s:
–a two-year extended warranty, that also covers three instances of accidental damage, for $44.99,
–a cover for, $24.99-$44.99, and
–streaming of TV shows and movies through Amazon Prime–which costs $79 a year and also gets you free two-day shipping on all AMZN purchases.
4. AMZN’s formidable cloud computing capabilities back the Fire, too.
AMZN is promising super-fast internet browsing with the Silk browser every Fire comes equipped with.
AMZN’s on-line retailing operations require massive server banks. Because the company has to have enough capacity to handle surges in demand during peak selling periods, it can often be left with as much as 90% of its servers idle. Years ago, it turned to providing cloud computing services to third parties as a way of using this asset better. Its careful study of its customers’ behavior while on the Amazon site has also given it the ability to anticipate their needs–meaning it will be able to pre-load onto a Fire device likely next pages even before the user tells the browser to request them.
More about this tomorrow.
Fire may not have the upscale cachet of the iPad. But the price is right at the level where surveys of US consumers suggest they’re willing to buy a tablet. It’s small, weighs less than a pound and has a battery life that AMZN puts at 8 hours of active use.
It seems to me the Fire will prove very attractive to consumers on the go, just as the early netbooks drew traveling businessmen for their light weight and essential functionality. I doubt the form factor will stagnate in the way that netbooks did, though, and I don’t expect the iPad will move downmarket to challenge. AMZN could easily be a very big winner with the device.