Wednesday, September 28, 2011

Amazon and Apple's dramatically different strategies

Today's announcement of three new black & white Kindle models, plus the Kindle Fire tablet, have shaken up both Amazon's competitors and a number of industry observers. The Kindle 4 models (the Touch, Touch 3G and just plain Kindle) each set new low price points for eReaders with their functionality. The Kindle, at $79, will be a stocking-stuffer for the coming Holiday season. The Kindle Touch Wi-Fi, at $99, provides comparable functionality to Barnes & Noble's Nook for $40 less, and the Kindle Touch 3G adds always-on wireless connectivity. for $149. (All these prices are for Kindles with Special Offers, or in other words, advertising. Add $30 to the Kindle and $40 to the Kindle Touch models if you don't want ads.)

The Kindle Fire tablet, at $199, is cheaper than any brand name Android tablet except Lenovo's forthcoming A1, which comes with front and back cameras and GPS, all of which Amazon leaves off. However, Amazon has built its own user interface on top of Android that's designed to make the Kindle Fire much easier to use than Google's standard Android. Amazon has also built its own browser, called Silk, that uses Amazon's cloud services to pre-render web content for better performance.

Everything about the Kindle Fire demonstrates how radically Amazon's and Apple's strategies differ. Apple uses software to sell hardware; the iTunes Store and App Store are there to increase demand for Apple's hardware. Apple makes money from software and content, but it's a drop in the bucket compared to its hardware revenues. Amazon, on the other hand, uses hardware in order to sell its goods and services. It's likely that the new Kindles, including the Kindle Fire, are all being sold at close to break-even or possibly even at a small loss, in order to generate more sales of other goods and services. Amazon sees the Kindle Fire as potentially being as stimulative for music, movie and television show sales, as well as Amazon Prime subscriptions, as the black & white Kindles have been for eBook sales.

There's not a lot of daylight between Amazon and Apple for competitors to exploit. Amazon is setting price expectations at the low end and is trying to dominate the content market; Apple dominates the developer community, and the iPad will continue to have a much bigger selection of apps than any of its competitors. Can competitors sell more expensive tablets than Amazon with a mediocre selection of content, or less expensive tablets than Apple with a mediocre selection of apps? I doubt it.

This would have been a great opportunity for a radically different tablet, like Microsoft's Courier, that could compete in a completely different market segment, but Microsoft killed the Courier, and there's nothing on the horizon from first-tier competitors that can forge its own path. In hindsight, HP was probably right to kill the TouchPad, and I wouldn't be at all surprised to see other companies rethink their entire approach to the tablet market. Cloning Apple or Amazon won't work; competitors need radically different products.
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