How Amazon’s new tablet signals the start of next generation

Guest Analysis: With the announcement of the Kindle Fire, Amazon has now made the long term tablet business an interesting three horse race — one that may ultimately turn on business models just as much, if not even more, than technology.

What this move largely comes down to for the tablet market is Selling Hardware (Apple) vs. Selling Advertising (Google) vs. Selling Everything Else (Amazon).

Amazon’s entry into the market really is more about business models and strategy than hardware.

Most hardware and device announcements have the same goal in mind – selling more hardware. This hasn’t changed.

Everyone wants their device to proliferate. What has changed is the intentional commoditization of the tablet hardware device driven by the business model.

It’s no longer about simply taking your profit per device and multiplying it times the number of units. It’s far more nuanced than that.

Selling Devices 

For the most part, Apple remains the closest pure play when compared to the original formula. Given their volumes, they do a nice business with their app store and selling content. They are even getting into the advertising game. The clear driver for them however, remains selling devices.

It’s long been Apple’s strategy (and in their best interest) to drive premium prices for their hardware and keep content prices relatively modest.

The lion’s share of their profits don’t come from content or even the apps, but this combination does serve as a significant barrier to exit inside their ecosystem and an inherent catalyst for driving the purchase of the next generation of devices.

This has been a terrific model for the past generation. Apple has leveraged their core competencies in design to revolutionize the industry. In the process, they have ingeniously enabled the consumer to stock the device with apps and media content and thereby implicitly lock themselves into the iOS platforms.

Fashion chic design and hardware platform innovation, backstopped by terrific software have been the drivers.  With increased competition from new devices and new models, this course will come under increasing pressure.

The Evolutionary Process

This game is evolving, and the recent Amazon play signals the entry into the next generation. If you look at where we are now, Apple has doubtlessly succeeded in reinventing the market. Imitation indeed is the sincerest form of flattery.

Tech veteran Bud Albers.

But the device market having been changed, is now on a course for normal hardware evolution.

When you see a new device today the reality is that it will have a comparably thick touch enabled screen, with a button or two below it on the front, a couple more buttons on the side and a very thin form factor with physical the predominance of it’s differentiation coming in the form of the rounding of its edges or the metallic or colored back of the device.

The overwhelming truth is: They are all starting to look pretty much alike.

Sure. There is still plenty of room for evolution. The devices will no doubt continue to get thinner, resolutions will continue to get better, connection speeds will continue to grow. They will store more and process faster for quite a while. Just like the PC market did.

This is all welcome and wonderful, but the truth is that the real battleground for innovation is now shifting fully to the software and the business models that will accompany the devices.

Google started this trend. They make their money via advertising, which is software centric and usage driven.

They have spread their platform via OEM’s, much as Microsoft did, and are moving now to integrate their software with their own hardware designs with the Motorola acquisition.

As I have written before, I believe this is not just about patents, but also the evolution of personal entertainment and shifting more of the advertising spend to these platforms, more rapidly.

A core business model play that uses the device, as a commoditized tool to drive revenue, rather than a high margin stand alone revenue driver. This is bad news for Apple and great news for the consumer.

Amazon’s Loss Leader

Amazon’s entry into the market takes this one step further. Not only are they leveraging their technological capabilities with the Silk browser integrated into their public cloud.

But they are fundamentally introducing the device at a loss leading $199 price point, thereby kicking off the hardware commoditization cycle in a big way.

In so doing, much as Google did, Amazon is using the Kindle Fire not so much as a revenue driver, but rather as a tool to drive revenue. In this case, it is subsidized much like the prior generation of cell phones without the commitment.

This was in full evidence when Jeff Bezos said during the product introduction that the Kindle Fire shouldn’t be thought of as a tablet, but rather as a “service.”

The potential for brilliance in this move lies in Amazon’s ability to increase convenience and reinforce its branding with consumers. In retail, convenience traditionally was correlated with store location and the now highly evolved science of store placement.

In the online world, this quickly falls down. And without inherent geographical advantages it has forced online retail into using other measures.

The reality of this is that outside of Amazon’s dominant online presence, few other online pure play retailers have managed to overcome this obstacle. If they are successful at controlling the device, the browsing and it’s related promotional experience, Amazon could advance much further in controlling the online “geography.”

From a retail perspective, branding meant customer loyalty, which was targeted at generating recurring store visits.

Having your own device and browser may be the ultimate in brand reinforcement and repeat traffic. With deteriorating operating margins over recent history, Amazon has to be shooting to drive down their cost of customer acquisition over the long term.

While the subsidy may be expensive and ultimately has to be proven out, one has to believe Amazon’s confidence has to be buoyed by the success of Kindle e-reader experience. With all of the talk about free Kindles, it’s a bit surprising to hear the negative chatter about a subsidized tablet.

Getting there from here

Technologically, Amazon is very well positioned to boost customer loyalty and reinforce their consumer brand. They will likely seek to accomplish this by becoming ever more relevant to the needs of the individual consumer through data gathered from the use of the device.

Personal recommendations are already core to the Amazon shopping experience. Amazon understands the virtuous circle of recommendations and data.

They understand that the more the consumer uses the Kindle Fire, the better they will become at anticipating his or her likes and needs effectively. Anticipation and a sense of context are increasingly important capabilities for online players.

The more utility an online player provides, the more data the consumer generates and within the recommendation engine itself, the more data that is available, the better the recommendations get, and in turn the happier the consumer is with the experience.

A Kindle Fire linked with things like Amazon’s One Click Purchase, a massive catalog of durable good, a growing library of digital content and a Cloud Drive offering for storing your own digital content puts them in a front runner position to deliver on this promise.

It’s fair to expect ad serving as well, but maybe, not just in the traditional way.  Manufacturers have long used a dual strategy to promote products for sale at retail. The vast majority of a manufacturers promotional budget flows into television, radio and increasingly the web, in the form of advertising.

The smaller, but still very important, part of these budgets traditionally flow to the retailer in the form of special deals, funded placement and in store promotion.

In controlling both the viewing venue for advertising, as well as having a deep targeted knowledge of the consumer inside the digital store, Amazon now has the ability to bridge both of these worlds in a way that no one previously has and therefore leverage these dollars in potentially new and interesting ways.

This combination makes the notion of porting these capabilities to future versions of connected televisions an interesting proposition in and of itself.

When you look at the history of advertising, television and retail have always been inextricably linked.

Products were promoted on TV and retailers closed the deal.  This symbiotic relationship has been the source of inspiration for numerous grand experiments involving the Holy Grail of Interactive Television.

For more than two decades these efforts have inevitably met with failure. Largely because they have simply been too complex, too proprietary and too costly to succeed, requiring proprietary hardware, special dedicated protocols, custom software stacks, a level of bandwidth to the home no one was willing to subsidize and the adoption of specialized ancillary devices to be used by consumers.

Subtly we are reaching a point where these barriers are dissipating and pretty rapidly. Most of the pieces are now coming into place to realize the commercial goals targeted by interactive television. Namely the easy transition from advertisement to sale.

Ironically, many of these pieces are either now totally free or actually being funded by the consumer.  The common and open protocol stacks of the web now come built into ubiquitous browsers that are part of every operating system or available as open source freeware.

Apps, capable of automatically updating themselves, are now low cost or many times free inside of the app stores. The consumer now happily foots the bill for his or her broadband connection and is purchasing the end point devices (read the tablet or smartphone) at a record pace. All of the pieces are indeed coming into place.

Summarizing 

All in, Amazon’s ability to retail products and to provide an entertainment experience makes for a potentially very interesting mix.

With the devices positioned on a somewhat predictable evolutionary path – at least for the time being – the points of differentiation are moving toward software and the business models it is enabling. thereby setting the stage for a capabilities arms race, which in the end can be nothing but good for the consumer.

We’ll have to see how it ultimately plays out.

Amazon, Apple and Google are in it for the long term.

There are also myriad other players who can and will have an impact on this course before it settles into the mainstream. Without a doubt, it will be fascinating to watch.

The stakes are high and the stage very public. While only time will tell, we may one day look back at this announcement and view it in the rear view mirror as a watershed event that helped to change the course of consumer entertainment.

In the mean time, as they say: “Stay Tuned.”

Bud Albers is the President of Interactive Technology Strategies. He’s been at the intersection of technology and media for the last decade, having most recently served as the Executive VP & CTO for Disney’s Connected & Advanced Technology Group. Prior to that Mr. Albers was the CTO for MediaNet Digital helping to launch Microsoft Zune, Yahoo Music, AOL Music and several others. He was also the first CTO for Getty Images.

  • john

    I am both happy and frustrated that Amazon is also entering the tablet race. On one hand, competition is good; its brings down prices and forces companies to improve always. However, it also fragments the market and fights for developer loyalty. So in the end what you get is a broken ecosystem for your devices. They each have their “cloud” which is restricted to one brand, if a developer wants to create apps for another platform, then you luck out.

    So I see this Amazon tablet as both a good thing and a bad thing.

  • http://twitter.com/vivekbhargava Vivek Bhargava

    i wish the kindle Fire also had an option to use it as an E-ink kindle mode. I hate reading books where the screen is back light, while want to have the joy of watching color, movies etc – the next version of Fire should have a regular kindle mode, I would be the first person to buy that version

  • Billk

    fantastic, thoughtful article.  So much more interesting than the typical feature-comparison stories.  I agree that it is and will be all about the business model and associated services and the hardware will be a commodity.

  • Keith

    great article!!

  • Guest

    Good analysis, but seems to focus primarily on the consumer market and ignore businesses. Also, you seem to gloss over Google’s legal problems with Android and the OEM concern over their purchase of MMI. Both are big issues that could have a major impact on the viability of that ecosystem over time. Finally, not sure even most consumers will over time want a device that’s either crippled or effectivley locked to a single manufacturer’s ecosystem. Apple, Google, Amazon want that, but do consumers?

    • Guest

      Businesses at this point are a rounding error in terms of tablet sales. All of my friends who work for a business are issued a laptop — usually a PC, not a Mac. The backward-thinking automatons who run corporate IT departments do not yet endorse any tablets, and based on recent history, I wouldn’t expect that to change in the next 10 years.

      Homework assignment: of the Fortune 500, how many companies’ CEOs use BlackBerry? iPhone? Android? How do these numbers compare with the consumer market?

  • Anonymous

    FLOP!!! DOA!!! Take your pick!! I expect everyone of the pundits/bloggers to right a really nice piece, admitting they were completely CLUELESS when this device was announced & drank the “kool-aid” without a second thought! How many FLOPS are needed before the “competition” concedes defeat?? This looks like the last contender, then it’s all downhill from there!

  • Guest

    This article seems to give Amazon more credit than it deserves, particularly as it relates to their competition with Apple and whether you can suggest they really have a “new” business model.  There is no doubt that at a $199 price point, Amazon will sell a ton of these devices and they are are smart to subdize the devices to gain market share, so they can sell their other services.  But, Amazon’s new device does not compare with Apple’s iPad in terms of features or functionality (and Playbook has been a flop, which is very similar to the Fire).  Further, Apple already has an enormous media buiness – they are signficantly bigger than Amazon in music and apps and bigger in TV/Movies (download).  Amazon has a much bigger digital book business, but in looking at the types of media that people consume on tablet devices, I think it is disingenious to say that Apple is just a hardware provider (their cloud initiative is huge).  So, I am not really sure that you can argue Amazon has really created a new business model, as compared to Apple.  They both offer similar media services, Amazon is just late to the game and their device is lower quality, as compared to Apple, so they needed to do something big from a pricing perspective to really gain market share…and, unlike other tablet makers like HP or RIMM that have failed to gain market share, Amazon does have other services it can provide to justify pushing prices lower…so I just think the comparison of Apple/devices to Amazon/”everything else” is not as black and white as this article makes it seems…

  • Anonymous

    Kindle Fire doesn’t have microSD slot that Nook Color has thus it is
    stuck with 6 GB usable internal storage unlike Nook Color that can get
    up to 32 GB card in. Kindles are made to be almost like a “dumb
    terminal” of the past to make sure you’re tied up to Amazon’s storage on
    the web (for which you need Wi-Fi connection to get to.) and you can
    only store content you get from Amazon there, not other files and they
    can spy on your web activities through the new cloud-integrated web
    browser. Also, VERY IMPORTANT – lack of microSD slot means that if you
    decide to root your Kindle Fire, you’ll have to root the actual device
    thus there will be no coming back. On Nook, you can make it boot from a
    “rooted” microSD card and if you want to get back to the original Nook
    you can just take out the card and reboot. Nook Color still has the best
    on the market anti-glare coated screen that is better for 
    eading/viewing outside.

    B&N is rumored to be coming out with Nook Color 2 shortly that will
    sure to have Netflix app among others (you won’t find it on Kindle).
    Nook Touch is still better designed than even the new Kindle Touch with
    battery lasting two months with ONE hour reading a day with Wi-Fi off
    thus it’s still twice as long as new Kindle’s two months with HALF and
    hour a day with Wi-Fi off. It looks like Kindle didn’t get any battery
    improvement in the new model, they only changed the test condition.
    More, Kindle Touch still flashes black on each page turn while Nook
    Touch reduces the flashing by 80%.