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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.

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