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Kindle Fire: The Disruptive Power of Amazon

Amazon.com launched its long-awaited tablet, the Kindle Fire, today and once again established its place, alongside Apple and Google, in the Bit Three of economic disrupters. My colleague Tim Bajarin has written about the details of the $199 tablet and why it will be a game changer. I am going to focus on the impact of the Amazon business model.

One reason that every tablet that isn’t an iPad has struggled badly is that they haven’t given consumers a compelling reason to want to own one. The iPad offers a great user experience based mainly on a rich system of inexpensive apps offered by Apple and a galaxy of third-party developers.

Competitors have offered products with a somewhat worse experience for about the same price or a much worse experience for a significantly lower price. Unsurprisingly, consumers found neither model appealing.

At this point, we have to assume that the actual performance of the Fire when it ships Nov. 15 will be close to what Amazon demonstrated on Sept. 28. Attendees at the event were only allowed to look at, not use, the prototypes on hand. But if it does, Amazon will be hard-pressed to meet the demand.

But the real prize for Amazon will be Fire’s ability to sell, something that should let the company quickly recoup the $50 to $100 in subsidy implied by the $199 price. The first thing it will sell is $79 annual subscriptions to Amazon Prime, an odd but highly successful bundle of free two-day shipping on all Amazon goods and unlimited access to Amazon’s large library of streaming movies and TV shows. My guess is that the conversion rate after the one-month free trial of Prime included in the Fire’s price will exceed 50%.

The Fire also looks to be a beautiful e-reader that will sell lots of books. (And Amazon protected its flanks by announcing three new monochrome eInk Kindles: an entry-level product at $79 and a new touchscreen version, with and without free 3G wireless, at $149 and $99. Those are impulse purchase prices that will probably finish off the printed book.)

Although Fire’s software is based on Android, it is not an official Google Android device and will probably not have access to the official Android Marketplace. I don’t think this is much of a concern to Amazon, because it stands ready with its own App Store, one more way to sell stuff. (In general, the fact that Fire runs on Android is about as apparent to the user as the fact that TiVo runs on Linux, which is to say not at all.)

Apple is not likely to be quaking at the prospect of Kindle Fire, nor should it. While the iPad and the Fire will compete at the margin–people only have so much money and only want so many gizmos–they are very different products with very different business models aimed at very different markets. Barnes & Noble and Google have a lot more reason to be worried. So does anyone else who sells stuff, whether the goods are digital or physical.

The Kindle Fire is a Game Changer

After months of speculation, Amazon finally rolled out the Kindle Fire this morning, their version of a cross between a super eBook reader and a small tablet. But make no mistake, this product is a game changer. And it has the potential of really helping refine the market for both future eReaders and tablets.

The first game changer is its price. At $199, it sets up a real battle with the other Android tablet makers and will give them serious headaches going forward. And even though it is a 7 inch color touch system optimized for reading, its use of Android’s Gingerbread OS (Android 3.3) gives it some serious OS power that lets it be a tablet in the true sense of that word. Especially since it supports full Flash and any other cloud based services.

The second game changer is its tie to their Prime Service. This is a huge deal. What it represents is a device (Kindle Fire) now tied to a full yearly subscription service. As you know, Prime was initially set up to cover shipping costs for all of the products one buys from Amazon. But it is now being extended to include their movies, music, etc. And it is being applied to any of this content that will be used on the Kindle Fire as well. What is interesting about this is that it is a subscription model masked as a much broader service fee that includes the coverage of all shipping fees of products purchased by Amazon. This is one of the great bargains alone and throwing in the other services like streaming media so that it is covered in this overall cost is brilliant. And consumers won’t think of this as a subscription service.

Third is the actual business model, which is very different from Apple and the other tablet makers. At $199, this device is clearly being sold under cost. My sources in Taiwan say that the bill of materials on this is somewhere between $229 and $249. But Amazon appears to be OK with this since they will amortize part of the payments that come from Prime, bought books, movie and music and perhaps other purchase to subsidize the actual cost. As I wrote in my PC Mag column about this in August, I see Amazon being perhaps the only one, besides Apple, that could deliver this type of model in which the device is sold under cost and future sales and services are amortized as part of their ability to cover costs and even have some profit tied to the device itself. (http://10.0.1.11:63651/)

The fourth game changer comes with their Silk Browser. This browser cache’s key content from a site like Time Magazine, such as its cover art, magazine format, etc, and then once connected only goes out and updates the new content that is available. The result is that the page itself can be loaded very fast. This is an amazing way to make a browser work with key content. This means that publishers and other Web content vendors can work with Amazon to make Web sites optimized for the Kindle FIRE and fully utilize Silk’s ability to balance its role as content mediator between local content and the cloud.
And software developers can also create special versions of their apps just for the Kindle fire as well.

Please note that the name of the device is the Kindle Fire. This is an important distinction. As Jeff Bezos has said on numerous occasions, if Amazon entered into this market it would be by making reading books and magazines the center of its design. And everything else they now have with it is icing on the Amazon Kindle Fire cake.

I believe the Kindle Fire will be a very big hit for Amazon. And it will be, along with the other 2 new versions of the Kindle, a very hot seller for this holiday season.

So how will this affect Apple and the other tablet vendors? For the Android tablet makers this is not good news. They have priced their products in the $399 and up price range which is designed to take the profit from the purchase of the tablet itself. And none of them, besides Apple, owns an eco system of content that can be leveraged and/or amortized to help keep the price of the devices down. This will only make it harder for them to compete with their current tablet designs and business model.

As for Apple, they do own an eco system of software services that they could use to offset costs if they want to. But I doubt that will happen. And while Apple does encourage book reading on the iPad, that is only one of the apps or uses for this device. From Apple’s viewpoint, the iPad is more an extension of the personal computing experience. Yes, it handles movies, TV and music well. But it also plays games with stunning graphics, allows for all types of interactive learning experiences and can be used for productivity in all levels of business. The Kindle Fire is not designed for these types of uses and instead is targeted more at the consumer market that wants a great reader and would also enjoy watching movies, TV shows and more entertainment driven apps as part of their “tablet” experience.

The Kindle Fire is not an iPad killer. In fact, as my son Ben pointed out in a recent Techpinion’s piece, there is no such thing as an iPad killer.

Rather, this is a worthy competitor to the iPad and will be of interest to a very broad audience who wants this type of device and can live with a small screen and a more focused entertainment edge it brings to a device like this.

Apple’s iPad will still be the gold standard for tablets and will always be in demand from a segment of the audience who wants their tablet to be more an extension of the PC experience. And both will do extremely well in this marketplace.

The Amazon Tablet: Less Could Be More

M.G. Siegler at TechCrunch has some interesting tidbits on the tablet that Amazon.com is expected to announce at a media event on Wednesday. The most interesting news, other than the name of “Kindle Fire,” is that the tablet won’t ship with a built-in email client.

Assuming this is correct–and Siegler’s Amazon sources seem to be very good–it may be an interesting case of product differentiation through subtraction. When Steve Jobs introduced the iPad in 2010, he clearly positioned the device as a PC alternative for a post-PC era. It’s hard to imagine a PC alternative without a good email client.

The Amazon tablet, however, isn’t vying for PC alternative honors. Amazon seems to view it much more as a way to facilitate consumptions of the stuff Amazon sells, especially books, videos, and music. It is fundamentally an entertainment device, not a productivity device. And it doesn’t really need email. (If you really want email, you can always download a client app, though you’ll probably have to get it from the Amazon App Store rather than Android Market, which probably won’t come with the tablet either.)

All of this is consistent with my notion that Amazon is interested in producing not an anti-iPad but an un-iPad. Amazon is one of the very few companies around with the heft and the smarts to, as they say in basketball, create its own shot against Apple. and the indications are mounting that this is just what Amazon intends to do.

7″ Media Tablets Like Kindle Fire…”Dead On Arrival”?

UPDATED with Amazon Kindle “Fire” references.

A few weeks ago, TechCrunch reported that Amazon’s 7″ Kindle tablet was “very real” and would ship for the 2011 holidays. (UPDATED: Now rumored to be called “Kindle Fire“. ) Almost a year before that, Wired’s Brian Chen reported that on an earnings call, Jobs said, “the current crop of 7-inch tablets are going to be DOA — dead on arrival.” So the stage is set for an interesting war of beliefs and concepts this holiday shopping season. In one corner, the world’s most trafficked internet retail stores and Kindle inventor, Amazon, and in the other, Apple, the most valuable company on the planet and inventor of the iPad. Will the Amazon Kindle Fire tablet be treated in the marketplace with very little respect or will it shock everyone like the original Kindle? It really comes down to the basics of the consumer value proposition.

Many Variables at Play

With a considered technology purchase, consumers actually do a bit of research before they buy. It can be as simple as asking a geek friend for advice, doing a Google search for reviews, or as complex as side-by-side feature analysis, but in the end, it’s still research. Consumers looking at buying a 7″ or 10″ tablet will look at variables like perceived price, value, content, brand, size, display, and weight. More meaningful, though, is how they apply those variables to what they believe they want to do with their tablet and the location they will do it.

For the sake of this analysis, I will use the iPad 2 as representative of the 10″ tablet and the combination of a Nook Color and the rumored Amazon Kindle “Fire” tablet as the 7” designate. I will also assume that each tablet has access to the same books, magazines, movies, videos, music and games. The only “iffy” one may be games given the iPad’s tremendous lead today.

Potential Advantages with a 7″ $249 Tablet (Amazon Kindle “Fire” Tablet)

20-30% lighter and even smaller means easier to carry and hold for almost every usage model. Anecdotally, I have heard that women prefer the 7″ tablet because they are easier to carry.
Half the $499 price of the cheapest iPad 2. Not only is the tablet less expensive, but I will guess that every accessory will be less expensive, too.
Free subscription to Amazon Prime, which means free access to Amazon Instant Video Service. Again, this is rumor, not confirmed.
Most of the same books, magazines, videos, movies, web content as the 10″, $499 tablet.
Simpler, as in fewer choices for apps and content providers, yet plays the same content. There is one button only.
Standard micro USB power and data cable. These are everywhere in the house, your cars, and at the local convenience store. You can also charge from your PC, unlike an iPad 2.
More durable, given plastic and rubber design. I don’t care when someone drops my Nook on the carpet. I shriek when someone drops my iPad 2.

Potential Advantages with a 10″ $499 (iPad 2)

Twice the viewable image area of everything you see, like pictures, videos, books, newspapers, and web pages.
Battery life, although tough to predict. Apple claims up to 10 hours for web, video, and music while Barnes & Noble claims 8 hours for reading.
Use more complex applications and basic activities are more responsive, given dual core processor and better graphics subsystem. Think better looking games, richer video and photos, and more complex web pages.
Watch videos and listen to music from the tablet to an HDTV, PC, Mac or other AirPlay compliant device. Maybe the Kindle will have some sort of DLNA capabilities, but from what I’ve seen on Android tablets today, it won’t hold a candle to the iPad AirPlay.
Take pictures and home movies. While I scoffed at this at first with the iPad 2’s low res camera, I find myself taking pictures and videos with it. It’s just so convenient to take it and show it to someone immediately. Maybe I will stop doing this when iCloud immediately uploads my pictures and videos, but we will see.

Conclusion

As you can see, there are potential benefits in a less expensive, smaller and lighter 7” media tablet like the Kindle “Fire” as there are in a fuller-featured, twice as expensive, 10” media tablet. I believe that if the Amazon Fire tablet ships this as rumored above and with Amazon Video on Demand, it will sell extremely well. That is, given competition stays still, which it rarely does. So does this mean Steve Jobs was wrong? No, because when he made that statement a year ago, 7” tablets were priced right on top of the iPad 2 with a lot less content and a much degraded experience. A lot has changed since then and a lot will change in the future. And I am sure of that.

Is there a market for Good Enough “Tablets?”

In April I wrote in my PC Mag column about Amazon Stealing Android from Google and argued in this piece that Amazon was most likely building their own proprietary approach to integrating their overall Android Store and a set of music, video and cloud services and integrate it into their future tablet offering.

Then, in August I wrote how Amazon Could disrupt the tablet market by creating a tablet that could sell for $249 even though it would cost $300 to build, but make it up by amortizing users purchases of books, music and videos over an 18-24 month period.

I suggested that if Amazon did this they could disrupt the entire market for tablets by introducing a new pricing model tied to their services that would make it very difficult for any hardware only tablet vendor to compete in this burgeoning market.

Now, in a most interesting post from MG Seigler at Techcrunch we get an actual hands on description of this tablet and it reinforces the price I suggested Amazon would sell it for. And he goes on to give actual details about it coming out in November including the fact that it has a color 7” screen but no cameras and no i/o ports.

If what Mr. Siegler says is true, then this Amazon tablet is more like a Nook on steroids then a serious competitor to Apple’s iPad. It will have very limited features as a multi-purpose tablet, but will excel in offering Amazon driven music, video and clouds services. And of course, we expect that it will have a browser so it would give people using it broad access to Web based content although apparently it will not support Adobe’s Flash.

But this brings up a very interesting question. Is there room in the market for what we would call a “good enough” tablet? Clearly, Apple’s iPad seems like it will be the Cadillac of tablets and to stay with the GM metaphor, the Amazon tablet is probably more like the Chevy Malibu of tablets. Both are very functional but what is inside and what they can do on the road are very different.

While there is always a market for full-featured products like the iPad, there is also perhaps an even larger market for “good enough” tablets like the first gen Amazon tablet might me. And Amazon, with this limited design and low price point, seems to be aiming at the “Chevy” market for tablets where bells and whistles are less important then price and basic functionality.

This concept of good enough computing has been bandied about in the industry for decades. It started with desktops where high end gaming PC’s ruled the gaming and engineering/graphics market, while lower cost PC’s with less horsepower and functionality took the lions share of the bigger “good enough” PC market. And the same thing happened with laptops. Gaming laptops powered the upper end of the portable market, while thin and lights went after the business crowd and value laptops with less power compared to the other two models took the lions share of the broader portable market. And they were good enough for a very large audience of consumers.

Could this “good enough” approach to the market be repeating itself again with tablets? There is no question that even though Apple’s iPad may be the Cadillac of tablets today, Apple was quite aggressive with their pricing so that it has appealed to much more than a more well-healed audience that normally buys upper end models of everything. On the other hand, there will always be a large audience who either won’t spend much on products or can’t for economic reasons and will opt for something in this value line of products or in this place, a just “good enough” tablet if it is available.

My sense is that as with desktop’s and laptops there is room for both and I suspect we will see tablets at a lot of different price points taking aim at the needs of all level of customers wants and needs. And if history is our guide, the products in the “good enough” category could be very large indeed.

Amazon Plans on Stealing Android Developers From Google

You may think such a statement sounds absurd. However if a recent report from MG Siegler at TechCrunch is true then Amazon wants to lure Android developers for their own version of Android and Kindle products.

Tim Bajarin in an April PC Magazine column explored this similar line of thinking and now we have more data confirming this assumption.

Earlier today MG Siegler published his scoop on the upcoming Amazon Kindle Tablet. Throughout the report he details his own experience using the yet unreleased and unannounced tablet.

It is interesting to think about how and more importantly why MG Siegler came about this information. This is an important baseline for us to establish since it determines whether or not we can count the details of his experience as credible or rumor.

Given the amount of detail disclosed to MG and that the conditions of his arrangement were that he would get info but couldn’t take pictures, we can reasonably assume this is a planned leak. We also learned that he was in Seattle for this encounter and we know Amazon’s headquarters are in Seattle which strengthens the planned leak assumption.

Strategically this also makes sense for Amazon. MG is very smart, and he has also been one of Android’s harshest critics. He also covers Apple. A lot. So to give the scoop to a rather influential Apple journalist, especially if the outcome of his reaction is positive, which it was, is a smart PR move. My applause for Amazon PR.

All of that to say that I believe his account is credible and is a planned PR leak from Amazon. Therefore I am assuming his account is correct and the information is not rumor or speculation and therefore credible.

Now on to the part where Amazon wants to steal Android developers.

MG details the version of Android as “nothing like the Android you’re used to seeing.” So as to be expected Amazon has taken and created their own version of Android. Because Amazon has their own marketplace they don’t need Google for anything therefore customization is feasible. Google only allows “approved” versions of Android to get Market Place Certification, so if an OEM wants Android Market on their device they have to play by Google’s rules.

Amazon never wanted to, has no intention, and has no need to play by Google’s rules.

The most interesting detail of MG’s account is the detail of what version of Android Amazon built this new Kindle experience on. He details that it is built on some version prior to Android 2.2 Froyo.

This is fascinating.

Why would Amazon not use Froyo? Why would they not use Gingerbread? Why would they not want to go live with Ice Cream Sandwich? Why would they choose what many would deem a supremely inferior and outdated version of Android to build their experience on?

The answer I believe lies in Amazon’s desire to lock Google completely out of benefiting in every way from their tablet, should it be successful. First off Google made major changes which included adding restrictions when they released Froyo. A strong case could be made that Android was more open prior to Froyo. More importantly many of the toolkits and technologies related to the SDK for Froyo evolved.

My point is that to take a version of Android that is not cutting edge means that Amazon intends to make their version cutting edge and will most likely release their own better version of an SDK to write apps for the Kindle.

If Amazon does fork Android as MG states then it means developers will be presented with a choice. Support and develop apps for the Kindle or develop apps for the broader Android ecosystem. I believe Amazon in this move plans to entice developers to follow them down their forked path of Android. They can use their marketplace, as well as their economic incentives to get developers paid, to create all the needed nuggets to attract developers.

If Amazon can show developers the money, and I believe they can, they may have a real shot attracting loads of developers to their market place who will develop apps for their version of Android.

Given that Amazon’s version of Android is so highly customized I am guessing that they have stripped every benefit to Google in terms of data, ads, revenue etc out of this product. Which would mean that Google would not benefit at all should this Kindle succeed. In fact I would be comfortable if we agreed that in fact this Amazon Kindle is not really running Android at all.

Can Amazon Make a Cheap iPad Challenger?

Developments in the tablet market in the past couple of weeks, especially Hewlett-Packard first killing the TouchPad then successfully disposing of tens of thousands of them in a $99 fire sale, has led to some very strange commentary on how competitors can take on Apple. All they have to do is sell a tablet that’s as good as the iPad–or at least nearly as good–for a lot less.

Kindle icon For example, in a Cnet post, Brooke Crothers quotes analyst Roger Kay as saying the TouchPad “wasn’t really a product failure, it was a pricing failure.” That’s self-evident as far as it goes. The TouchPad at $500 was priced higher than people were willing to pay, and when the price was cut 80%, they flew off the shelves.

The problem is that in the real world of business, pricing has to bear some relationship to cost. No one is going to beat the iPad by building a product of equal performance and quality for less. Apple has mastered the supply chain and, with sales of the iPad in the area of a million units a week, achieves considerable economies of scale. It’s in the rare and wonderful position of offering a premium product while actually enjoying a cost advantage over competitors.

That means that no one can hope to compete with Apple simply by offering a product similar to the iPad for less. If Apple were to perceive it as a threat, they could underprice the interloper while feeling less pain than the competition. It’s a game that only Apple can win.

Another alternative is a subsidy model. Both my colleague Tim Bajarin and Kevin C. Tofel at GigaOm suggest that Amazon could afford to subsidize the hardware and cover the subsidy cost either through advertising on the tablet or through sales.

The one place where the subsidy model has succeed in in mobile phones, including the iPhone. But wireless carriers are in a unique position. Because they sell the phone on a contract, which gives them a revenue stream of known amount and duration, they can be certain of recovering the subsidy and making a profit besides. (Those early termination fees take care of most of the contingencies.) The carriers, however, have shown little interest in extending the subsidy-plus-contract model to tablets.

An Amazon subsidy would be a lot more problematic. Amazon’s operating margin runs less than 4% of sales. On a crude calculation, that means that every $100 in subsidy would require $2,500 in incremental sales just to break even. Maybe tablet customers buy higher margin goods, but the math of the subsidy model seems truly daunting.

All the signs point to Amazon doing a tablet of some sort, though the company itself has remained silent on the subject. But I don’t expect that it will offer an iPad-like product at a substantially lower price. One possibility is a tablet that competes with the iPad not on price but on a distintive feature set. (What might that be? If I knew, I’d design it myself instead of speculating about it.)

The other, which I think is a lot more likely, is a sort of super-Kindle: A 7″ tablet more capable than the Kindle or Barnes & Noble Nook, but simpler and cheaper to make than the iPad. It would primarily be a book reader, casual game console, and media player with, of course, an optimized Amazon shopping experience. A product like that could probably be sold for $300 without much subsidy. (B&N is selling the color Nook for $249, apparently without subsidy.)

Another, bolder approach, would be for Amazon to come up with its own subscription-based revenue model. The company has been steadily diving deeper into online services. It currently sells a somewhat odd bundle of movie streaming and free shipping on Amazon purchases for a $79 annual fee. The trick is finding enough other services to roll in to provide enough revenue–and profit–to pay for substantial subsidies. Book rentals are an intriguing one, but would be a tough sell to publishers. It’s a difficult proposition, but amazon has shown itself to be nearly as creative a company as Apple, and if any one can do it, they have the best chance.

Why A Tablet is Key To Amazon’s Business

I was being interviewed by a journalist recently where the discussion was around the impending release of an Amazon Tablet. I enjoy helping journalists out with stories and I gladly accept interview requests because the discussion is always engaging and often helps sharpen my own thoughts on a subject.

This was the case again when I was asked why a tablet is important to Amazon’ business and business strategy. That is the question i’d like to address in this analysis.

A Tablet is Amazon’s Brick and Mortar
Here is an analogy: a tablet is to Amazon what a physical store is to Wal-Mart.

If you think about Amazon’s business, it started with selling books online and then quickly became a place where consumers can buy just about anything and shop competitively from one single location. It just so happens however that this location is not physical it resides fully within your browser. Amazon’s location is virtual.

To contrast, a company like Wal-Mart is evolving into the digital age with a strategy that includes their brick and mortar stores. To some degree Barnes and Noble is doing something similar but only in the realm of books. Amazon however has no intentions to create a physical location where you walk in to experience their service. I would argue however that Amazon is very interested in giving you a physical storefront and it started with the Kindle.

The Retail Experience Matters
I wrote an article on Why Apple Retail is Key to Their Competitive Advantage. In that article I highlight some key things about retail.

Any retailer will tell you how important the overall retail experience is to their success. Some companies do retail poorly and others do retail extremely well.

The Kindle for Amazon started completely around discovering, purchasing and reading books. The Kindle is the retail storefront to Amazon’s digital book library.

I believe that the evolution of the Kindle will follow Amazon’s business evolution. It started with books then included everything else. Which is why this next device that will most likely be a fully featured tablet will also come with Amazon’s complete shopping experience built in. This includes not just digital storefronts like books, music and movies but physical items as well. Since Amazon is one of, if not the largest digital storefront, it benefits them to get devices on the market where they control the shopping experience.

This is one of the reason’s I believe Amazon re-jiggered their iOS app strategy to stay away from Apple’s transaction model and fees. I don’t believe this move was just about avoiding fees but that Amazon wanted to control the user experience with their storefront instead of Apple. This is why previously with the Kindle app on iOS the Kindle store launched a web browser and took you out of Apple’s ecosystem and into Amazon’s.

Reflecting on that point briefly it becomes clear that Apple’s app store commerce model works for those for whom billing and storefronts are a problem but it does not work for those companies who have spent millions of dollars perfecting their own e-commerce experience.

Amazon also has an interesting strategy with their Prime service that could be strategically integrated as well with their tablet. Perhaps Amazon gives better deals or promotions to those who own the tablet thus incentivizing more purchasing from their store directly on the tablet.

This is why I believe a tablet is strategic for Amazon. Of course they can and will make sure their services are available on every device imagineable. However if they bring a device to market that is a full blown tablet but also includes the most elegant and seamless experience to research, discover and purchase from; then that device becomes the retail storefront to everything Amazon sells – and more.

Further Reading on Amazon:
How Amazon Could Own the Android Tablet Market

How Amazon Could Own the Android Tablet Market

One of the first marketing classes I had in college discussed the concept of razors and razor blades. Sell the razors cheap and then sell men blades over and over. The profit would be in the blades, not the razors. In our tech world, we have our own version of this. It is called printers and printer cartridges. The printer companies sell their printers at a very low price, perhaps even under cost, knowing full well that they will sell users expensive ink cartridges over and over. The profit is never in the printer. It all comes from the ink cartridges and companies like HP and Epson make billions of dollars a year from their ink business.

With this in mind, if I were Jeff Bezos, CEO of Amazon, I would really go to school on this concept and see if it could be applied to tablets. This model would never work for the PC vendors at this stage of the PC game. Although their PC’s are getting cheaper, they are not tied to an eco-system of software and services in which they could derive additional revenue tied to the PC and earn recurring revenue this way.

But I believe that the tablet is the first PC like device where this could be possible. So, Jeff, if you are listening, here is my suggestion to you. Sell your tablet at a price that is really cheap. Perhaps you sell it for 20-25% below cost. I know this sounds crazy and radical, but you actually have the recurring revenue ecosystem to potentially pull this off. It would take some serious guts to do this but if any one could do it, Amazon could.

In this model, think of the tablet as the razor. And in Amazon’s specific case, their Android Store, UnBox movie service and music service would be part of the “blades” they sell to users over and over again. And add to that the profit they could get through their Kindle bookstore as well as items you might buy from the Amazon store. And then add any Amazon cloud service revenue tied to the device that could also be part of an amortized profit pool over perhaps a two-year accounting period.

With info I have on components from my contacts in Taiwan, I was able to do some back of the envelope calculations to see how this could work. Bill of material costs along with manufacturing costs, shipping and tariffs most likely would put the device cost around $300 depending on its specs. For sake of argument, let’s use this as the baseline. But let’s say Amazon discounts this by $51,00 and sells it for $249.

Now, they do some research and determine that over a two year period, a person who has that tablet would buy or rent 15 movies, stream or download 50 songs, could buy 18 books and might pays $5.00 a month for cloud storage from Amazon. And, they purchase let’s say five items through the tablet’s Amazon store that can be counted against a 2 year amortized profit curve. And lets throw in some advertising in this mix as well. Although the prices of the books, video, music, etc would vary, by my guestimates, they would make back the lost “cost” of that $51.00 within six months and realize a profit of anywhere from 20-35% on the tablet over the last 18 months of the devices accounting period.

Amazon already has the trust of over 200 million users as well as their credit cards. And their “one click” buying model would make it quite easy for an Amazon tablet user to buy often through both the Android store and the Amazon store in general. Of course there are a lot of variables in this model, but you get the idea. The tablet is the razor and all of these apps and services are the blades.

Now imagine how this could affect the other Android vendors making tablets. Amazon would provide a product that if sold under cost with the goal of making up the rest of the cost and profit from apps, services and even advertising, it could give all of the other Android vendors a serious run for their money. And, given their deep eco system, other Android vendors would find it very difficult to compete with them. This could make Amazon, measured by units shipped, the king of Android tablets very quickly. In fact, I would go as far as say that they could “own” the Android tablet market.

For Apple, this would be a competitive threat but they have a pretty big lead and their own rich echo system of apps and services that could continue to keep them a market leader in tablets. And given their history of riding down prices of the iPod once it gets to scale, you can imagine that Apple will also be more aggressive with the iPads pricing over time and, as they are today, use their apps, services and the upcoming iCloud to deliver high margins for a long time.

But as radical as this idea might sound, it could make a lot of sense for Amazon to go to market with their tablet with this business model. As I stated earlier, it would take guts, but the impact on the market for tablets could be significant if they did this right and the consumers bought into their version of the old razor/razor blade school of marketing.

The Amazon Tablet Opportunity Could Be Huge

I have fielded a lot of questions recently regarding the rumors of Amazon making a tablet of their own to bring to market. Right off the bat there is enough data out there to support this rumor, so I am certain Amazon is bringing a full featured tablet to market.

I make the distinction of full featured tablet because of the rise of the term “feature” tablet. The current Kindle as well as the B&N Nook Color are examples of feature tablets. A feature tablet is a tablet that focuses just on certain features like e-reading, navigation, gaming etc. Where a full featured tablet is a more general purpose than feature specific device.
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