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Monday, December 1, 2014

Amazon’s Fire Sale


Amazon.com Founder and CEO Jeff Bezos says that Amazon is “the only tech company with low margins.”

Low margins is an understatement. The company is losing money on every single Kindle Fire tablet they sell. But it’s all part of Jeff Bezos plan to conquer the Universe. He may or may not succeed, but one thing’s clear: The Kindle Fire is about to change the tech industry forever.

About a year ago, a tech blogger noticed something strange. He laid out the various price points Amazon has charged for its Kindle e-reader on a simple bar graph, with the Y-axis representing the dollar amount, and the X-axis representing the date of the Kindle’s price change. What he found was that the Kindle, which originally went on sale in 2009 for $399, was dropping in price at a perfectly consistent rate. If the trend continued, he extrapolated, the Kindle would be free by November, 2011.

In August 2010, blogger Kevin Kelly had the chance to mention this to Jeff Bezos, the founder and CEO of Amazon. Bezos just smiled and said, “Oh, you noticed that.”

Then he smiled again.

The Family

Well, November 2011 is here, and we don’t have a free Kindle. What we have instead is a brand new Kindle family, which includes the Kindle Fire–a full color Android tablet–as well as the Kindle Touch–a standard Kindle with an e-Ink touch display–and the cheapest Kindle yet, an ad-supported model that’s retailing for $79. Wired Magazine brought up the idea of a free Kindle to Bezos again this year. He responded, “It’s an interesting marketing idea, and we should think about it over time. But $79 is low enough that it’s not a big deal for many people.”

It shouldn’t come as a surprise that Bezos isn’t ready to give away the Kindle just yet. Especially when you consider the fact that he’s already losing money on it. And not for lack of sales. Whereas Apple will sell their iPad for twice as much as it costs them to manufacture it, Amazon is selling much of their hardware at a loss. Their goal isn’t to make money on the millions of Kindles and Kindle Fires that they’ll be selling this holiday season.  Their goal is to make new customers.

Because of that, many people haven’t ruled out Bezos offering free Kindles to Amazon customers in the near future. Sure, he’s indicated that it isn’t a part of his short-term strategy, but like anything else he says, it’s best taken with a grain of salt. His secrecy is a thing of legend, and, from what I’ve found, he has no qualms with misleading journalists if it means keeping the cat in the bag for a little bit longer.

When Bezos spoke with Wired Magazine last October, for instance, he was quoted as saying, “The number one app for the iPad when I checked a couple of days ago was called Angry Birds–a game where you throw birds at pigs and they blow up. The number one thing on the Kindle is Steig Larsson (author of The Girl With the Dragon Tattoo). It’s a different audience. We’re designing for people who want to read.”

Even as the words were coming out of his mouth, development on the Kindle Fire tablet was likely well underway. Of course, it’s not a complete about-face. The Fire and its black-and-white kin appeal to two different, if overlapping audiences. The traditional Kindle, Bezos argues, can’t be beat when it comes to long-form reading. The Fire, on the other hand, is perfect for reading a magazine or watching a movie. Ask Bezos whether Kindle users should switch over to the Fire tablet, and his response is: “They should buy both.”

Not a surprising response from a man who runs the largest eCommerce store on Earth. But with prices like these, it’s kind of hard to argue with him.

The Price

“The main tactic Bezos employs is quite simple: low prices. It’s hard to argue with that tactic. Who doesn’t want low prices?”

-Richard L. Brandt, One Click: Jeff Bezos and the Rise of Amazon.com

The thing that amazes me most about Amazon is that they still have the power to amaze me.

When I got my second generation Kindle two years ago, I was amazed that it offered a free wireless connection anywhere. I was amazed again when Amazon began offering models for as cheap as $130, the following year.

By the time the Kindle Fire was announced last September, I was ready to not be amazed. All the tech bloggers knew that Amazon had an inexpensive, full-color Android-powered tablet in the wings. But when the news finally broke and Jeff Bezos unveiled the much-anticipated Fire, I couldn’t help it– My jaw dropped.

A good friend of mine was working for an ad agency that had made a bid on the Kindle Fire campaign earlier this year. He had been given most of the critical specs of the tablet and was sworn to secrecy. But even he was shocked on the day of the Kindle Fire’s announcement. While he’d been privy to most of the Fire’s specifications, there was one detail they managed to keep a secret: the price.

The Kindle Fire costs only $199. That’s less than half the price of the cheapest iPad model available, and almost exactly half the price of the very first Kindle. Here’s some more perspective:

One year ago, I was writing about Samsung’s Galaxy Tablet, last Christmas’s only real iPad competitor. The cheapest version of the tablet was a $399.99 promotion T-Mobile was offering with a 2-year data plan. Without a data plan, it costed $649. And it wasn’t even a very good tablet.

So how can Amazon sell the Kindle Fire so cheap without losing money? The short answer is: It can’t. Each $199 tablet that Amazon sells actually costs them about $201.70 to manufacture.

The Strategy

“Tech companies always have high margins, except for Amazon. We’re the only tech company with low margins.”

-Jeff Bezos

While there are some people who might still think of Amazon as an online bookstore, most people recognize that you can buy almost any product imaginable on the site. But it still isn’t the number one name in digital goods. When people think of buying an MP3, they usually think of iTunes, even though Amazon has been selling digital music for four years. And when people think of streaming movies and TV shows, most people think of Netflix. If the owner of an Android phone wants to download an app, he’ll just go to the Android marketplace, not the Amazon Appstore.

But when the owner of a Kindle Fire goes to do any of those things: Amazon will be the first place they check.

That’s because the Fire runs a customized, almost unrecognizable version of the Android operating system that is streamlined to make getting content from Amazon dangerously simple. There has been a good deal of press about the iPad’s popularity with non-tech savvy children and senior citizens, because of its ease of use. Well, hand an infant your Kindle Fire, and he’ll probably be able to buy a book, rent a movie, or download an album for you with just a few swipes of his pudgy little hand. It’s the same principle behind Amazon’s famously patented One-Click buying method: Make purchases as simple as possible for the customer, and minimize the amount of time they have to change their minds.

It’s not rocket science: the more people with Kindle Fires, the more digital content Amazon sells.

“It’s actually an age-old strategy,” Why Didn’t I Think of That? ® co-host Bob Smith points out. “Gillette started doing it years ago. Give them the razor for free, sell them the blades.”

While many companies are not comfortable losing money, even in the short term, it’s a strategy that can really pay off in the long run. “If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people,” Bezos says in the latest issue of Wired Magazine. “But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that… At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow–and we’re very stubborn. We say we’re stubborn on vision and flexible on details.”

The Tablet

When it comes to new tablets, a comparison to Apple’s iPad is inevitable. But, with the exception of its price, the Fire can’t really compete with the iPad. It has a significantly smaller screen and no camera (the iPad has two cameras). It also has half the memory of the smallest iPad.

Also, unlike most tablets, the Kindle Fire doesn’t come with the option for 3G. It’s Wi-Fi only. But, rather than subsidizing the device with a data plan, Amazon is actually offering a free one-month trial of Amazon Prime with the tablet. Of course, anyone who has never used Amazon Prime is eligible for a one-month trial. But when Kindle Fire owners first boot up their devices, the trial starts automatically.

Amazon Prime used to just give you free two-day shipping on most Amazon purchases. Today, it also gets you free movie and TV content to stream directly to your Kindle Fire or computer, as well as access to the brand new Kindle Lending Library, a service that lets you “borrow” one book at a time for no charge. Well, no additional charge. Amazon Prime membership costs $79 a year.

You’re not totally limited to Amazon products with the Fire. It is, after all, an Android tablet. You can download any number of apps from Amazon’s curated Android Appstore. Netflix subscribers, for instance, can download the free Netflix app and stream movies to their Fire. But, there are some apps, like Barnes & Noble’s free Nook Reader Android App, that are conspicuously missing from Amazon’s Appstore.

Aside from its price, the most (or perhaps only) revolutionary feature of the Kindle Fire is its web browser. It’s called Amazon Silk, and it aims to solve the biggest problem with the mobile Internet: speed. Going to a website on your phone can be a tedious process, even if you’re connected to WiFi. There are a number of reasons for this, but the main one is processing power. Tablets and phones are getting faster and faster, but they’re still way behind computers. Most websites pull page elements from over a dozen different servers. Some of those processes can happen simultaneously, but a lot of them can’t. For a computer, that’s not a very big deal. For a phone or tablet, all those milliseconds can really add up.

And the Kindle Fire isn’t exactly a speed-demon, so Amazon has decided to leverage their cloud-computing power to speed up the process. When you go to a webpage on the Silk browser, Amazon will do most of the “computing” or page-loading on their powerful Amazon Web Services servers, the same machines that host websites like Netflix and the New York Times. This minimizes the amount of processing the Fire actually has to do, and loads pages in a fraction of the time it would normally take. Silk is available exclusively for the Fire right now, but look for other tech giants to follow suit soon. I haven’t gotten my hands on the Fire yet, so I can’t vouch for Amazon Silk’s real world performance. But it’s a big step forward in mobile browsing, if only in concept.

So far, early reviews of the Kindle have not all been terribly kind. At the time of writing, the device has an average of 4 out of 5 stars from Amazon reviewers. Many people are praising the ratio of features to price, while others are complaining that the interface is clunky, awkward, laggy, and glitchy. Not the warmest sentiments, and not unlike the feedback given on the very first Kindle model. Hopefully, many of those problems can be cleared up with a simple OS update.

In the end, the Kindle Fire might be “great to pull out of your pocket at a lunch meeting for a quick visual aide,” as I hypothesized in last month’s Fall Tech Buzz. “But small businesses looking to make tablets an integral part of their daily operations should probably wait before going anywhere near the Kindle Fire.”

The Impact

“It’s a phenomenal concentration of power. If we were scared of Amazon in the Web world, we should be absolutely terrified of them in the tablet world.”

-Fiona Dias, ShopRunner

The Kindle Fire will revolutionize the tablet market. Not because it’s a revolutionary product, as the iPad and iPad 2 were. It’s not. As far as tablets go, the Fire’s specifications are a little lackluster. But one year ago, people who wanted a tablet couldn’t expect to pay anything less than $400 dollars. This time next year, tablet buyers should expect to pay anywhere from $100 to $800, depending on the model. Amazon has literally created a “low-end tablet market” where there was none.

I predicted that the Kindle Fire would be a huge seller this Christmas. I stand by that. But in the long-term, it’s too soon to call the game. Yes, we finally have a legitimate iPad competitor. But next year will bring a new iPad, as well as a fresh army of Fire competitors. Maybe the iPad will beat out the Fire in the long run. Maybe the Nook will beat out the Kindle. Maybe Amazon will ultimately lose the online content war, its name never becoming synonymous with streaming movies or digital music.

For his part, Bezos doesn’t think it’s quite so black and white. From where he stands, the playing field is big enough to accommodate Amazon, its competitors, and then some. “I believe these industries are so big, there are going to be multiple winners,” he told Businessweek last month. “When I look at something like the Kindle Fire, what I want is to be one of the winners.”

Only time will tell if releasing a brand new luxury item during an economic recession–and selling it at a loss, no less–was the best or the worst idea Jeff Bezos has ever concocted. In some ways, the success of Amazon’s digital empire is tethered to the Fire’s performance.

But with a track record like his, I for one am willing to give Jeff Bezos the benefit of the doubt.

 Our upcoming article, “Jeff Bezos’ Amazon Empire (It’s Bigger Than You Think)” will take a closer look at the man who started Amazon, and what other entrepreneurs can learn from both his successes and failures. Interested? Like us on Facebook, where we let our followers know about our favorite new stories, podcasts, and promotions. 

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  • Robert Andrews

    Thanks for the fair-minded look at the new Kindle. No it’s not an iPad — but that’s good. I don’t want to shell out $500 for something with a lot of features I won’t use. If you’re a reader vs. a gamer, what’s not to like?

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    Glad to see some real contenders for the iPad. At $199 I would be willing to risk a dabble into the touch-pad world, no biggie. *thumbs up*

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