Amazon vs. Apple? No, it's Amazon and Apple vs. Everyone Else

To me, there's something magnificent about a well-executed product strategy.  Features and price and marketing all come together to delight a particular type of customer, and everyone wins.  The developer gets to sell a lot of products, and the users get something that improves their lives.

In the tablet market right now we have the privilege of watching two companies do great strategy, Apple and Amazon.  The press wants to label the Kindle Fire an iPad killer, but really it's the first sensible iPad counterpoint, a tablet device with its own unique design center and business model.  I don't think either one's going to kill the other, but I think together they're likely to chop up almost every other company that gets in their way.  In particular, that means Microsoft, RIM, and Google.

Let me start by talking about the new Kindle line, and then its likely impact on the market.


Two tablet paradigms

When Apple entered the tablet market, it asked "what can we do to redefine computing for tablets?"  It re-thought the user interface, application model, and an endless set of other details to create a unique new computing experience.  Apple has been rewarded with explosive sales growth.

With the Kindle line, Amazon asked a different question: "What can we do to redefine content distribution?"  The answer led it to a tablet computer, but one with very different hardware specs, user experience, and a vastly different business model.  None of the Kindles can match the iPad feature for feature (link), but they're not intended to.  At $499 and up, the iPad is a serious investment for most people, a lifestyle statement.  At $199 and down, the Kindles are impulse buys, the sort of thing people will get under Christmas trees or just buy for themselves because it looks neat and why the heck not?

Apple makes money from the sale of the iPad and its accessories, with a bit more coming from applications and content.  Given the breath-taking pricing for the Kindle line, Amazon will probably lose money on the hardware, or at best break even.  Its main profit will have to come from the sale of ebooks and movies and all sorts of other media products, plus some apps.  Those revenues may take years to fully develop, so Amazon is playing a very long game.  That's why I see Kindle as a strategy rather than just a product.  The company is betting that by subsidizing the Kindle now, it can dominate electronic media distribution for the indefinite future.

To keep iPad successful, Apple will need to continue to add wonderful new features to it, constantly refreshing the "magical" experience.  It will also continue to drive it into markets where tablet computing can make a big difference.  Apple is already making a huge push in education; some people tell me Apple has almost completely refocused its education salesforce on selling iPad to schools rather than Macs.  And there are plenty of reports of iPads moving into other verticals like aviation.

I'm sure the Kindle Fire will also show up in schools, but at heart the Kindle line is a Volkspad, priced to be the tablet thing that everyone eventually gets for basic content access.  Already about 40% of tablet owners also own e-readers according to Pew Research (link), and I expect that percentage to increase. 

Over time we might see Apple and Amazon compete more directly; it all depends on how much Apple is willing to subsidize hardware to get long-term revenue from content.  There is also potential for product line conflicts -- if Apple makes a lower-priced iPad, it might cannibalize iPhone sales.  In the past Apple has tried to keep its product lines separated in price, and it hasn't used the subsidy model.  This is a very interesting test for Apple's new CEO Tim Cook, and I'm glad Steve Jobs is still on the scene to advise him.

But in the meantime, it's very likely that iPad and Kindle will coexist nicely in the market.  The losers, I think, will be everyone else trying to play in the tablet space.


Hammer and Anvil

Companies trying to sell tablets against Apple were already suffering from slow sales.  Now instead of just being pounded by the iPad hammer, they've been undercut by the Kindle anvil.  For most of them, there's no place to go.  It's very hard for me to picture how somebody like Samsung is going to get market traction with its current tablet line, and I think the RIM PlayBook, due to its size, is going to suffer against Kindle Fire.  Between slow sales of its current phones and now the PlayBook's dwindling prospects, I hope RIM has been very very careful about managing its inventory of parts and finished devices.  Otherwise it could end up with a massive inventory writedown in a couple of quarters.

I will be very interested to see what Barnes & Noble does next with its Nook Color tablet.  Nook Color is similar in many ways to Kindle Fire, but B&N was reluctant to add a lot of Android apps because it was afraid people might buy it as a tablet rather than an e-reader.  Amazon appears to have overcome this fear, and there's a danger that B&N may have let its opportunity for leadership slip away.  On the other hand, if the next Nook Color has better features than Kindle Fire, Amazon's announcement might validate B&N's product and help it sell.

And then there's Microsoft, which has a beautiful-looking new Windows 8 tablet interface coming maybe late next year.  I'm excited, I hope it'll be wonderful, but I'm starting to wonder if any customers will still be available by the time it ships.

There is still plenty of room in the market for competing tablets, but they'll need to be aimed at different usages than the iPad and Kindle.  The biggest opportunity is for a stylus-equipped business productivity tool, an info pad (link).  But none of the major hardware companies are working on that; they seem to prefer to bash their brains out competing directly with the iPad.

You're not the licensee Droid is looking for.  Google's reaction to Kindle Fire speaks volumes about its goals for Android.  Kindle Fire is based on Android, and will run Android applications.  Android has been struggling in the tablet space, so you'd expect that Google would be delighted to have Amazon on the Android bandwagon.  But you'd be wrong.  Let's look at the press release Google issued today to welcome Amazon to the Android family.  Wait a minute, there is no press release.  Okay, so let's look on the Google blog.  Nothing at all.  Maybe a tweet from Andy Rubin?  Dead silence.

The problem is that Amazon is using Android as just an OS, not using the Google-branded services and application store that Google layers on top of the OS (link).  Although Google touted the openness of Android when it was first launched, the reality is that Google is using it as a Trojan horse to force its services onto hardware.  What Amazon did with Android is very threatening to Google, and so you're not likely to hear a lot of supportive words from them.

Silken dreams.  Speaking of threats to Google, we should discuss Amazon's new Silk browser.  It supposedly integrates Amazon Web Services with the browser to produce a faster, more efficient browsing experience on Kindle Fire.  Given the inefficiencies of web browsing over the wireless networks, this is potentially a compelling innovation that also might make it possible for future Amazon tablets to browse over 3G networks using less bandwidth than competing devices.  That might lock in a structural cost advantage for Amazon's tablets.

Kindle Fire today is a WiFi only device, but I'd be very surprised if we didn't see a 3G version sometime in 2012.

Silk potentially gives Amazon a very powerful position (link).  I can picture a couple of ways it could be used to disrupt the mobile market.  First, Amazon could tie the browser to its own content services and distribute it to other hardware vendors.  Basically, it could try to make Silk the content layer on Android that Google wants to be.  This could be a good business move for Amazon, since it's not making money from the hardware anyway.

Google would hate this passionately, but with the company already under antitrust scrutiny, it would have to respond very carefully. 

Amazon's other play could be to expand Silk into an enhanced platform for mobile web apps.  I've been waiting for someone to make web apps work properly on mobile, and many smart people have been getting more and more depressed about the lack of leadership in mobile web APIs (link).  Amazon has the expertise and the incentive to fill that gap.  The question is whether it wants to. I think it should, I hope it will.  If it does, Silk could become the platform for the next great generation of applications, giving Amazon enormous power in the computing market.

This will be a fun space to watch. Apple and Google will both feel pressure to respond to Silk to prevent Amazon from getting a decisive lead in mobile web apps.  Maybe just the threat of Silk will be enough to finally drive some innovation in the mobile web platform.

I may be indulging in wishful thinking, but there's a possibility that ten years from now we'll look back on Silk as the single most important thing in today's announcement.

Or not.  It depends on what Amazon's agenda is, and they're not telling.

Slouching toward Bethlehem.  One revolution I'm sure is coming is the remaking of the print publishing industry.  As I've said before (link), once about 20% of the reading public has electronic devices, an established author can make more money bypassing print and selling direct through e-readers.  I think the new Kindle line, and especially the entry-level Kindles at $99 and below, will finally push us past the 20% threshold.  It will take a couple of years to play out, but this will force the long-awaited restructuring, or destruction, of the traditional book publishing industry.

(Note:  I wrote this before I read John Gruber's take on the new Kindles.  He and I are thinking along similar lines. link )

51 comments:

Anonymous said...

For some strange reason when mentioning the Silk browser everyone seems to call it new and innovative. Opera have already been doing that for years.

Walt French said...

I saw reports that Amazon didn't describe WHICH version of Android it'd used. I'll guess 2.2 Froyo, possibly quite customized, because it's gotten into the AOSP and it's a clear step up in performance from prior versions.

But it lacks all the tablet features that Google put into 2.3 and later; this absolutely requires developers to tune their code to run well on state-of-the art Android tablets versus the Fire.

Given that I totally agree about the likely success of Fire, that may mean very few devs can afford to tweak their code for Pure Android tablets.

Walt French said...

Another likely implication of the Fire:

This may mark the end of big-name retailers such as Sears, Macy's, Penney's, etc. Amazon now has a killer advantage — a subsidized storefront in all the Fire customers' hands — that I can't quite see how others compete with.

Unless Apple decides there's something to gain by co-branding or other ways to get retailers into a broad, one-search-for-multiple-brands store… and one NOT using Google, I'd expect. Maybe Bing would be for sale or maybe MS will see this as something THEY could assemble?

(Yeah, I figured readers could use a laugh.)

Michael Mace said...

Anonymous, I think you made a good point about Opera. I always think of them as the "transcode content for a small screen" guys, but they've evolved the product a lot over the years.

Are they doing the same sort of deep content parsing and caching that Amazon hinted at? I don't know, and I don't know if Silk will actually work either. We'll really need to see both products side by side.

Walt, very interesting point about developers. By the way, Chris Zigler over at This is my Next... says it's based on Android 2.3. His article is worth reading (link).

I want to think some more about the potential impact on retailers. You're right that the device puts an Amazon storefront in a lot of hands, but people buying Kindles are already Amazon customers. But it's a good example of how many directions Amazon could take this thing in.

Chris Espinoza pointed out another one, which is the huge amount of customer data Amazon can collect using this device (link). Lord only knows what they'll do with that.

Anonymous said...

Compare the 25 million or so, hype overdrive "post-PC" iPads sold since release, to 85 million PC's in 2Q11 and 35 million netbooks in 2010. Apple fans must really be praying that that 25% iPad order cut is false.

The Fire is post-iPad, it out-content consumes the supposed Kindle-killer iPad and iBooks. Aboard Boeing's Dreamliner, the Fire will certainly compete for its owner's attention with its brother Android in-flight entertainment system.

Continue adding features to the iPad and the usual wealthy Apple demographic won't be able to tell the difference between it and the Macbook Air. As it is, what do you call an iPad that's usually on its stand, with the popular bluetooth keyboard? - a gimpy laptop

An easy way to tell that Apple starts to fear the Fire is when it sues Amazon. Hopefully, this Fire won't need to be rooted to get Google Plus on it. Actually, there's already a way far more successful tablet form than the over-sized iPad- that's the touchscreen phone. Most of the 500,000 Androids activated everyday are phones. Until tablets become more capable, more people (450 million Windows 7) will have the PC and phone combination.

Tatil said...

"Compare the 25 million or so, hype overdrive "post-PC" iPads sold since release, to 85 million PC's in 2Q11 and 35 million netbooks in 2010."
Despite all the hype about the internet, most people still spend more time watching TV. This web thingy is all a fad I tell you.

Ricardo Valfreixo said...

In a stright business point of view, I think Amazon is not looking to make money on the Kindle. I believe that the their position is to break even. Don't loose any or very little money. But that will drag the entire tablet market price line down. The in-betweens (non apple nor Amazon) will have to create better and cheaper. Eventually the iPad will lower the price tag too. And that's a statment. Amazon saying (we're arriving and we're already poking the market. So everyone with a good structure can do that to). Anyways, I think that will be a tremendous gagdet and we, the consumer, will be the true winner on this.

Tatil said...

"I hope RIM has been very very careful about managing its inventory of parts and finished devices."
Maybe, they can sell their inventory to Amazon. :) I hear the hardware is pretty much the same as Playbook, but priced $300 less.

"Its main profit will have to come from the sale of ebooks and movies and all sorts of other media products, plus some apps. Those revenues may take years to fully develop, so Amazon is playing a very long game."
There are also rumors that Amazon is subsidizing many ebooks to gain a dominant marketshare early on. If so, this is a really long game and possibly illegal in some countries, where a big retailer is not allowed to sell below cost and drive competitors out of business, out of fear that prices would jump up once the strategy succeeds. In the US though, we'll be happy as a clam. :)

Nevertheless, this is a risky strategy. Apple's main income is from gadgets themselves, so it has been pricing content at fairly low prices, operating its stores at supposedly just above break even level and putting a ceiling for the others. That does not leave much margin for others to subsidize gadgets. Apple does not compete in streaming videos, but content owners will probably suck most of the profits through licensing deals. They'd rather consumers keep using cable TV, so they are in no mood to let anybody subsidize new delivery mechanisms. That pretty much leaves advertising as the main subsidy mechanism.

Anonymous said...

Does this not mean that Google will now enter the hardware race, at least in tablets? Assuming they are successful in acquiring Motorola Mobility.

I mean they cannot undercut Amazon on digital content, since said content is not 'owned' by them. (Though long term if the old models break down Google could be a real threat in digital content, in trying to drive prices to zero so as to sell ads).

So they might have to subsidise the hardware to make sure Android is not wrested from them...

An acquisition of a retailer also makes sense from their side. B&N? Overstock? Google needs a retail presence if they want to push the sales of their own Android 'experience'.

Tatil said...

"An acquisition of a retailer also makes sense from their side. B&N? Overstock? Google needs a retail presence if they want to push the sales of their own Android 'experience'."
Some call Android the moat strategy for Google to protect its search and advertising revenue in mobile. Now it needs a moat to protect the moat? Oh, boy...

Gabor Torok said...

Is my guess really wild to picture Facebook soon joining the Apple-Amazon duopoly with their different kind of content repository: people? Armoured with Social Ads, their own virtual currency, willing to rent movies, books, etc. and their HUGE userbase I can see another mobile giant growing.

Glenn Bachmann said...

Thanks again for the nice writeup Michael.

-Interesting insight on the choice to incorporate core Android but leave out google's services. How will this play out moving ahead for app developers who want to support multiple variations of Android?

-Missing from Amazon's offerings (I think) is a set-top box for movie/video/tv distribution. We use Apple TV quite a bit now for movie rentals, they have current titles and the iTunes experience is familiar and easy. Most people still want to consume movies on their TV.

-As I've told people since the beginning of the iPod, yes the device is sexy and gets all the press, but nobody else has yet to come up with a credible alternative to the iTunes juggernaut that is the ubiquitous method for purchasing and managing your music, movies, etc. Since I agree the tablet is all about content, I think the growth of Amazon's sales of this tablet will be somewhat pegged to how successful they are in getting customers to buy into the Amazon storefront and using it as a different way to manage their content. People underestimate how deeply iTunes has wormed its way into our lives and how difficult it might be to wean those people off of it and migrate them to a different way to access/manage their music/movies.

TDC said...

I wonder if samsung's galaxy note will give the push your looking for in the infopad, not sure about the form factor yet but it looks like a start, maybe if it looked like a diary?

mikecane said...

>>> ...or destruction, of the traditional book publishing industry.

Yes.

Amazon’s Kindle Price Punking

MikeTeeVee said...

Glenn said "Missing from Amazon's offerings (I think) is a set-top box for movie/video/tv distribution. We use Apple TV quite a bit now for movie rentals, they have current titles and the iTunes experience is familiar and easy. Most people still want to consume movies on their TV."

Amazon does basically the same thing as AppleTV via the Roku player, and a bunch of other devices:

http://www.amazon.com/gp/video/ontv/ontv

One of the features of the Kindle Fire is Whispersync for videos. Start watching on the Fire, then continue on your TV. Amazon keeps track of where you left off.

Glenn Bachmann said...

Thanks was not aware of the Roku partnership. Can't really say whether its better for amazon to get to your TV through partners or through an ATV-like box of their own. There is a certain lack of control of the experience by hitching a ride on someone elses product, whereas ATV totally controls the Apple-esque UX.

But I do think its important for Amazon to be able to somehow get customers to accept an Amazon version of "itunes" in some form if they are to be able to convince people to migrate to their devices to consume media. If they don't, people will remain tethered to iTunes, and if so, using a non-apple device to consume media when all of it resides in iTunes doesnt make much sense.

MikeTeeVee said...

Glenn, I think this is an example of how Apple and Amazon approach things differently, as Michael Mace describes.

Apple's product is the iPod, iPad, iPhone, etc. The iTunes store supports the devices. For the most part, you need an Apple device (iPod, iPad, AppleTV) or a PC/Mac to access iTunes.

Amazon's product is the books, movies, and music. The Kindles, Kindle apps, and hardware partnerships (Roku, Tivo, Blu-ray players, etc.) are there to support the media store.

Either way, once you buy into Apple's iTunes or Amazon's media stores, you're likely to continue with them, because switching is hard.

Anonymous said...

To me this a competition of business models.

If I was Google I would give Amazon a run for its money by giving content producers an even more attractive option than Amazon with less than 30% fee.

Google needs to:

a.Give content producers tools to publish books, music and film in any browser (protecting the content and offering a good reading, listening watching experience). Kindle is already a Chrome app so in terms of technology we are almost there.

b.Prefab publishing site/tools that an author can manage without any coding. This ensures that buyers will get a familiar buying experience, while giving authors more room to present their works in a more interesting way than on Amazon.

c.Discovery via google web search (possibly with new categories such as books, films etc.

d.Promotion via adwords

e.Payment via Google checkout

And finaly packaging a-e in easy to use ready made offerings to authors.

They should promote it by signing up a few very famous authors, musicians and film makers.


What do you think?

Do we all have to go to one store or could we have a mall?

Andy Norris said...

It's interesting that you lump Microsoft in with the other companies being left out in the cold by this, because Microsoft is the only other company executing a unique strategy in the tablet space.

Apple put its stake in the ground first with the iPad. Cheaper than a good PC, surf the web from the couch, ereader, email, video, music, games, limited productivity apps, etc. With the possible exception of couch surfing, the iPad isn't the best device for doing any of these things, but it's fairly portable, it's appealing, and it does many of them "well enough." And if computers are too complicated for you, it might be the only computing device you need. (It is for my dad, who loves his.)

Amazon has now come in, staked out a whole new price point, and tried to build a device centered on reading in particular, and content consumption in general. It's more portable, and easier to hold for long-form reading. In return, it pretty much gives up any pretensions of being a replacement for a computer.

Microsoft is coming at the iPad from exactly the opposite direction. They're making tablets that will range from the size of the iPad to somewhat bigger and bulkier, and making devices that you really can use to replace computers -- because they are computers, they just hide it under a super-friendly tablet interface.

Instead of trying to rig up a workflow that allows you to sort of do all your work right on an iPad if you squint at it just right, you get a device that boils things down to simple for content consumption and such, then lets you drop into desktop mode (including docking your tablet to a keyboard and mouse, if you want) when you need to do real work. No more worrying about whether your keyboard shortcuts will be there or whether you'll have the couple of obscure word processor features that only something like Word supports, because it really is a full-on computer.

It will still be key to make sure hardware vendors deliver the right devices at the right price points, but in terms of delivering a value proposition that will be better than an iPad for the right audience, Microsoft is absolutely on the right track. Businesses, for example, are likely to eat these things up.

Tatil said...

"No more worrying about whether your keyboard shortcuts will be there or whether you'll have the couple of obscure word processor features that only something like Word supports, because it really is a full-on computer."
We don't know how well MS and developers will handle the complexity of desktop and touch OS in one device. It may become a swiss army knife that can theoretically do many things, but that gets spurned by those who would rather have a "single purpose" steak knife instead. Next couple years will be interesting to watch.

nigeltufnel said...

Really good article, the first one I've read about the impact of the Fire that really gets it right.

matt said...

"Either way, once you buy into Apple's iTunes or Amazon's media stores, you're likely to continue with them, because switching is hard."

...no. because theres little reason to switch. my content is mine and travels quite easily.

matt said...

"because they are computers, they just hide it under a super-friendly tablet interface."

er, no, both ipads and the as-of-yet not-on-the-market Windows8 machines are both computers. the word youre looking for is "different" types of computers.

imagine if you brought an ipad back in time to the original Mac, or the DOS machines of the day -- theyd think it was the most kickass computer theyd ever seen. yet a computer is what it'd be classified as. now youre saying they arent computers...but if they would be in 1984, how could they cease to be today? answer: they cant. the ipad is still a computer, but one designed to do something different than most desktops.

truenorthbbq said...

Silk is definitely the most important part of all of this. But you have missed the real reason why: Everything you do in Sllk goes through the servers of a retailer. Imagine the power of a retailer that has records of all of the shopping you have done at it's competitors - everything from "just browsing" to "making purchases". And records of how you spend your leisure time on line. And what you chat with your social media pals about. Amazon could give the Fire away for free - they will more than make their money back in marketing intelligence and targeting.

Hell, they can even cut google out of search revenue game with this model.

Silk is they key. But no one seems to really see why.

AlfieJr said...

Amazon is a mortal danger to Google. that's the big story everyone is missing.

Amazon has totally ripped off the "open" Android OS from them (the worm turns!) for its own "walled garden." it is freezing them out of its directly competitive new cloud ecosystem and its media/app stores. it could freeze them out of search and ads too. it might start offering its own email and other web services - it has plenty of servers (suppose it bought Yahoo?).

Apple is not Amazon's target. Google is.

Drywall said...

What's with the two spaces after periods?

abu said...

@ truenorthbbq:
you're very right, Silk absolutely is the key for Amazon.

To be fair to this blog's author, anyway, in the very middle of the Silk part of the piece, he linked to this post, cdespinosa.posterous.com/fire, which perfectly echoes your view.

Anonymous said...

Amazon has pretty low margins on everything it sells, but it makes a good profit due to its scale and volume, like WalMart and Costco. It acquires goods at low prices and gets lots of inventory turns in its warehouses.

So although the Kindle Fire aims to help Amazon dominate digital sales, its real goal is to help Amazon dominate all online sales. Kindle Fire and Silk are intended to make it easier (frictionless) for consumers to get to Amazon.com and its non-digital goods. No slow-to-start, harder-to-maintain, sit-at-a-desk PC involved. Note that Amazon pairs video streaming with Amazon Prime (free two-day shipping).

So both Apple and Amazon are using low-priced, low-margin digital content to sell something else; for Apple, it is its devices, for Amazon, it is its non-digital goods. The disruption Amazon is focused on is in retail.

Amazon will continue to make its storefront available on all mobile and PC devices. But the Kindle Fire and Silk slows (or even blocks) expansion into the retail commerce space by Apple and Google from the device and advertising/search businesses, respectively. For that's where NFC, digital money, and iTunes/Checkout accounts are leading them into.

kevin

sscutchen said...

Indeed, it's Google that should be the most fearful. Amazon has absconded with the family jewels.

Apple sells devices and hopes you'll use them to do stuff. So they encourage developers to make stuff to do. Some of that is media, and in that window they compete with Amazon just like they did with the e-ink Kindle. But the Fire is not going to compete with iPad as a pseudo-laptop.

Amazon sells stuff and hopes you'll use their devices that are aimed at their stuff. The Fire is at it's heart a modern Sears catalog, with the capability for instant gratification. It is a well designed device that enhances Amazon's current businesses, and they can afford to even lose money on the sale of each one.

So Apple is relatively unaffected. Amazon wins big...

The real loser here is Google.

Google sells eyeballs. Their customers sell their own stuff to us, and Google makes money when they put their customers in front of us. So Google does like the TV networks, they give stuff away as bait for eyeballs. Android is one of those things they give away.

They do this with Android in exchange for placing all of their eyeball-generating software in front of the device-using public (as opposed to the PC-using public. They already own that space, but it is devices that are growing so fast.) Google search, mail, maps, the Android Marketplace...

Except that Amazon is not interested in using the Fire for that. They took Android, alright, the latest free version (2.3). They built their own environment sans Google. They have forked Android and are using it basically as a BIOS, or underlying OS, on top of which is Amazon's stuff. Nary a peek at Google software. And, just as importantly, they have developed their own Android marketplace so that they don't have to go to Google even for that.

Amazon has taken Google's dowery without even the promise of a date, much less marriage.

James Thiele said...

roughlydrafted.com thinks that the Kindle Fire will torch the Android tablet market for reasons similar to those presented here.

Anonymous said...

Microsoft has tried pushing a desktop OS as a tablet for years and has nothing to show for it. What makes you think W8 will be any different?

Brian Gillespie said...

Not so fast Michael. Amazon may have some challenges before the Fire is in the hands of the public. Having chosen Android both Apple and Oracle can be expected to ask for an injunction against the Fire. Microsoft will surely ask for licensing fees further raising the cost of the Fire. I am also sure Google will recognize this product as the death knell for other Android tablets and may move to place legal obstacles in front of Amazon to protect its business model. This is just starting to get interesting.

Hamranhansenhansen said...

The thing I disagree with here is that iPad at $500 is a lifestyle choice or investment. iPad is a PC, not a media player, not a phone. People are spending their notebook PC money on iPads, not their iPod money. It is not a media player, it is a low-end PC. That is the market it sells in. It is the mythical $500 Mac that so many said would be Apple's only way to really take significant market away from Windows. It's the "marketshare Mac." Notice which Mac disappeared from the lineup after iPad debuted: the MacBook (white,) which is the successor to iBook. iPad is just an iBook.

There is much proof of this:

• without counting iPad, the PC market shrinks unexpectedly after the iPad launch, but count iPad as a PC and it grows by the expected amount
• Acer did not just coincidentally take their first loss last quarter, they were murdered by iPad because they make notebooks whose main feature is small, but which are huge compared to iPad
• users have been surveyed: 80% bought instead of a notebook, and 10% bought it as their first computer ever, that is 90% buying it to be a PC
• 90% of iPad users were satisfied, so they got what they were expecting, which for 90% was a PC
• the biggest reason non-Apple tablets were returned (in large numbers) is the user expected it to replace a PC and it did not, it was just another phone, that is the reason they gave

Kindle has been described before as an iPod for books. That is clearly still the case with Kindle Fire. It lacks a PC class screen, PC class OS, and PC class apps like iPad. That means most users will still need to buy a notebook PC. That makes Kindle Fire *more* expensive than an iPad. The cheapest choice is to just make your next PC purchase an iPad. When iPad goes truly standalone and goes quad-core this year, we are going to see that be even more popular.

Michael Mace said...

Wow, these are great comments. I'll come back later and answer more of them, but I wanted to respond to Brian's thought on patents.

It turns out Amazon signed a cross-license agreement with Microsoft back in February 2010. This is one of the things I like about Amazon -- they plan ahead.

As for Apple and Oracle (and Google for that matter), I believe that Amazon has accumulated a few patents of its own in the process of creating AWS, not to mention its notorious set of e-commerce patents. I think it's probably well-enough armed that it can deter a patent attack.

Anonymous said...

Microsoft and Amazon reached a patent cross-licensing agreement in 2010 that involves Kindles that existed at the time (as well as the Linux operating system).That agreement apparently does not cover Android.

Microsoft declined earlier this week to comment on whether it intends to either talk with, or a file a lawsuit against, Amazon over its new Android-based tablet.

http://seattletimes.nwsource.com/html/microsoftpri0/2016366318_amazon_in_talks_to_buy_palm_perhaps_to_avoid_payin.html

Brian Gillespie said...

Michael surely you don't think Amazon is better protected than Samsung, Motorola or HTC in patents? All of which are slowly loosing their battles. Also the Oracle problem is not only patents, but copyright infringement as well.

Anyway, it will be exciting to see this unfold. Everyone recognizes the Fire as a game changer. With on fell swoop Amazon has cut the tablet market in to two distinct parts while cutting out the other OEMs. There are a bunch of businesses who won't want the game to be changed this way.

Something to look into Michael, is this why Google kept the Honeycomb code private? Also this might have been a major contributing factor in the Motorola purchase. Google is the only other company with the resources to do a complete solution like Apple and Amazon. The only thing they lacked was Google brand hardware.

Brian Gillespie said...

You know what Michael, the more I think about this, the more I think this is just a stopgap while Amazon works out a deal for WebOS.

Michael Mace said...

As so often happens, I think the comments here are becoming more interesting than my original post. Thanks for all your ideas, everybody.

I can't respond to everything, but a few thoughts...


Tatil wrote:

>>Maybe, they can sell their inventory to Amazon. :) I hear the hardware is pretty much the same as Playbook, but priced $300 less.


I read those reports too, but I'm not sure the commentators really understood how the ODM world works. They have all sorts of motherboard designs and off the shelf product designs that they can adapt for you. That doesn't mean they'll be copying any proprietary work they did for another vendor, but they'll certainly reuse any standard designs that they had used as the basis for someone else's product.


>>There are also rumors that Amazon is subsidizing many ebooks to gain a dominant marketshare early on.

They were for a while, but then the book publishers forced them to stop it. There have, however, been notorious cases of Amazon giving away mobile apps to get its software store established, and in the process destroying the perceived value of the developers' products. I've read some amazingly angry commentary about that from mobile developers.


Anonymous wrote:

>>Does this not mean that Google will now enter the hardware race, at least in tablets?....An acquisition of a retailer also makes sense from their side. B&N? Overstock? Google needs a retail presence if they want to push the sales of their own Android 'experience'.


What a slippery slope Google is on. Once they decide they have to be like Apple, they are obligated to duplicate all the parts of Apple, none of which they can run as well as Apple does. It would be like Atlantic City trying to copy Las Vegas. Don't do it, Larry.


Tatil wrote:

>>Some call Android the moat strategy for Google to protect its search and advertising revenue in mobile. Now it needs a moat to protect the moat? Oh, boy...


Nicely put.


Gabor Torok wrote:

>>Is my guess really wild to picture Facebook soon joining the Apple-Amazon duopoly with their different kind of content repository: people?


Yikes. I hope they're wise enough to understand that they do not need their own hardware. They have enough other control points.


Glenn Bachmann wrote:

>> How will this play out moving ahead for app developers who want to support multiple variations of Android?


Amazon claims it will take on the work of making sure the apps can run unchanged. We'll see. It'll be very hard to avoid forking at some time.

Michael Mace said...

TDC wrote:

>>I wonder if samsung's galaxy note will give the push your looking for in the infopad


Not that I've seen. I don't think they have the software chops to make it work right.


Anonymous wrote:

>> If I was Google I would give Amazon a run for its money by giving content producers an even more attractive option than Amazon with less than 30% fee.


That would certainly be a very sensible move for Google. Since Amazon is using store revenue to subsidize the hardware, make the store into a commodity and you'll destroy Amazon's financial model.

That's the way Google used to operate -- if a company is in the way, commoditize it to death and sell ads on the wreckage.

I don't know if Google still has the wisdom (and the courage) to do this, but it's what they should do.


Andy Norris wrote:

>>It's interesting that you lump Microsoft in with the other companies being left out in the cold by this, because Microsoft is the only other company executing a unique strategy in the tablet space.


Andy, I am fascinated by Windows 8, and if it were shipping today I'd be very high on Microsoft's chances. But when is it coming out? Online reports say it'll be late next year at the earliest. Amazon and Apple are evolving so fast that Microsoft may be rendered irrelevant by that time. It's like dinosaurs vs. bacteria.


truenorthbbq wrote:

>>Silk is definitely the most important part of all of this. But you have missed the real reason why: Everything you do in Sllk goes through the servers of a retailer.


That was why I linked to Chris Espinosa's post. I didn't see the sense in repeating what he said, but I should have made that more clear.

And yes, I agree with you.


Drywall wrote:

>>What's with the two spaces after periods?


I think it looks fly, Drywall. Live with it.


Anonymous wrote:

>>Microsoft has tried pushing a desktop OS as a tablet for years and has nothing to show for it. What makes you think W8 will be any different?


Because I think it looks fly. (link)

Michael Mace said...

Hamranhansenhansen wrote:

>>The thing I disagree with here is that iPad at $500 is a lifestyle choice or investment.


Your points about PCs are valid, but there's a basic truth about how consumers approach purchases. They think long and hard about buying something for $500, no matter what it is. For most people, you have to discuss that sort of purchase with your spouse, and you would never buy it on a whim.

But below $199, people start to act much more on impulse. It's a totally different psychology, and that's what Amazon is clearly going to tap into with the new Kindles.

Watch this Christmas. E-book readers are already outselling tablets, and that will continue, if not accelerate. Doesn't mean one is beating the other; they are just two different worlds.


Brian Gillespie wrote:

>>Michael surely you don't think Amazon is better protected than Samsung, Motorola or HTC in patents? All of which are slowly losing their battles. Also the Oracle problem is not only patents, but copyright infringement as well.


Fair enough, Brian. We're both making predictions based on our own assumptions, when we don't have all the data we need. In particular, we do not know the details of the Microsoft agreement (is Kindle Fire covered or not?), and we do not know if Amazon's patent portfolio is strong enough to make Apple and Oracle hesitate before suing.

Knowing how long Amazon has been doing patent deals, I personally believe they will be prepared for this issue. But I do not know that for a fact.

And by the way, yes, I am positive Amazon has a better patent portfolio than HTC. Far, far, far better.


>>Something to look into Michael, is this why Google kept the Honeycomb code private?

It's a great question. I'd also like to understand exactly what obligations Google has to release its code, when. I don't know enough about IP law to answer that.


>>Also this might have been a major contributing factor in the Motorola purchase. Google is the only other company with the resources to do a complete solution like Apple and Amazon. The only thing they lacked was Google brand hardware.

The Moto purchase is like an ink blot test. We can read all sorts of intentions into it. Some of them are right, but which ones?


Brian Gillespie wrote:

>>You know what Michael, the more I think about this, the more I think this is just a stopgap while Amazon works out a deal for WebOS.


You have a devious mind, Brian. I like that. But I'm not with you on this particular issue. I think Amazon had a very robust plan in place before HP decided to kill Web OS. I would not be surprised if Amazon bought Web OS, but I think it would be more for bits and pieces of technology that could be melded into Amazon's products, plus the IP.

Heck, even the Palm brand would be useful, and I bet HP would throw that in for free.

Anonymous said...

with great network existing for Amazon world wide, no need any carriers. That is the winning Fire formula. No body can duplicate that easily (Apple can not do it without damage its relationship with carrier. Everybody else is locked in, except Amazon). Bravo!

Anonymous said...

Though Amazon will make some money from selling content (i.e., media, ebooks, app, etc.), neither Amazon or anyone else is likely to get monopoly or oligopoly rents from the distribution of content. Amazon's play for greater than competitive rents from its Kindles is collecting and trading in its customers' personal data that it acquires from customers who use its Kindles. Revenue from trading its customers' personal data can subsidize the Kindle Fire, and it can do so quickly.

Amazon's longer term road to profits is, as you say, supra, using the Kindles as a means of locking customers to its distribution system for sell content. The success of that strategy will depend on the success of the Kindles, especially the Kindle Fire, and on whether the Kindles, especially the Fire, only permit distribution of content from Amazon. Will Google and/or Apple every try to put apps on the Kindle Fire to capture distribution of content and services for their respective ecosystems?

Anonymous said...

Several interesting comments here.

"Michael surely you don't think Amazon is better protected than Samsung, Motorola or HTC in patents?"

No, but they are not blatantly copying Apple either. The small handful they infringe, they will likely just pay Apple $5 a device and move on.

I saw reports that Amazon didn't describe WHICH version of Android it'd used. I'll guess 2.2 Froyo

Yes.

Google will recognize this product as the death knell for other Android tablets and may move to place legal obstacles in front of Amazon to protect its business model.

Not sure how... Google open sourced the software they used, and Amazon purposely did not use any of the higher end code that they did not open source.

Everything you do in Sllk goes through the servers of a retailer. Imagine the power of a retailer that has records of all of the shopping you have done at it's competitors - everything from "just browsing" to "making purchases". And records of how you spend your leisure time on line. And what you chat with your social media pals about. Amazon could give the Fire away for free - they will more than make their money back in marketing intelligence and targeting.

Hell, they can even cut google out of search revenue game with this model.

Good point!

Mike Payne said...

Amazon is dipping its toe into the post-PC world with the Fire (and boosting its already successful e-ink Kindles with a solid refresh). There's talk that Amazon will almost certainly release different form-factors of the Fire in 2012.

There's potentially an even bigger implication if we play out the following hypothesis:

Compare Amazon to Apple on its most simplistic level: Apple sells content to help sell its main product, devices; as opposed to Amazon selling devices to help sell its main product, content.

Apple launched the iPhone in 2007; it then built on that success with the launch of the iPad in 2010. How about Amazon launching the Fire in 2011 followed by a mobile phone (the 'Spark'??) in 2012 or 2013? Now that would be interesting...

Tatil said...

"I am also sure Google will recognize this product as the death knell for other Android tablets and may move to place legal obstacles in front of Amazon to protect its business model. This is just starting to get interesting."
This is not the first time somebody took Android and removed Google services from it. Google may have managed to push out Skyhook, but there are phones that use Bing as the exclusive search engine. Baidu has announced its own Android fork, as well. Amazon is no more a mortal threat than the others before it.

Anonymous said...

"Apple sells content to help sell its main product, devices; as opposed to Amazon selling devices to help sell its main product, content."
Yes, but Apple's prices puts an upper limit on digital content, leaving very small profits for everybody else to subsidize devices. Amazon sells physical goods, too, but I am not sure if people would end up buying more from Amazon just because they own a Fire.

EricE said...

"Already about 40% of tablet owners also own e-readers according to Pew Research (link), and I expect that percentage to increase. "

The only reason I own a Kindle is for eInk. The Fire doesn't have eInk, therefore there is no reason for me to own it as well as the iPad.

And as for the comment about eReaders selling more than tablets - citation please. Apple publishes their sales numbers. Unless I have missed something huge, Amazon has yet to publish their sales numbers.

Michael Mace said...

Thanks for the comment, Eric.

Go read the Pew Research report that I linked to. The e-reader vs. tablet numbers are in there. They survey consumers directly, so their numbers are far more reliable than any claims made by a manufacturer.

jason @ mobile website design said...

I fully agree sir. Amazon and Apple are just two of the corporate giants looking at 'world domination', leaving others to pick up scraps here and there and the little bits to do that they can't really be bothered with.

Not exactly Davids vs Goliaths but along those lines, although this time I think Goliath might win!

Anonymous said...

All nicely said, but I do feel rather left out in this, as I'm sure the Kindle Fire is going to be NorthAm/Western Europe only as late as five years after launch.

If the tablet manufacturers are smart, they'll build and price solutions aimed at China and India, where I doubt we'll see Kindles on sale well into 2020, at the rate things are going.

MobilityKen said...

"If the tablet manufacturers are smart, they'll build and price solutions aimed at China and India, where I doubt we'll see Kindles on sale well into 2020, at the rate things are going."

Going for the China and India markets is a no...no...
Remember Samsung has more clout in Asia and Africa and is aggressively marketing its Samsung Tab in this market, with good results. It plans to triple its sales in Asia-Pacific and Africa region over the next three years.
I would say that is very strategic given the mobile penetration is currently at 65% and growing at 9% annually in that area.

Then there are the Chinese brands like Huawei Ideos, 7" tablet and cost an amazing $200.

Both of these run on Android so iPad, Motorola and the rest are great losers in this market.