The Kindle (on) Fire

On September 28, 2011

I watched Amazon’s announcement today, and I have to say I’m very, very impressed.

The Kindle Fire

The big news is that the device looks great, only costs $200, and unlimited streaming is free with the $80/ year amazon prime. It was so cheap that I looked at the picture, looked at the price and just “1-click” bought it before my brain really even had a chance to process it. Unless the media selection is terrible, I’m going to pay for amazon prime and cancel netflix. I think a lot of people are going to be doing that between now and Christmas, and even more with their Christmas Amazon gift certificates.

The big question that everyone in the media is asking is “Will this be an iPad killer?”, and the answer is not entirely. I think we’ve learned a lot about how people will use tablets in the past two years since Apple invented the space. And I think people generally fall into 2 camps: (1) Aspiring laptop replacement, and (2) Anywhere media consumption device. Most of the negative press about the iPad has been customers that fall into bucket 2, who like the device, but can’t understand why it costs so much. This is the group of people the Kindle Fire is made for, and I think Amazon is going to win over tons of them because they have a great product at a truly phenomenal price.

But can Amazon make any money at this? IDC had estimated the whole table market to be 46 million devices by 2014, but Apple is already selling more than 9 million per quarter, so I expect the market size to be significantly higher than that. Assuming that amazon gets 25% of the current market and sells 9 million Kindle Fires next year, that’s a whopping 1.8 billion in revenue (current annual revenue is forecast to be ~50 billion in 2011) That’s reasonable, given that Samsung sold about 10 million galaxy tablets world wide last year. Guess how many units Samsung could could have sold if they were Amazon?

Half the price of the Galaxy tablet
High promotion in the largest online store in the world (80 million people per month!)
Killer story for great Movie & TV content
The best andriod app store, a free app every day, and no malware
No tax and free shipping (unless you live in Seattle)

But this is just revenue, what about profit? I’m guessing that they are breaking even, or losing money on each of these tablets – so any profit they make will be on the back of the profits for media purchased through the device. Which Amazon already sells at a super slim margin. This is the part of the business model I don’t quite understand – Apple charges more than Amazon for all content, and that still ins’t significant enough to count for much on their balance sheet. How’s amazon going to make a business out of this when they’ve cut margins on every side of the equation? Plus, they incur the added cost of the cloud services that come free with the device. This is all before the patent trolls wind up their lawyers to take their cut.

The bottom line is, while I love the product and the effect it will have on the industry, I’m not ready to invest in AMZN, especially with their super high PE ratios.

The Other Kindles

While you certainly can read books on your Kindle Fire, I don’t think that anymore people will do that, than the number of people who read them on the iPad. And we can tell by the prior kindle sales numbers that it is still a large enough segment to continue to invest in the black and white kindles. I have seen a significant number of people who carry both iPads and Kindles because the reading experience on a Kindle is so much better. I actually miss my black and white kindle enough to have bought one of those too.

I am very impressed with their Ad Subsidized (e.g. special offers) Kindles. They’ve managed to generate at least $30 in ad revenue, while making ads that in no way harm the experience of the device. I can only imagine that this amount will increase as the further optimize the ads and scale out their ad sales team (not to mention start leveraging their plethora of customer data to tailor the ads to each customer and provide analytics back to their advertisers). This could also be part of their plan for how to increase the margin’s on their Kindle Fire.

The only thing I don’t understand about this product line is why it is so complicated. There are 4 devices to chose from: No touch, Touch, Keyboard and DX. It really seems like they could benefit at multiple levels by simplifying their product line to Touch and DX.

I’m also concerned about this kindle from the profitability perspective as well. The only thing I can imagine is that they are taking an early loss to own the ebook market, and they will use that market share to disintermediate the big publishers and allow authors to publish direct to market. Then Amazon will split the publisher’s cut with the Authors and finally create a good margine and a highly defensible monopoly, I mean business.

The New Browser

Who cares. No, seriously. I think they’ve created some really interesting technology to solve a problem that isn’t really holding people back – at least not on a wifi device. Now throw in an AT&T 3G connection and this starts to get really interesting. But then, they haven’t announced 3G, at least not yet…

What should Apple’s Response Be?

There is no way that this isn’t a threat to Apple’s core business, business model and profit margin. The more I think about this, the less I believe this is competing head to head with the iPad, I really think it is competing more with the iPod Touch. If you assume that people aren’t going to use the Kindle Fire for eBooks, and they aren’t going to try to replace their laptop, then they are mostly going to end up: Watching TV/ Movies & Music, Surfing the Web, and Playing Games. Exactly what people do who only have an iPod Touch.

Apple is going to have to do this, the iPod is too small for games & movies and the iPad is too big and heavy. Apple knows this, which is why they spent so much R&D making the iPad 2 33% thinner and lighter than the first iPad. But it isn’t enough. This is also a giant opportunity for them to disrupt the hand held video game market, which is currently more than $2.5 billion / year divided between the Nintendo DS, PSP and the iPod Touch. That’s not anywhere near as big as the iPad market, but for the iPod touch, that’s not too shabby. And with Apple’s superior hardware and developer ecosystem, they should be able to build a sustainable advantage here that Amazon would have a hard time competing with. So, which would your kids want:

$200 Kindle Fire