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Amazon's "Prime" challenger to the iPad

Why Amazon's Kindle tablet can succeed where others have failed.

Amazon Kindle logoIf you haven’t noticed, creating and executing mobile platform plays is really hard. Just ask HP, RIM, Nokia and Microsoft.

Even Google’s Android, which made it look easy to grab dominant market share in the smartphone market, is finding it much harder to secure a footprint in the tablet market, where, let’s face it, there’s iPad … and iPad.

Enter Amazon, whose forthcoming Kindle Tablet represents the clearest alternative to Apple’s iPad.

Securing the design win

I once co-founded a device management platform company in the embedded systems space (Rapid Logic) where we came to define three core precepts for succeeding in a platform-oriented business:

  1. Secure the design win.
  2. Grow the dollars associated with the runtime (via royalties or new product add-ons).
  3. Get the customer to want to embed themselves more deeply.

Flash forward to the present and we see a post-PC device market emerging that has revealed some interesting attributes.

For one, we see how the carrier-dependent mobile phone segment logically bifurcates between the Apple approach (vertical integration) and the Android approach (horizontal, loose coupling).

Why is this so? For the simple reason that for a large portion of the market, carrier “push” via phone pricing — plus a subsidy combined with a retail presence — dictates buying patterns every bit as much as product positioning and differentiation.

Most fundamentally, this is because regardless of whether the end phone is an iPhone or an Android phone, A) the buyer is already a mobile phone subscriber, and B) either phone represents a step up from traditional feature phones.

However, when we move into tablet-style devices, ebook and media device players, where the alternative is non-consumption (i.e., buying no device), it becomes clear that the breadth and depth of ecosystem orchestration that is required goes up materially.

This is why Android has not yet found a foothold in the tablet market (see also: Android’s Missing Leg).

Cloud Street meets Main Street

Now, consider Amazon, the ecommerce company that many have officially anointed as this generation’s Walmart (see chart below: Walmart, Amazon, Google and Apple head-to-head over the past 10 years).

Comparison of Apple, Amazon, Google, and Wal-Mart over a 10-year period
A comparison of Walmart, Amazon, Google and Apple from October, 2001 to August, 2011. See a larger version and read related analysis.

Amazon, in fact, just experienced its fastest revenue growth quarter in over a decade (up 51% versus the same period in 2010). It is unquestionably on a roll.

To establish the scale and market presence that Amazon has on “Cloud Street” in about one-third of the time it took for Walmart to dominate “Main Street” is nothing short of amazing.

Simply put, it’s emblematic of a company whose ability to marry a clear, disciplined strategy with a pragmatic focus on tactical execution knows few bounds.

Kindle as an entry point for a new tablet design

Amazon’s Kindle reading device has catapulted the company into a position where it’s now selling more digital books than print books, all at a time when the physical bookstore is on its last legs (Borders is gone, Barnes & Noble is for sale).

Now, having proven that it can execute a hardware-software-service play vis-à-vis the Kindle, Amazon is expected to announce its first iPad competitor in a matter of days.

Such a device will build upon several “unfair advantages” that Amazon has established in the marketplace:

  • Ecommerce and marketplace logistics.
  • Digital media content acquisition, publishing and distribution.
  • Cloud computing platform know-how and a nascent ecosystem.

Just as Apple has leveraged its iTunes as the wedge upon which it established a billing relationship with 160 million users, Amazon has built a differentiated position of its own called Amazon Prime.

Amazon’s “Prime Directive”

Amazon Prime illustrationReturning to the start of the article, remember the success mantra that I told you about for my company? You can apply the same logic when looking at how Amazon matches up to Apple.

Apple’s initial innovation with iTunes was that it afforded consumers the ability to purchase music à la carte — one single at a time — when up until that point it could only be purchased in record or CD form. Coupled with a $0.99 per song pricing model and the unparalleled convenience of click-buy-play, this was a recipe to change the way that customers bought and experienced music.

Similarly, Amazon’s initial innovation with Amazon.com was that it enabled people to discover, purchase and transparently receive a seemingly bottomless wellspring of books, where formerly you pretty much only got what was on the shelves in the bookstore.

Like Apple, Amazon used a disruptive pricing and logistics model to entice customers to change their buying behavior.

That Apple has expanded iTunes into an App Store (and iBooks) and a family of devices bound by a common software platform, and Amazon has expanded its catalog to products and services of all stripes (analog and digital), makes perfect sense in this context.

From the initial “design win” of music buying and book buying, both companies have grown the categories and aggregate dollars of their bases in ways that have made consumers want to be more deeply embedded in their relationships with Apple and Amazon.

The Amazon Prime product has cultivated a base of an estimated five million subscribers (from the company’s aggregate base of 120 million customers) that, in exchange for an annual $79 fee, provides expedited shipping on many products.

Why is this a big deal? The friction-free model is enticing some customers to use Amazon for product purchases (e.g., bulk goods, toiletries) that historically have been the parlance of the local Walgreens or Costco.

So, if MG Siegler of TechCrunch is correct in his excellent scoop on Amazon’s Kindle Tablet, then Amazon will be bundling Amazon Prime with its forthcoming 7-inch tablet device and pricing the device at a disruptively low price point of $250 — about half the cost of an entry-level iPad.

If you create a superset between Kindle buyers and Prime subscribers, a logical early-adopter user base emerges for Amazon to target for its iPad alternative (in terms of price, footprint and aggregate value proposition).

Plus, from a strategic leverage perspective, it makes total sense. Amazon, after all, is first and foremost a great retailer.

Add on to this value proposition the fact that Amazon has surrounded its Prime offering with an ever-growing free library of bundled video content (i.e., a poor man’s Netflix streaming service), and the Kindle Tablet starts to feel like a lifestyle device that can succeed over the long haul.

After all, media is a big differentiator on this type of device. And in terms of sheer economics, there are a lot of people these days for whom a bundled video service with a pay-as-you-go library of premium music, books, video and app offerings feels right at $250.

No less, if we know anything about Amazon, it is that it, like Apple, has the fortitude, focus and sense of purpose to see big ideas through to long-term success.

Amazon, after all, wants to be the only shopping cart you’ll ever need, and this becomes another channel back to the consumer.

Plus, from an average revenue per user perspective (ARPU), you can probably subsidize the device a bit more with the Prime subscriber, knowing that Prime customers are already paying $79 a year and are faithful, dedicated, recurrent commerce customers.

Some final thoughts:

Just because Amazon has a logical path to finding a “wedge” in the tablet computing market doesn’t mean that it will. There are hard strategic decisions about how to fork Android and how that ties in with Amazon’s Appstore strategy, including approaches to competing services (e.g., will Amazon allow Nook or iBooks to be installed?).

Moreover, is Amazon prepared to develop and support a software developer’s kit (SDK) and get sucked into a developer tools arms race with Apple?

Similarly, how does Amazon Web Services and Amazon’s cloud platform fold into the equation?

Like I said at the start, mobile platforms are really hard to create and execute, but if anyone is in a position to do just that, it’s Amazon.

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  • http://borasky-research.net/about-data-journalism-developer-studio-pricing-survey/ M. Edward (Ed) Borasky

    I’m not as bullish on this as you are, at least if the device is as TechCrunch described it:

    1. A *fork* of Android rather than Google’s version,
    2. Using *Amazon’s* app market rather than Google’s,
    3. A 7″ device,
    4. WiFi only,
    5. Priced at $250.

    If they can price this at $114, where the WiFi “Kindle with Offers” lives, I think they have a good shot. But at $250, I’m not sure it’s viable.

    I have a Kindle 3G and an Android phone. The Kindle app on the Android is lame – the only lamer version is the Cloud Reader. And I don’t have an iPad. But it seems to me the 10-inch iPad has already “inoculated” buyers against 7″ devices. And I’m guessing it won’t make phone calls either.

  • Stu newman

    It’s a failure before it’s even been released. Manufacturers don’t seem to get that people aren’t interested in 7″ tablets.

  • http://www.thenetworkgarden.com Mark Sigal

    @Ed, I think the key here is that Amazon is going to deliver a fully integrated solution, inclusive of media/content relationships, and I believe that that’s the right play for tablets at this stage of the market. As such, I don’t think that you can compare it to the other Android loosely-coupled tablets.

    Re 7″ v. 10,” I have no question that Apple has tested the use case relativity to device size (in choosing 10″), but that doesn’t mean that another form factor can’t be successful. We all have a tendency to fall into the trap of “one right way” type of thinking, but especially in large markets, multiple approaches can pick off worthwhile segments and achieve success. It still comes down to execution of the total package.

    @Stu, as noted above, we can reach all sorts of “one right way” conclusions about form factors, but the fact remains that even though the iPod touch (arguably a tiny form factor equivalent of the iPad) has been out for a few years, there STILL is not a single breakout success story in terms of an Android-based iPod touch competitor.

    In other words, we have limited data on what users aren’t interested in in the tablet realm, other than that if the software sucks, and the value proposition isn’t clear or well executed for the target outcomes at hand, the device will fail.

  • http://touchadventures.com Stephen Ackroyd

    The Good

    1) Price – they are knocking it out of the park. In video game consoles, lowering the price by $100 increases volume by 10X. Not sure how it translates here, but Amazon has the first tablet that can compete.

    2) Credit cards – Amazon is one of the most trusted sites. They already have your credit card. You already buy stuff from them. So, the Android problem of a marketplace with no transactions is solved by Amazon by ignoring the Android marketplace, and using their own, where you already trust the vendor.

    3) Amazon is going to make the most amazing touch-based shopping experience. The Sears catalog will be reborn on Amazon’s tablet. No one will be able to compete. You will buy everything on this tablet. Hide it from the wife.

    4) Bet you did not know that Amazon prime includes a FREE video service like Netflix. Wow, this thing includes movies, for FREE if you have amazon Prime.

    5) Songs are cheaper than Apple and they are MP3s on Amazon.

    6) Amazon works on 20% margins rather than Apple’s 50% margins. It will win on price, and it will never support the overhead of retail. And, for now, no tax too – another 10% here in California.

    7) Who is going to write tablet apps to a souped up Android 2.2? I do not think that Amazon really cares about apps, except their own. I think Amazon may go for a highly curated app experience, like a game console. By the way, an open platform full of crappy apps is no great consumer experience.

  • http://www.thenetworkgarden.com Mark Sigal

    @Stephen, all great comments; wouldn’t change a thing. Re point #7, that remains to be seen, but that’s definitely a plausible scenario. Thanks again.

  • vikram333

    The problem I think for Amazon is that it’s neither fish nor fowl.

    It isn’t as good a reading device as the e-ink Kindle which has a similar screen size and at 7 inches, it may be too small for a good tablet experience.

    I am sure that it will sell ok because Amazon will flog it on their front page but $250 is a lot of money for a less good book reader and a less good tablet.

  • http://www.couponfacet.com John

    Good post. I think Amazon can’t make a tablet to beat ipad, it just improves the old one and introduce some new features like android OS, 7-inch screen, color and more apps.