Jonathan Pressnell
EIS – Section 1
Ecosystem Mini-Project
Kindle Fire
Less than two weeks ago, Amazon unveiled a new generation of kindle e-readers as well as their
first entrant into the highly competitive tablet PC market – the Kindle Fire. While many PC and
electronics companies have followed the Apple Ipad into this space, the fact that Amazon has
thrown its hat in the ring is extremely interesting for several reasons, least interesting is the tablet
itself. In this paper, I will explore the innovations which were put in place well in advance of the
Fire’s introduction which I believe will make Amazon a true competitor to the Ipad in the tablet
market. I will also discuss why I believe Amazon’s goal with the Fire, and any generation to
follow, will not be to compete in the tablet PC market, but rather to advance the applications and
instances of usage surrounding Amazon’s existing core market, online commerce.
On September 28, Amazon introduced the Kindle Fire, a 7-inch tablet which they will retail for
$199. Many have called Amazon’s product the “Ipad Killer”. I believe that those who use this
term for the Fire are woefully mistaken. When you compare the Ipad and the Fire on most
dimensions, you will likely find the Fire to be woefully lacking. That is, unless all you want is an
entertainment device which has internet connectivity and allows access to streaming content.
That is exactly what the Fire is and that is why I do not believe it will be the Ipad killer.
The Ipad should continue to maintain a high share of the business users of tablet PCs. While the
Ipad is a great platform for entertainment, it serves a much different consumer than the Fire
because it can do so much more. While the Fire may steal share from some consumers who
would have purchased an Ipad, I see it as unlikely that it will unseat the Ipad in the near future.
The real value proposition of the Fire is as an easy to use tablet which is tailored to take
advantage of the cloud infrastructure Amazon has been developing over the last few years. While
the Fire is based on the Android system, it is slightly customized to provide a better experience
and also to make the integration with Amazon offerings seamless. This includes e-books, music,
video and more. Amazon is the largest e-book retailer in the world, the second largest in the
online music space and is growing its presence in video. Amazon is not entering the tablet space
to be a tablet provider. They are entering the tablet space to push forward the mobile use and
access of existing Amazon services.
This point becomes even more evident when you look into the details of the Fire’s launch. First,
there is the timing of the launch. Many analysts have been looking for Amazon to enter the
market since shortly after the Ipad was unveiled. It has taken this long because Amazon wanted
to build out their services beyond e-books before it made sense for them to produce a tablet since
the Kindle is already the leader in the e-reader space. The music, photo, video and cloud storage
needed to be built out significantly before Amazon’s tablet strategy would make sense. That
explains the delay in introduction.
Another clue to Amazon’s strategy lies in pricing. Analysts believe the cost of the Fire is around
$210. That implies that Amazon loses money on each Fire it sells. This would seem bizarre taken
in isolation, but fits squarely within the operating model Amazon has used in the past. Amazon
has sold the previous Kindle e-readers at a loss. They rely on the razor-razorblade model taking a
loss on the hardware, but making up for lost profits with each purchase of digital content. This is
the same model they are using for the Fire; however the “razorblade” has expanded beyond ebooks to music and videos as well as to the purchasing of physical goods on Amazon.com.
Kindle Fire Ecosystem
Content*
•
•
•
•
E-books
Video
Music
Cloud Storage
Android Ecosystem*
Android O/S
Fire O/S Modifications
Amazon Appstore Ecosystem*
Kindle Fire
Consumers
Amazon Specific Apps
Tablet Production Ecosystem*
Physical Tablet
• Screen
• Processor
• Etc.
* Denotes ecosystem already in existence
As you can see from the ecosystem exhibit above, Amazon relied heavily on the combination of
multiple existing ecosystems. Since they were late in the game, the manufacturing ecosystem for
producing tablets, especially less-than-cutting-edge tablets, is well established. They also chose
to utilize Google’s open Android operating system as the basis for the tablet. As opposed to
constructing a closed, homegrown system like Apple, this would allow for a much faster
development process and also reduced the co-innovation risk which would have been required to
develop a proprietary Amazon process. The downside of this is that, excluding a few Amazon
specific changes, when you combine the Android system with a low-end tablet, Amazon cannot
compete with other tablets on a technology basis.
The most important part of the Fire innovation ecosystem is that it leverages the existing
Amazon ecosystems. Amazon has been developing and refining its e-commerce businesses
continually. As discussed previously, they have dominated the e-book market and challenge
Apple in the music space. Their evolution in these cloud markets would have continued with or
without the introduction of the Fire. The Fire just provides one more way for the consumer to
access these goods and, similar to the original Kindle, it makes this access as smooth and easy as
possible.
To bolster its presence in the mobile space, Amazon launched its own competitor to the Android
Market last year. While this market is still much smaller than its Android and Apple
counterparts, the introduction of the Fire, including the Amazon Appstore application provides
another way for Amazon to build upon and leverage its existing infrastructure in the tablet
market.
When you view the Fire ecosystem, it almost seems that the actual tablet is an afterthought. The
Android ecosystem has been in place for years. The tablet manufacturing ecosystem is becoming
mature and Amazon would likely be pushing into cloud services no matter what they intended to
do in the tablet market. The Fire just appears to be a logical next step in the evolution of Amazon
and Kindle. Because of this, much of the innovation, co-innovation and adoption risks are
minimized. The largest innovation risk really appears to be the subtle changes to the Android
Gingerbread operating system and Amazon had already created its own app store and was able to
leverage this talent pool to make modest improvements to the Android system, not wholesale
changes.
An interesting part of the Fire ecosystem is that I believe it is designed to force changes and
innovation on the other members of the tablet market. Amazon has set the bar for a new
generation of value tablets which will force the other value tablet manufacturers (Asus, Vizio,
and others) to react. Because Amazon is willing to take a loss on the sale of the tablets, they will
put price pressure on these competitors. In turn, these competitors will need to provide higher
value to the consumer than the Fire. I believe Amazon is anticipating this and will allow other
manufacturers to use the Amazon apps on non-Amazon tablets. The proliferation of Amazon
applications on non-Amazon devices would be the best possible outcome for Amazon. I believe
the entrance of Amazon to the tablet market, at this price, is a calculated move to incentivize
other tablet pc manufacturers to include Amazon applications in their software offering in order
to prevent Amazon from dominating the low-end of the market. The fact that Amazon sold
95,000 tablets on the first day proves the threat Amazon can be.
Strategy Evaluation
I believe Amazon’s strategy will be a successful one, yet that doesn’t mean that Amazon will be
a large player in the tablet market. They are following a tactic which they have previously used
with the Kindle e-readers. While the tablet market is more competitive than the e-reader market,
I believe they will achieve success for the same reason the Kindle has been a success, i.e. they
control the content.
Amazon entering the market with a product which is inferior to the Ipad is intentional and
extremely strategic. They want to show consumers the potential functionality of a low-end tablet
when combined with the cloud services Amazon provides. Because there is no camera, limited
memory and no email service included with the Fire, they have essentially eliminated themselves
from competition with high-end devices. The Fire’s spotlight is immediately directed on the
services Amazon provides outside of the device.
Similar to the e-reader Kindles, I would expect Amazon to release additional applications to
utilize their cloud services on other devices and we should see many of these applications
coming standard on other tablet devices. The Fire will be used as a tool to push changes and
innovations in other tablets which are favorable to Amazon. For Amazon, the goal is not to sell
the most Fire devices possible. The success of the Fire will not be in how many devices are sold.
It will be seen in the increase in e-books, mp3s, streaming videos and Amazon prime
memberships sold. Amazon’s goal is to highlight their mobile services. This can be done on any
platform, not just the Fire. Given that Amazon loses money each time they sell a Fire, they
would actually prefer that consumers use an Asus tablet to buy music on Amazon. The point is
just that consumers are buying things from Amazon.
Amazon has provided a feature-light, budget tablet focused on entertainment and by doing so has
provided an alternative to the Ipad. While this will likely take some market share from the Ipad, I
believe the arguments presented above have shown that the Fire actually replacing the Ipad is
unlikely. Instead, Amazon has identified a large segment of the market who does not need all of
the Ipad bells and whistles and don’t want to pay $500 for a tablet. Going forward, I would
expect to see Amazon push innovation and performance enhancements in the lower-end of the
tablet market while at the same time growing its content presence with other tablet
manufacturers. Assuming Amazon has based its expectations for the Fire upon an increase in
mobile usage of Amazon products, I believe that, whether or not the Fire itself becomes a
commercial success, Amazon will likely reach its goal of driving increased mobile activity.