Does Amazon Have an iPad Killer Up Its Sleeve?

Written by on September 5, 2011 in Stock Talk with 12 Comments

On Friday, Twitter was buzzing when TechCrunch reported that one of its editors had seen and played with the Amazon Tablet. Adding to the excitement was that it’s expected to ship in November with a price of $250. This combined with a report from Forrester Research claiming that Amazon would sell 3-5 million tablets  in Q4 had the Apple haters doing cartwheels. Finally, Apple was going to get its comeuppance.  Before we get too far, let me just say in my opinion, this will not be an iPad Killer.  Not even close.  However, if it plays out as reported this will be a brilliant move by Amazon and will definitely keep Apple on its toes.  Now let me explain my thinking.

Last week Horace Dediu on Asymco.com wrote a post called The Case for the iPad’s future.  The article addressed the topic of low end disruption and questioned if the iPad was at risk.  Toyota is the classic example of low end disruption.  Toyota entered the US auto market many years ago by offering a small inexpensive car.  The Big Three ignored the low end of the markets as the majority of the profits were in the higher end.  Fast forward the story, now the Toyota Camry is the best selling mid-sized car in the US.  Also Toyota’s luxury brand, Lexus, easily outsells the US made luxury cars each year.  This pattern is repeated throughout many industries.  PCs disrupted mini-computers in the ’80s. Now it appears as though tablets will disrupt PCs.  Horace made the case that the potential for low-end disruption of the iPad is not immediate. Read his article for more details.  I initially agreed with Horace’s position, however the Tech Crunch report gave me some new information to consider.

HP’s TouchPad was supposedly next in line for the iPad Killer crown, but after 10 weeks of virtually no sales – HP pulled the plug.  A buying fervor developed when HP dropped the price to $99.  Supply sold out in days and started a huge debate on using price to disrupt the iPad.  In my opinion, the discussion was nonsensical. Of course selling a $500 list price device for $99 would sell.  However, no company could stay in business with such a pricing strategy.

I find it amusing when people say that the iPad sells for $499, so a competitor’s initial selling price should be lower than that.  The bill of materials for tablets containing the specifications of an iPad or TouchPad are estimated in the $300 price range.  I worked for a semiconductor company and let me say most likely Apple’s material costs are lower than $300 and HP’s costs are higher than $300.  It is simple.  Apple is expected to sell +40 million iPads in 2011 and HP sold maybe 500,000 at a fire sale. Volume drives component pricing.  Apple has the best supply chain relationships and volumes in the business – I am fairly certain that no one can build an equivalent product cheaper.  Motorola proved my point when it released the Xoom.  It was higher priced than the iPad – not because Motorola was greedy, but because its costs determined the price.  Obviously a company can use lower spec components to lower price – for example a single core processor instead of a multi-core one, but I am talking about equivalently spec’d products.

Now back to Amazon.  In my opinion, the brilliance of Amazon strategy per Tech Crunch is that Amazon is not attacking Apple head on.  I’m sorry – even with Amazon ecosystem advantages over the other iPad wanna bees – it would be years before it could catch Apple in volume.  The successful disruptors have always started at the low-end and they have not started by selling a $500 product for $250.  They have started by selling a $250 product for $250.  This is exactly what Amazon is doing.  The Kindle will be 7 inches not 10 like the iPad. It will have a single core processor instead of a multi-core.   It won’t have front or rear camera. It will have two finger multi-touch instead of the 10-finger.  This is a device that Apple has absolutely no interest in making as it is moving up the chain tackling more PC capabilities.

So the question becomes who would want such an under-powered device.  It just so happens that Amazon has a huge installed Kindle user base that would not consider this under-powered at all. The number of people wanting to upgrade simply for the color screen alone would be crazy.  Not Motorola, HP or anyone else can pull-off a strategy such as this.   I tweeted the following a few days ago:

One thing that I learned in sales is that it is easier to sell to an existing customer than to secure a new one – $AMZN brilliance. $AAPL

As I said, I don’t think this will be an iPad Killer.  The Kindle and iPad have co-existed just fine.  However, I do believe it has the potential to grow the market. There is a market for a fully spec’d non-iPad tablet.   There are people who simply will not buy an Apple product no matter how magical it is.  In time, Amazon will be well positioned to serve that need.   I don’t think that Apple will fret over this, but it will be enough to keep it looking over its shoulder.  That will  benefit all of us.

Disclosure:  Long Apple.

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  • Anonymous

    Amazon has the luxury of not needing to get into the speculation game by releasing sales numbers for Kindles. As a result, we do not know whether the iPad2 (plus maybe the Nook) have cut Kindle sales off at the knees.

    I have to believe that while the momentum for reading on a Kindle has been building as the success makes people less leery, that the number of people who want ONLY to read long-form stuff they’ve already bought from Amazon, is a fairly saturated market at this point. It could well be that the new device is an attempt to regain momentum.

    Again, I certainly don’t claim to know. But the only natural market for the new Kindle seems to be people who already bought a lower-powered device (the e-Ink Kindles) and somehow wants to trade up … just a bit in functionality because the modest CPU can’t drive slick functionality … and down in terms of the Kindle’s current advantages (screen, battery).

  • http://www.asymco.com Horace Dediu

    I remember when the iPad came out many assumed that because it was so much better than the Kindle, the Kindle would disappear. We don’t know what sales are like but B&N’s Nook product was reported to be booming so there is plenty of evidence that e-readers are co-existing happily with iPads.

    But they’re not the same product. E-readers are not tablet computers. They are reading appliances. They are more iPods than iPhones. They are not designed to create ecosystems. They are created to enable commerce.

    In other words, they are hired to do different jobs.

    We’ll have to see whether the new Android tablet is a Kindle or an iPad. 

  • Anonymous

    According to TechCrunch, it’ll be branded and sold as a color Kindle. I suspect, though, that once the buyers unbox their new “e-readers”, they’ll be pleasantly surprised how much of an iPad competitor it really is. If it can browse the web, read Kindle books, do email, and play games, who needs an iPad?  It won’t be quite as full-featured as an iPad, but it’ll be good enough for a lot of people, and at $250 cheaper, with a front page presence on one of the largest internet retailers, Apple should definitely be concerned.

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  • Neil

    I’m sorry, but the whole “Will product X be the product Y killer?” headline is such a shopworn cliché for the lazy tech blogger that it automatically tells me that there’s nothing to follow that’s worth reading.

  • Anonymous

    The only thing the Amazon tablet will succeed in doing is disrupt the business’ of the OEM’s using Android’s OS. Amazon (like all of the other OEM’s using Android), doesn’t release “sales” numbers. So believing that the amount shipped = the amount sold is absurd, especially basing it on their online business model! 

  • http://michaelkdawson.com/ TrendRida

    “The only thing the Amazon tablet will succeed in doing is disrupt the business’ of the OEM’s using Android’s OS. ”  

    That’s basically what I said. A year from now Amazon’s tablet will most likely be the go to tablet for non-iPad folks.  Some people will not buy Apple products – no matter how good it is.  Those aren’t Apple customers anyway, so Amazon’s tablet shouldn’t impact iPad sales.

    Also I didn’t say anything about shipped vs. sold.

  • http://www.facebook.com/profile.php?id=594289803 Jerry Ballard

    Best description was by Gruber on Talk Show this week.
    The Kindle is a vending machine. Always remember that that is its primary function… displaying stuff you’ve bought from Amazon, and that’s essentially all.
    Different product than iPad.

  • http://www.facebook.com/profile.php?id=594289803 Jerry Ballard

    I don’t think Amazon has the chops to turn it into a computing platform, and I don’t think they even want to.
    Again… its pretty much a vending machine.

  • Anonymous

    Well, it’s going to have the Amazon App Store prominently integrated. I suppose we’ll see how far that goes once it ships. The fact that they have plans to make a 10 inch tablet if the 7 inch version sells well makes me think that they’re aiming higher than the e-reader market. The Amazon of today has shown that they like to get their hands into as many pies as possible. They started as a bookstore, then moved on to become the largest internet retailer. After that, they got into e-readers, software platforms with the Kindle app (which is now on basically every app market), digital music, movie streaming with Amazon Prime, and cloud storage. Jeff Bezos even owns a rocket company! So far, I haven’t seen any reason to think that mobile computing isn’t next. Amazon is actually a very Apple-like company, in that they’re constantly reinventing what it is they do, and that’s dangerous.

  • http://michaelkdawson.com/ TrendRida

    Gary Vaynerchuk is bullish on Amazon’s tablet. http://bit.ly/nMn6xP

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