Bloomberg News

Amazon Bargain Tablet to Grow Market Without Being ‘IPad Killer’

September 30, 2011

Sept. 29 (Bloomberg) -- Amazon.com Inc.’s Kindle Fire is poised to help Chief Executive Officer Jeff Bezos lure bargain tablet-computer shoppers. It’s unlikely to dislodge Apple Inc. from its perch at the top of the market.

The Kindle’s $199 price, at less than half the cost of Apple’s most affordable iPad tablet, holds appeal for consumers who want a low-priced machine for reading books and watching movies, said Herman Leung, an analyst at Susquehanna Financial Group. Consumers who want a bigger screen or the ability to chat over video will probably stay loyal to Apple, Leung said.

Bezos may ship as many as 4 million units of the Kindle Fire this year, in part by undercutting Apple, said Brian Blair, an analyst at Wedge Partners Corp. in New York. Still, Amazon will need to release a larger version with a faster processor to siphon share from the iPad, which according to EMarketer Inc. had 85 percent of the market at the end of 2010.

“I don’t see this as an iPad killer,” said Leung, who is based in San Francisco. The Kindle Fire “caters to a much lower-end consumer. A bigger screen and a more powerful processor over time -- those are the two main things that will enable them to get there.”

The Kindle Fire will have a 7-inch display, smaller than Apple’s iPad, the company said at an event in New York yesterday. The device will run on Google Inc.’s Android software and have a dual-core processor, Seattle-based Amazon said. The Kindle Fire offers Wi-Fi connectivity and comes with a 30-day free trial of Amazon Prime, the company’s $79-a-year membership service that includes streaming video and free two-day shipping.

Tablet Market Growth

Amazon is angling to grab a piece of a market that Cambridge, Massachusetts-based Forrester Research Inc. predicts will grow 51 percent a year through 2015. The company’s shares rose yesterday on optimism that the Kindle Fire will avoid the fate that befell tablets from Hewlett-Packard Co. and Research In Motion Ltd., which failed to gain traction with consumers.

Amazon gained $5.50, or 2.5 percent, to $229.71 on the Nasdaq Stock Market. The stock has risen 28 percent this year.

The company’s next device must offer more built-in features, such as video chat, an upgrade to the dual-core processor and the option of a bigger screen, said Wedge Partners’ Blair. The Kindle Fire also lacks a microphone or a connection to a 3G wireless network.

Amazon will have to beef up its application store after the company said one offered by Google won’t be available, said Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco.

IPad’s Advantage

“The iPad looks a little more elegant to the eye,” Sebastian said. “The iPad’s more powerful, and when you restrict it to Amazon’s Android app market, you’re missing a lot.”

Apple leads the market for mobile applications, the downloadable software that lets users access games, tools and other information. It boasts more than 425,000 -- more than 100,000 of them custom-designed for the iPad.

While the new Kindle will add to Amazon’s sales, estimated by analysts to rise 32 percent to $64.6 billion in 2012, the company may disappoint if the tablet doesn’t bring in revenue quickly, Steve Weinstein, an analyst at Pacific Crest Securities in Portland, Oregon, said in a note this week.

Sales of Amazon’s electronic books, movies and music on the device may help make up for the narrower profit margins that are likely to result from the low price, Blair said. He expects Amazon to sell out of the device this year.

‘Powerful’ Kindle Fire

“I don’t think it’s a question of stealing customers yet,” Blair said. “But it’s an iTunes-like offering of content, and that’s powerful. The number of people who really want the front-facing camera are going to be small relative to the people who want to pay $199 for this thing.”

Amazon may spend about $250 on each Kindle Fire, for a loss of more than $50 per device, Gene Munster, an analyst at Piper Jaffray Cos., said in a research report yesterday. That compares with a $350 cost of production for Apple’s tablet, giving the Cupertino, California-based company a profit of $149 per unit.

Apple started selling the original iPad in April 2010, and introduced the iPad 2 in March of this year. The touch-screen device, which has a 9.7-inch diagonal display, is already Apple’s biggest source of revenue after the iPhone. The company shipped 9.25 million iPads in the quarter that ended June 25.

Two other tablets have failed to make a dent in Apple’s dominance. Research In Motion’s PlayBook, introduced in the second quarter, shipped 200,000 units, less than half of what analysts predicted. Hewlett-Packard, meanwhile, discontinued its TouchPad in August -- only about a month after its debut.

‘Bad for Nook’

Amazon’s Kindle Fire could also take share from Barnes & Noble Inc.’s Nook Color electronic reader, which sells for $50 more and lets users buy and read digital books, Blair said. Barnes & Noble, based in New York, fell 91 cents, or 6.9 percent, to $12.30 yesterday on the New York Stock Exchange.

“This is going to have more content outside of just books, and overall better content at a better price point,” he said. “This is bad for Nook sales.”

The Kindle Fire will expand the tablet market, rather than take customers from Apple, said Peter Misek, an analyst at Jefferies & Co. in New York.

That’s because Amazon has created a new part of the market by targeting bargain hunters, said Lance Strate, a professor of communication and media studies at Fordham University in New York.

“With the other Android products, what we get is kind of a cheap imitation of the iPad,” Strate said. “What Amazon has is something is different, with a separate set of advantages and disadvantages. You’re not going to beat Apple at its own game, but Amazon can create its own.”

--Editors: Jillian Ward, Tom Giles

To contact the reporters on this story: Danielle Kucera in New York at dkucera6@bloomberg.net; Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


American Apparel's Future
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus