Bloomberg News

Amazon Readies Kindle Fire Update to Keep Up in Tablets

September 06, 2012

Amazon.com Inc. (AMZN:US) is readying an updated Kindle Fire tablet, seeking to revive demand for the 10- month-old device as the market crowds with competing machines from Apple Inc. (AAPL:US), Microsoft Corp. (MSFT:US) and Google Inc. (GOOG:US)

Amazon is holding an event at 10:30 a.m. today in Santa Monica, California, where it is likely to announce the newest versions of its line of Kindle e-readers and the Kindle Fire tablet, according to Anthony DiClemente, an analyst at Barclays Plc. The company said it sold out of the Kindle Fire last week.

Last year’s holiday shoppers helped vault Amazon’s share of the market to 17 percent in the December period, according to research firm IDC. Demand for the Kindle Fire has since stalled -- the device’s first-quarter share slipped to 4 percent. To stay relevant in tablets, Amazon needs to tap consumers’ desire for streaming movies and video games they can’t find elsewhere, said Edward Williams, an analyst at BMO Capital Markets.

“There’s a big opportunity for Amazon to design digital content that specifically exploits the Kindle Fire,” Williams, who is based in New York, said in an interview. “People who own the Kindle Fire are probably watching content that was repurposed for it. Apple has done a phenomenal job at this. There’s room for another player in the market, and Amazon has a good chance, but we’re definitely dealing with version one right now.”

New Entrants

In June, both Microsoft and Google announced their own tablets, pushing into a market that may reach $66.4 billion this year, according to research firm DisplaySearch. And Apple plans to debut a smaller, cheaper iPad by year-end, two people with knowledge of the plans said in July.

Google, which makes the Android software that runs the Kindle Fire, is entering the running with the Nexus 7, a tablet that is thinner, lighter and has better screen resolution than the current Kindle Fire for the same $199 price. Both have 8 gigabytes of storage and a 7-inch display, though Google buyers have the option to upgrade to 16 gigabytes for $249.

The Nexus 7 also boasts Bluetooth connectivity, GPS and a camera -- features Amazon’s tablet now lacks.

Microsoft’s device, the Surface, has a 10.6-inch display and also is slimmer than the Fire. It will run on Microsoft’s revamped Windows operating system and has a cover that serves as a full keyboard with a track pad. Microsoft hasn’t yet announced the Surface’s price.

“There’s still room for improvement” in the Kindle Fire, Williams said.

Digital Content

Amazon started selling the Kindle Fire in November, seeking to extend its success in e-readers into the fast-growing tablet market, where shipments may almost double to 116 million units this year, Gartner estimates. Still, its entry came at a cost to profitability -- Amazon spends $139.80 to make each Kindle Fire, according to IHS.

Chief Executive Officer Jeff Bezos is pushing sales of digital content -- movies, books, music and other media -- on the device to make up for the low price. To gain that loyalty and woo buyers, the company needs to ensure users become addicted to a digital experience they can only get at Amazon. Games may be an easy way to do that, Williams said.

Amazon has “the books, they’ve got the videos, they’ve got the music, but where they’re still lacking is on the game side of it,” Williams said. “I think that’s probably an area that can get a little more focus on the next-generation device.”

Social Games

Amazon announced GameCircle in July, which gives developers the ability to make games more social by adding leader boards and a way to track trophies and achievements. The ability to make more sophisticated games may draw more app makers to Amazon’s device. For every $1 generated for developers in Apple’s iTunes App Store, they earn 89 cents in Amazon’s and 23 cents in Google’s, according to Flurry, a provider of app- analytics software.

Amazon, based in Seattle, said in August that exclusive Kindle books have been purchased, downloaded or borrowed from the company’s virtual lending library more than 100 million times. Amazon doesn’t give revenue figures for purchases on the tablet. The company’s sales of all digital media last year reached $17.8 million and accounted for 37 percent of revenue, data (AMZN:US) compiled by Bloomberg show.

To sweeten the selection of movies and TV shows available on the Fire, the company has been striking agreements with content providers. Amazon reached a deal with pay-television channel Epix this week to offer films such as “The Hunger Games” through its instant video service.

New Features

At today’s event, Amazon may announce more than one tablet and offer the option to upgrade memory for a higher price, Barclays’s DiClemente said in a note to clients this week. The company may also add a built-in camera and let users connect to the Web through a cellular network. Right now, the device can only access the Internet through a wireless connection.

An updated and aggressively priced tablet “could be very attractive to the lower end of the market, and may help to stave off some share gains from the Google Nexus 7 and a possible iPad mini entrant,” DiClemente wrote, noting that the original Kindle e-reader cost about $400, compared with a $79 price point for the cheapest current version.

Loyal Members

To drive purchases of the Kindle Fire as well as movies, music and other content, Amazon can further leverage its millions of users with registered credit-card numbers, a one- click payment option and loyal Prime members, who pay $79 a year for free shipping and free access to some movies and videos -- advantages Google doesn’t have, said Atul Bagga, an analyst at Lazard Capital Markets in San Francisco.

The company may have sold about 7 million Kindle Fires since the device’s release in November and will control 10 percent of the worldwide tablet market by 2016, Bagga estimates. Digital sales on the device will help boost an operating margin that narrowed to 1.79 percent last year, lower than 96 percent of companies in the Standard & Poor’s 500 Index, data compiled by Bloomberg show.

“Digital media -- selling apps, selling music, selling games -- that’s a high-margin business,” Bagga said. “These things position Amazon as a very strong contender in the digital media space. I wouldn’t be surprised to see some meaningful changes to the Fire.”

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

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


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