The iPad is actually the first PC-like product that Apple has aggressively priced since Steve Jobs turned Apple around. Why? It’s subsidized by royalties and fees from accessories, media, and applications that surround it, allowing Apple to both provide an attractively priced product and maintain the high profits Apple investors have come to expect. The Kindle Fire takes this concept one huge step further: It’s basically a dedicated front door to Amazon that every Fire user will carry with them.
This is something an online retailer can do that neither Apple nor another hardware maker can do as successfully, because as Apple demonstrated, making this work is about the store. A full-service retailer will have more opportunity to make money than a specialist shop. Granted, people will still need to get the product, but Amazon should be able to make more money through the Kindle Fire than Apple does through the iPad, if (and that’s a big “if”) Amazon can execute in line with Apple.
Let’s talk about tablets, and potentially PCs, as digital storefronts today.
Traditional Android doesn’t work
The sneaky thing about Android is that while Google provides it for free, it basically owns the back-end and most of the revenue opportunity that Apple is using to make money off the iPad. In effect, your normal Android licensee takes all the hardware risk, but gives up the majority of the profit potential to Google. Google just doesn’t execute on that potential as aggressively as Apple does, or Amazon plans to. To redirect the stream of cash from the Kindle away from Google, Amazon started with an older version of Android, updated it, and basically forked the code to make it theirs.
In the old world, Microsoft sold the OS and made much of the profit. Google gave the OS away for free, but seized most of the opportunity to sell to its users, even though it didn’t seem to do much with it. Profit is the most important part of this new tablet world, and frankly any business world. Increasingly,the profit appears to come from what you do with the device, not the device itself, which is why Apple and Amazon are moving to own the entire software and services stack.
Barnes & Noble vs. Amazon vs. eBay?
If the value of the product isn’t the product itself but what the product is used for, this would seem to benefit a vendor whose strength lies in those services. Both the Nook and initial Kindle were connected to e-book back ends and relatively balanced. However, Amazon is a full-featured vendor (you can pretty much get anything either directly or through affiliates that can be shipped through Amazon), while Barnes & Noble is still just a book re-seller. With similar efforts,this means Amazon should be both able to sell its product for less and make more money from it, suggesting that over time Barnes & Noble will be aced out if it can’t expand its retail breadth.
Companies that live off of some form of Internet retailing could go the same way. I can imagine an eBay tablet, for instance, with tuned services tied back to eBay’s various retail offerings, or even a Best Buy tablet that mirrors the Kindle Fire in many ways. They would all come at aggressive prices, and largely tied to the services the firm branding them provides.
Just the beginning
We’ve gone from packaged products to advertising-supported offerings, and now to offerings that are funded by their dedication to some retail back-end or secondary revenue stream. We are already seeing “blends,” with some Kindles being further subsidized by advertising and expected to approach free, which is somewhat unique in hardware. In the end, we are just at the beginning of this. In the future, you wonder if TVs might be tied more closely to certain retailers, who then will own more of the advertising and retail revenue streams in exchange for a cheaper set.
In the end, conversations about which sports team you support may change to which retailer owns your eyeballs. At that point, I begin to wonder if this trend is ultimately a good thing. I guess we’ll find out.
One final thought: Amazon is redefining the tablet world so that it better fits Amazon’s model. I can recall another vendor doing that with MP3 players a few years back, and that was with the iPod and Apple.
Guest contributor Rob Enderle is the founder and principal analyst for the Enderle Group, and one of the most frequently quoted tech pundits in the world. Opinion pieces denote the opinions of the author, and do not necessarily represent the views of Digital Trends.
The Nook Tablet seems a better buy.
The comments are much better than the story.
I don’t have the time to go into details but I don’t like this article at all or what it suggests about technology. Yeah, everybody knows the point of business is to make money, but people don’t care about which tablet maker is the shystiest, people don’t gauge the quality of a product by who is able to make the most money off you with it. If this was a stock exchange website this article might be relevant.
So as a consumer I am not allowed to look behind the curtain before making a purchasing decision? That’s a load of blow. This article is fine, and it shows me Amazon’s and Apple’s true intentions. The video game market has been built off of royalties and subsidies, so of course this makes sense with tablets and content ecosystems.
I like a good product and content as much as the next person, but I’m not ready to be fully brainwashed into thinking every company out there has a mission statement to give away their proceeds. Google’s “Do no evil” mantra has tricked enough people out there for long enough. Amazon isn’t going to full me into believing they are any better than Apple or Google.
*fool
Let’s forget the fact that you didn’t bother to check your post for typos but here is your quote copy and pasted:
“It’ssubsidized by royalties and fees from accessories, media, and applications that surround it”
So you’re calling a product that generates between $200-300 dollars profit per sale of the hardware “subsidized”? Really?
Thanks. I went through the piece and fixed a bunch of it. Obviously this did not hit an editor before being posted. GRRR
My apologies for that.
I consider Amazon’s tablet subsidized. They’re losing money on each one sold. I think it’s $10-20 dollars from what I’ve read. They hope to make up the deficit through content sales and it may turn out to be a genius move on their part.. Apple on the other hand is making good money off each sale. Hardly subsidized. On top of that they sell a ton of music, movies, and apps.
Now compare the 2 models. Who’s better off. Clearly that’s Apple. Because if a buyer just buys their tablet and nothing else, Apple wins. If Amazon sells a Fire and that user buys nothing. It’s a loss.
I was going to buy a Fire even though I have an iPad 1, iPad 2 and a Samsung Galaxy Tab 7.0 Plus. Simply to experience the user interface since that’s what I do for a living. But I cancelled the order. Twice. It’s so crippled. You get a measly 8 GB of on-board storage and not even a MicroSD slot for expanding memory?? Sure you can upload to the cloud. How many people want to upload their home movies up to the cloud just so they can watch it on a device. That’s a ridiculous user experience. I see the value of it as additional content storage for when you do buy content through Amazon channels but what happens when you’re on that car and plane ride with no Wi-Fi and all your content is sitting in the cloud? Of course you have your 8 GB…
A MicroSD would have saved this tablet in my opinion. It looks great, it really does and as a huge Amazon fan I’d like to see them do well but this is just a fail in my book. 16 GB might have changed my mind.
How do you know Amazon isn’t making money off of their tablets? It’s not like they are using cutting edge technology to build them. E-Ink has been around forever, the processors they are using are pretty standard too.
As you mentioned, you only get 8GB of storage and there is no SD card slot. Proof right there that Amazon is not investing in the hardware.
This discussion is about the Kindle Fire not the regular Kindles. It’s been stated by numerous media outlets that they will lose between $10-20 dollars per tablet. Could they be wrong? Sure.
And there is no E-Ink on the Kindle Fire. It’s an IPS screen like Apple uses on the iPad.
Gotcha re: E-Ink.
$10-$20 per tablet is next to nothing IMO. And in a few months they will either be break even or profitable as yields get better.
For argument’s sake let’s say Apple makes 200 dollars per unit. I think they make more but this is just an example. Amazon loses 20 dollars per unit. In order to get to where Apple is, Amazon would have to sell 220 dollars worth of content/media to a customer. That’s a lot. That’s just to catch up. Considering how much Apple sells in the form of music, books, apps, games and movies on top of the 200 dollars they make on each unit and there is no way in hell the title of this article is reality. There’s no “burning” going on. There’s a lot of playing catch up though.
You are right though. It’s not a lot of content to sell to break even. It’s a lot to catch up to Apple’s revenues like I mentioned.
One last comment. I hope Amazon kicks ass with the Kindle Fire. Both Apple and Amazon are my two favorite companies. I see a world where both tablets can coexist. I just see that world as Apple making a helluva lot more money :-)
http://www.digitaltrends.com/android/ihs-amazon-kindle-fire-costs-201-70-to-make/ Looks like the Kindle Fire costs a couple bucks more than Amazon is selling it for.