Amazon Will Be Tablet Product Strategists’ New Frenemy

We’ve been beating the Amazon tablet drum for a while—in fact, as early as April 2010, my colleague James McQuivey wrote that Amazon's product strategists should “go head to head” with Apple and create its own tablet. Now, on the cusp of Amazon actually doing so (perhaps as early as October), we’re turning up the volume with a new report explaining exactly how, and why, Amazon will disrupt the tablet market.

This report has been in the works for months. We held off publishing it last week out of respect for Steve Jobs, and we have great admiration for his inventions and influence on our culture.

Even though Amazon taking on Apple is a bit like David taking on Goliath (compare the market cap, profits, and cash position of the two companies), Amazon’s willingness to sell hardware at a loss combined with the strength of its brand, content, cloud infrastructure, and commerce assets makes it the only credible iPad competitor in the market. If Amazon launches a tablet at a sub-$300 price point — assuming it has enough supply to meet demand — we see Amazon selling 3-5 million tablets in Q4 alone.

Amazon’s quick ascension in the tablet market will completely disrupt the status quo. Apple will retain dominant market share, but Amazon will cause product strategists at:

  • Apple to prepare for war. Apple sells software and services, but the lion’s share of Apple’s revenue still comes from hardware, which makes it vulnerable to a company, such as Amazon, that isn’t seeking profit from hardware sales. Amazon and Apple’s relationship, already fraught with Apple’s policy changes on content sales, will become even more strained.
  • Android OEMs to seek Amazon as a platform partner. We see potential for Amazon not only to launch its own hardware as an “Amazon tablet” but also to be a platform for other OEMs, layering Amazon’s software and services over Android to provide a richer customer experience. In a year from now, we could see a range of “Amazon tablets” made by different hardware manufacturers.
  • Software, media, retail, banks, and others to scramble to build Android tablet apps. So far, product strategists across industries have invested in iPad apps but have held back from creating Android tablet apps: Apple claims 100,000 custom-built iPad apps, while Google’s Honeycomb platform has attracted fewer than 300 apps. If Amazon’s Android-based tablet sells in the millions, Android will suddenly appear much more attractive to developers who have taken a wait-and-see approach.

The bottom line: A year from now, “Amazon” will be synonymous with “Android” on tablets, a strong second to Apple’s iPad. If you haven’t yet contemplated how Apple-Amazon tablet domination will change your product strategy, now is the time to plan and act.

Comments

Agreed

I could definitely see this happening. Amazon already has a strong ecosystem and very satisfied customers. Their leading seller is already a WiFi/3G mobile device, the Kindle 3.

With the exit of HP it’s also not hard to imagine Amazon becoming #3 in mobile behind Apple and Google. The two leading firms have found themselves at an intersection of the mobile web, consumers and specialized infrastructure or supply chain assets – not to mention a strong vision and execution from leadership. Amazon would seem to fit a similar bill.

There’s talk of Amazon’s Android install being very customized. That could be great, Amazon has many awesome services. But you also wouldn’t want to remove the also-awesome services from Google – Navigation, Talk, Gmail, Calendar, Voice etc. Would Google allow Amazon access to services like Gmail on their device while the two firms’ music locker and e-books services compete? I hope so.

Isn't it illegal to use money

Isn't it illegal to use money from one enterprise (say retailing) and use it to finance the takeover of another by selling products at a loss (kind of like Microsoft did)?

But no matter, people will continue to want the iPad because Apple provides an integrated ecosystem that is easy and safe to use. Just like an awful lot of people buy music from the Apple store even though it's often cheaper and less of a hassle (to my thinking, anyway) to get it from Amazon like I do. And it is only going to get better when the iCloud allows them to seamlessly access their apps, music, docs and other data from their iPhone, iPad, Mac and TV, no matter where they are!

You were right before, nobody really wants a generic tablet, and that's all any Android tablet can ever be. A few million people might take one if they're cheap enough, but so what? Will they regularly use them as anything other than a reader? Lack of software is not Android's only problem (there's malware, for example). And there are a lot more reasons developers shun Android than simple lack of users (like the near impossibility of developing apps that work on all or even most Android tablets, and the fact that Android users apparently hate to pay even a pittance for software).

Apple simply gives their customers a great experience, provides developers with an attractive market, and makes tons of money doing it. Everyone else will continue to go broke trying to sell or give away a lesser experience. Bezos has no real hope, Jobs will continue to reign supreme even if he does die, and all the wishful analyses in the world won't change that.

Apple has no clue...

Isn't it funny how the the apple people come out of the woodwork, crying about fairness, when they use frivolous patent lawsuits to stop anyone from offering any product remotely close to the ipad.

Now if you want to talk about illegal, why don't you talk about a company that sells a product that can only be used in the manner determined by the manufacturer. Or how about a company that forces you to overpay for songs and apps.

I guess you completely overlooked the fact that HP touchpads flew off the shelf when they were reduced to fire sale prices. And that was with minimal applications, little to no support and no future. What do you think's going to happen when people realize they have complete freedom over their hardware, combined with Amazon's best in class retail operations?

I'll give you one guess, what happened to the Mac, years ago?

"Now if you want to talk

"Now if you want to talk about illegal, why don't you talk about a company that sells a product that can only be used in the manner determined by the manufacturer. Or how about a company that forces you to overpay for songs and apps."

There is nothing illegal about selling a product that can only be used in the manner determined by the manufacturer. It might be undesirable to a lot of people, but it is certainly not illegal. The great thing for you and people who share your preferences, is that there are a strong alternatives to Apple's ecosystem. You don't like iOS? Buy an Android or Symbian phone. Don't like iTunes? Amazon has about the same catalog and they even have an online storage locker thing. A buck too much to pay for a song? Good thing there is spotify. Before you spend too much time complaining, the thing to remember is.. you have choices, and Apple is one of them.

As for the HP touch pads selling like crazy... I am not so sure that the lesson to be learned is that a $99 tablet will be successful. There have been other $99 tablets int he market before.. and they have not been successful. I suspect that the lesson to be learned is that a $500 tablet selling for $99 will be popular. Unfortunately, if HP decided to keep going with WebOS and sell the tablets for $99, I don't see how they would ever recoup the loss they are taking on each tablet.

Blog

Thanks to you..

I'll give you one guess, what happened to the Mac, years ago?

Dude, if you didn't notice, the Mac won. The #1 PC maker, HP, is getting out. The #2 PC maker, Dell, is forecasting weak sales. The #3 maker, Acer, lost money last quarter and is forecasting a fiscal year loss. The #4 maker, Lenovo, made $100M last quarter, one of its best in a few years, and that's still 1/74th of what Apple made. Not to mention the fact that Apple sold more product in China than Lenovo did in their home market.

You clearly have not been paying attention because the PC market is imploding in front of our faces with commodity product and slim to none margins. Apple has tiny share, but it reaps the lion's share of profit. Did you read what Leo Apotheker wrote and said in his interview?

It's taken 15 years since Steve Jobs' return to Apple, but Apple won the PC wars. Who is still around from the beginning? Not IBM. Not Tandy. Not Compaq. Not Packard Bell. Not Gateway. And, not many others. Shall we add HP to that list soon? Apple won the PC wars, but most people don't know it yet. If Sarah Rotman had predicted that, I would have been more impressed.

delusional

Mac has never been anywhere close to winning the PC market. They hovered near extinction at <5% for over a decade, and only recently increased their sales, but still are out-numbered >4:1 in market share. You're referring to Apple's success in portable media players, media sales, cell phone sales, and tablet sales: none of which are the PC market.

Re: Delusional

I think he is referring to the fact that while manufacturers like Dell and HP sell many more units than Apple, Apple's PC business is much more profitable than either of those two. (In fact it may be more profitable than those two combined.. if you only consider the sales of the PCs themselves and do not include things like monitors and printers)

So while Apple is "winning" in the PC market (in that it has a wildly successful business) you can't say that it is "winning" the PC market (in that it still accounts for a small fraction of total PCs sold). The obvious explanation for this is that apple's share of certain segments of the PC business like POS machines, desktop business machines, and servers is small, while their share of other segments such as laptops and consumer desktops is much larger. The segments that they enjoy good marketshare in tend to be the higher margin segments.

the PC market is a fraction of Apple's sales

While Apple is a wildly successful company on many fronts (profit, marketing/consumer-appeal of many of its products), the PC market is only a small fraction of its diversified portfolio. Profits from non-PC products like iPods, iPhones, iPads, and iTunes are high. While their profit margin on Apple PC's (laptops, desktops) is also likely high, it's market share of <10% for (several sources) makes that segment of their sales arguably much less successful than their competition. When 90-95% of consumers choose non-Apple personal computers, they can't be considered to dominate that market. That's all I'm saying. If you consider servers, POS machines and other computers as PCs (which I wouldn't), their market share drops further. They are successful, but don't dominate in every product area in which they participate.

Profit Share

I was looking at this information from a report put out by Deutche Bank:

http://www.businessinsider.com/chart-of-the-day-revenue-vs-operating-pro...

According to the report, while Apple PCs account for only 7% of the total revenue in the PC marketplace (about equal to their marketshare), they account for close to 35% of all the profit in the market.

You are right, that Macs make up a smaller and smaller percentage of Apple's total profit, and also that Macs certainly cannot be considered 'dominant' from a unit marketshare perspective, but there is little doubt that Apple is dominating their competitor when it comes to actually making money in the sector. What does this mean to consumers? Almost nothing. But it's interesting from a business perspective.

The profit margin on high-end

The profit margin on high-end or luxury goods is usually quite a bit greater than mid-level or economy versions. Since Apple only tends to sell high-end, stylish products, it stands to reason their profit margin would be inflated compared to companies which sell a full range of economy to luxury end products. If one were to examine the profit margin on the most expensive Dell or HP PCs, it would likely be closer, but likely not equal, to that of Apple.
Part of Apple's appeal for many is the stylish or elite nature of their offerings. If Apple were to garner a greater percent of the market share, that aspect of their appeal would tarnish. Also, since many consumers aren't interested or willing to pay premium prices for utility goods (which includes PCs for most), and prefer to buy economy versions, Apple could not expand into the majority of the market without offering lower-priced/quality products - which would diminish their profit margin as they began to compete in the robust economy market. I'd submit that Apple is designed (and likely prefers to exist) as a niche company. Only a high-end consumer electronics company that maintains a stylish appeal could continue to command high prices - the open market won't support it.
Factor in the highly restrictive environment that Apple applies to its hardware, and you should expect DOJ antitrust interest to pique as Apple's market share exceeds a certain threshold. One company is unlikely to usurp control of the entire PC hardware/software industry without raising strong concerns. Nor is it feasible for them to out-compete the numerous companies that actually manufacture their products. So their status overall seems to rely on several limiting factors.

lol at people who still think

lol at people who still think "cell phones" aren't PCs. On paper, and by some retard in a suit's "marketshare" stats smartphones and tablets are not "PCs". But WAIT a minute, what does PC actually stand for? Personal Computer...

Desktops, laptops, netbooks, smartphones and tablets are all personal computers. It's not 2004. It smells like Steve Ballmer in here..

Only if you do it to establish a monopoly

Since no one seemed to address my question, other than to accuse me of being an Apple users whining about fairness, I looked into it myself. Apparently, it is only illegal to use profits from one business activity to finance operating another at a loss if you do it to establish a monopoly in the targeted market. So Amazon can sell tablets at a loss if they want, cause there is no way they will ever gain monopoly status in that arena.

Will you ever be right?

I would believe Sarah's projections if she had ever made a prediction on tablets that panned out. First she states "Amazon’s quick ascension in the tablet market..." To correct her, first, there is no such thing as a tablet market, only an iPad market. Second, what makes her think that Amazon can do any better than HP, Samsung, or Motorola when it comes to faking the iPad with Android software? Unless Amazon can create a total user experience with music, books, movies, games and more (400,000+ apps), they will not be able to sell enough "tablets" to make a difference. All of the other manufacturers promised the same thing, none of them panned out. In fact, HP's "tablet" venture took entire computer hardware business with it on the way down.

Estimates?

So let me get this straight. You are estimating all of this without even seeing, using, or even knowing for certain that an Amazon tablet exists? What you seem to be saying here is that any android tablet that can be offered at $300 or less will sell 3-5 million units a month regardless of it's merits as a product.

Forgive me if I'm a bit skeptical of your methods.

I wish you're right but your

I wish you're right but your track record sucks. You predicted 3.5 million tablets in 2010 and Apple alone sold nearly 15 million...

And you even failed to figure Google in all this. To the reader, above, unless there is there a surprise partnership between Amazon and Google no one knows about, there will not be Google apps on Amazon's tablet just like they're not on Barnes and Noble's Nook. Chances are, Google isn't happy with Amazon's tablet move because its not making any money from this.

And you also failed to figure in Microsoft's Windows 8.

Oh...and the patent war that's going on...Amazon will not come out of this unscathed. And you can bet that Apple will pull its products from Amazon if it thinks they're using its profit to hurt iPad sales. Question is can Amazon afford to lose hundreds of millions (possibly a billion) of Apple sales a year.

Personally, I love a strong competitive Kindle tablet and will pick one up. As an Android user and a more objective mobile fan, none of what you're saying makes sense. It's really kinda sad...

Did you know that in a couple of months, these Kindle tablets will be competing with $250-$300 7" Honeycomb or Android 4 tablets as well? The irony is that these cheaper tablets will be the reasons why Android tablets will grow in marketshare and the reasons why more app developers will be interested in developing for tablet apps. Not because of the Kindle tablet.

Anyway, we'll check back with you a year from now to see how wrong you are...again.

… unless there is there a

… unless there is there a surprise partnership between Amazon and Google no one knows about, there will not be Google apps on Amazon's tablet just like they're not on Barnes and Noble's Nook.

---------
Right. Two predators will not made a successful Android tablet. Both Amazon and Google are predators, like the dinosaurs. Google will not allow Amazon to eat its lunch by making tons of money out of its OS, which brings zero revenue to itself; neither will Amazon allow Google to dictate terms on what it can do. Remember, before Apple changed the revenue sharing formula, Amazon was gouging the authors of books by taking 70% of the revenue, and with this can afford to discount the price of books below cost. What would happen if Google were to replicate Amazon's business model? Google has no hesitancy to throw billions to disrupt Amazon's apple cart. Proof?: Look no further than Apple and Facebook.

"Isn't it illegal to use

"Isn't it illegal to use money from one enterprise (say retailing) and use it to finance the takeover of another by selling products at a loss ? "
Well. Apple has been doing just this for years and a company is a company - its assets are not accounted for in terms of what came from what - the notion is absurd.
As for selling at a loss to run another company out of business, that's hardly relevant here, since Apple has far greater financial resources than Amazon. Besides, since when has the DOJ ever enforced anti-trust laws? Obama has hardly shown any willingness to go after anybody or company that has provided him with campaign contributions.
The long term problem faced by Apple is that the premium enjoyed by some (but not all) of their devices will disappear - there simply are no more ways to significantly improve things like the iPod, iPhone, and all the others will quickly
produce products that are not significantly inferior to Apple but will have better prices. The bigger 800 pound gorilla is Amazon - they have a much larger reach than Apple and are already offering cloud storage - they may have even beaten Apple to the punch on that one, clear indication that Apple's days of stealing marches are over. This is a good time to dump Apple stock. The prospects of a downside right now appear to be overwhelmingly larger than any upside potential.
I mean, what's Apple going to do? Launch a new desktop? We sure don't need another handheld device from Apple that replicates what their other 3 handheld devices already do. I think the world is tired of forking over yet another couple hundred bucks just because Jobs says it's cool to do so. Jobs is gone and Apple
will follow, probably sooner rather than later, depending upon Amazon's performance. It's hard to keep referring to a company as an American success story when the vast bulk of their retail dollars goes to the Far East.

"Apple has been doing just

"Apple has been doing just this for years and a company is a company"
Where is Apple doing this? I've heard many things about Apple before, but I don't think I've ever heard of them being accused of selling things too cheaply! You are right, however, in noting that this is something the DOJ seems very reluctant to go after.

"there simply are no more ways to significantly improve things like the iPod, iPhone and all the others will quickly
produce products that are not significantly inferior to Apple but will have better prices"
Anything is possible, but I do think that you can't reduce Apple's success to something as simple as the feature list of their hardware. Apple has built a very rich ecosystem around their hardware and backed it up with some very savvy brand marketing. While it might be true that Apple will lose it's marketshare dominance, I doubt it is true that Apple will lose it's profit-share dominance. Look at their personal computer business.. you can argue that after 30 years... there is nothing more that can be done to significantly improve personal computers, and yet Apple, with it's small 10 percent marketshare, manages to make an estimated 35% of all profits in the personal computer sector. At a time when market-leader HP is dumping it's computer business.. Apple's is thriving.

"It's hard to keep referring to a company as an American success story when the vast bulk of their retail dollars goes to the Far East."
Not sure what you mean here. If I understand you correctly, it sounds like you are criticizing Apple for manufacturing all of it's products overseas. While it would be nice if more American companies were able to manufacture their goods here in America, the reality is there is no practical way for it to be done and be able to maintain the prices that people are used to paying. This is especially true of consumer electronics. I can guarantee you that Amazon's rumored sub-$300 tablet is not going to be manufactured in the US. I don't know what percentage of the money you pay for an iPhone ends up in China, but I doubt it's the "vast bulk." Also keep in mind that over 50% of Apple's profits are generated overseas, so a lot of that money is actually flowing back into the United States. At any rate, in terms of direct benefit to the US economy, I'm sure you'll agree that buying an Apple product will keep a lot more money in the US than buying an Acer or Lenovo product, for example.

Apple has never sold anything

Apple has never sold anything at a loss. The rest of your comment is just as stupid and ill informed. I did get a good laugh at some of it though..

Amazon's Tablet

Well, as you might found out in your many months reaserch, Ipad sells not just as a hardwear but more specific as a tool that enhance user's experiance--both machine and content.
In addition, hardwear has specification( weight, durability, easy of use, battery life etc.) Buyers are smart enough not to just shell $300 for inferior hardwear that--MIGHT--attract future developers.
As you are awear, about 250,000 $99 tablets were sold in one weekend recently (hance with a superior OS than Android!). One would assume that that is about the right price for Amazon.
PS. It might short live anyway depands on some court decision about Android patents' infrigments (sorry for sppeling)

Oh boy...

I see Sarah is doubling down on stupid. Amazon is not making an iPad competitor. They are making cheap device that will only provide Amazon content not a general purpose tablet. This is obvious and apparent not to mention all over the internet.

For an example of Sarah's past brilliance;

On June 17, 2010, Forrester’s genius prognosticator Sarah Rotman Epps estimated that U.S. sales for tablet computers from all manufacturers would total 3.5 million for all of 2010.

Meanwhile, back in reality, during the first quarter of availability alone (ended June 26, 2010) Apple sold every iPad they could make: 3.27 million units. Apple sold a total of 14.79 million iPads in 2010.

Bottom line: Take Sarah Rotman Epps’ predictions with a dump truck full of salt.

You call yourself a

You call yourself a researcher? You predicted Apple would sell 3.5M Ipads and they sold that plus another 11M in the first year. DId you notice the cover of Fortune Magazine where your blog showed up? It reads " American Idiots"

As to some of the

As to some of the specifics:
• "whose tablet can compete on price, content, and commerce."

Amazon does NOT have the supply chain competence to compete with Apple on price when ODMs like Samsung can't. Amazon may have some content, like books, but they lag Apple on music and movie downloads, and are way behind on apps if they use Android. As for commerce, the problem is that people like to hold a portable device, that is why Dell stumbled when the PC market shifted to laptops, and away from their JIT desktop PC competence. Amazon's lack of retail channel will put any Kindle tablet in the "roach motel" with the other Android tabs.

• "If it's launched at the right price with enough supply"

That's Rotman's out. A big "if", and a "right price" and an "enough supply", gives her plenty of wiggle room when her prediction is horribly wrong.

• "Amazon's tablet easily selling 3 million to 5 million units in Q4"

Hardly disruptive when Apple should sell over 20M iPads in Q4. Besides, we won't ever find out how many units Amazon ships, since it never discloses Kindle sales, so Rotman is safe with her guesstimate.

• "Amazon have the potential to gain share quickly but its willingness to sell hardware at a loss, as it did with the Kindle"

Amazon sells the Kindle at a loss?!? What, I thought they sold the books at a loss, that's why the publishers wanted to go to the Agency model? So, they're selling the hardware and content at a loss, and they're going to make up for it in volume?

• "Amazon, that isn't seeking profit from hardware sales."

Actually, looking at Amazon's puny margins, it doesn't appear that Amazon is looking for profit at all, but rather, it's looking to eke out a profit from avoiding sales tax.

• "Amazon tablets flying off the shelves, they'll want to make one, too."

So, Rotman is saying companies will want to make Amazon Tablets?!? It's a brand now? Using Google's OS? What exactly will be unique about this Amazon tablet? She told us price, content and commerce. So, adding another middleman is going to make the price lower? And, Android doesn't already have access to the Kindle app, so what content are they missing? Music? They can't find Pandora? And commerce? What, they don't have an Amazon app on Android yet? Please, the notion that Acer will want to make an Amazon Tablet is ludicrous.

• ""Amazon" will be synonymous with "Android" on tablets."

And, they'll all be living in the "roach motel".

Rotman must believe in unicorns if she thinks Amazon will launch a tablet for less than $300. Amazon has no hardware competency, no design chops, no software skill, no supply chain expertise, but they do have a one-click button.

Amazon will eventually GIVE tablets away

Education is going to adopt the Kindle over the iPad because of cost: http://thenextweb.com/us/2010/09/18/us-school-replaces-textbooks-with-ki...

This is going to lure app developers like me ( tinyvox ) to port and optimize for Kindle on Android.

I have an iPad 2. I love it... but I just use it for a few things, and it isn't always with me. The Kindle App is almost definitely one of the top five must have apps on the iPad 2. Another of the top five = the Amazon app. The best apps will port, and Amazon can curate and even bundle these without breaking a sweat.

And I have probably bought $1200 worth of Amazon goods off that iPad 2. They freakin OWE me a free tablet ;) Their margin on e-books must be amazing.

Amazon will GIVE these babies away if they can do it smartly. This won't happen until supply chain is down. But the ultimate wedge market segment is education. (Look at early Apple itself.) And education wants one thing: PRICE. As in, FREE. Amazon probably should think to itself, "look at all these hip new textbook apps. look at them SELLING E-BOOKS. that is OUR business. WE want that money." Give school districts free Kindles, gain a welter of goodwill and a locked in forever market. (Ironically, the Kindle's got another advantage in that you CAN'T run other apps on it until it does Android, making it a great "reading tool only" that doesn't do games for instance... possibly they'll give away free "non-android kindles" to schools at first?)

Keep provoking thought Sarah. This is a real cool perspective. Bezos is a sleeper candidate for the "next Steve Jobs" title methinks - Amazon has done nothing but succeed, and the markets built now might be eternally defensible. Apple let Android show up to the party by being exclusive and pricey. There will never be a free iPad, but if Amazon's margins can justify the needed supply chain augmentation, free or nearly-free will be the price of Amazon's Android Kindle. Freaking WOW.

You guys who think Amazon

You guys who think Amazon will offer free to nearly free tablets to gain market share must be smoking something good. If they could do that(offer free tablets), they would already be doing that with Kindle. If they DID do that, they will be shooting themselves in the foot, because it will defenitely kill their kindle business. I mean who's going to buy Amazon kindle when new Amazon tablet sells for free or $99? Also, there are already couple of sub $300 android tablets out there. people just aren't interested in them even at that price.

WHAT???

Ms. Forrester, Your predictions are weak opinions on I-pads and their sales are crazy. Perhaps you need to check your medication or least get on some. Stop for the sake of integrity and embarrassment.

Is marijuane legal in your state?

Tablet Fragmentation

Whatever the rights and wrongs of the prediction, one thing is clear. The tablet market continues to fragment. So we have device fragmentation on smartphones, platform fragmentation and those that hope that HTML5 can be refined enough to avoid the 3effects of Browser Fragmentation and the need to tailor each implementation to the various deployments. Frankly it isn't getting much simpler to create apps that run on everything, but we are giving it a good go !