Market Insight

Amazon ups the ante with new Kindle lineup

September 10, 2012

Laura Aguilera Laura Aguilera Senior Research Analyst, Service Providers & Platforms

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Amazon has announced the refresh of its lineup of Kindle ereaders and Kindle Fire tablets. The new models feature a number of hardware and software upgrades.

The company’s range of tablets has seen the biggest changes with a number of new devices joining the lineup. The original 7” Fire has received a memory and processor bump and will cost $159 for 8GB of storage - $40 less than its predecessor and the Google Nexus 7. This is joined by two Kindle HDs one at 7”, the other at 8.9”. The Fire HDs offer appreciably higher resolution screens (1,280 by 880 and 1,920 by 1,200, respectively) and more memory than the base model as well as the option to add LTE for use on a mobile network. Prices range from $199 to $599. All models are ad-supported (add $15 to the list price to opt out of advertizing.) The smaller Fire HDs are due to ship at the end of September with the larger models due in November.

On the ereader side, the company has introduced the ‘Paperwhite’ which includes a frontlight for reading in the dark as well as a higher resolution screen and boasts an eight week battery life. The device costs $119 for the WiFi-only models and $179 for 3G. Both models are ad-supported (add $20 for ad-free versions) and will begin shipping 1st October. The Amazon site is already showing that date pushed to October 8th for new orders due to heavy demand. In addition older models of Kindle see some software updates and a price reduction to $69 (including ads).

Amazon also unveiled new software services in an effort to improve the tablet experience with new features such as X-Ray for movies (where users can pause a film to get more information about actors from IMDB); Whispersync for games (so players never lose their place and have to start over); and Immersion Reading for audiobooks (users can both listen to and read their books simultaneously) or switch from audio to reading mode and back seamlessly.

In its latest aggressive pricing move, Amazon furthers its goal of getting as many Kindle tablets into the market as possible. Indeed Amazon has been quite open that its long term strategy is to make money when people use its devices, not when they initially buy them; this is what allows it to follow such a competitively priced device strategy (which in all probability will involve them taking a loss on the new Fire hardware). However, we continue to believe that Amazon’s long term strategy is fundamentally about getting a shopping cart for the broad suite of products that it offers into consumers’ homes rather than being one about offering digital content as is often reported.

Key to the Amazon offer is that its content is competitively priced. This is as true of physical goods as it is of digital domain. But where competitive, optimized pricing for physical goods has given Amazon a large, albeit low margin business in physical goods, the company is still unlikely to be making a positive margin on digital content. The retailer has made common practice of selling ebooks at a loss, has priced MP3s aggressively (e.g. 2011’s $0.99 for the new Lady Gaga album, along with a full rate wholesale price) while simultaneously retaining the market-standard prices for online video which generally entails losses on new release EST and means that the services themselves generally run around break even. In addition, Amazon has been tiering more value into its Prime subscription service including ebook lending and growing quantities of video content, most recently a deal with Epix. While it seems likely that some of these elements are likely to change (e.g. wholesale price on new release EST), Amazon is deeply committed to an aggressive price strategy for digital content as it tries to build share and it seems unlikely that approach will change in the near term.

This is in contrast to Apple's longtime strategy of making an initial profit from hardware sales. It is tempting to see Amazon as competing with Apple by offering rock-bottom prices for long term share – an aggressive, but risky strategy. Their more immediate competitors, however, are other devices in the Android universe from the likes of Google/Asus and Barnes and Noble. To date it is not obvious that the Kindle has impacted Apple’s share at all but the aggressive price point of the original Kindle Fire meant that it captured a 17.4% share of the North American tablet market, during its first three quarters in that market.

Geography
USA
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