Monday, September 10, 2012

Thoughts on Amazon's New Offerings

SANTA MONICA, CA - SEPTEMBER 6: Amazon CEO Jeff Bezos holds up the new Kindle Fire HD reading device in two sizes during a press conference on September 6, 2012 in Santa Monica, California. Amazon unveiled the Kindle Fire HD in 7 and 8.9-inch sizes, with prices starting at $199. (Image credit: Getty Images via @daylife)
It's obvious I'm not a pro blogger. If I were I'd have made this post right after Jeff Bezos finished his talk last Thursday. I'm going to try to come up with a few new insights in spite of my tardiness. Let's see how I do.

First of all Bezos and his team did a great job putting this event together. The products are compelling and he told a coherent and interesting story.

Companies ignore their customers requests at their own peril. An example of why this is the case is the addition of profiles in Amazon's new Fire tablets. The ability to have multiple user profiles on iPad's has been a frequent request since the first iPad debuted nearly two and a half years ago. If Apple wasn't listening Amazon was. Parents will be able to set time limits on book reading, video and games. This seems like a very attractive value add and one I suspect Apple will emulate within the next twelve months if Google shows any sign of gaining market share.

The addition of a larger Fire tablet had been rumored for awhile. The lack of FCC approval probably explains why there were some last minute claims that Amazon wouldn't make the announcement. 8.9 inches isn't that much smaller than the iPad when you consider that it's actual screen size is actually 9.7 inches rather than the oft quoted 10 inches. That's makes the larger Kindle Fire about nine percent smaller than the iPad and the difference in pixel density is less than half of that. It's hard not to see the large Fire HD as a competitor to the iPad at this point. This is particularly true of the 4G models which offer a pretty compelling ROI argument when you take into account the $50 data plan which provides 250 meg of data a month. That isn't a lot but it's enough to check email occasionally and bridge between wireless hot spots in a pinch. The equivalent plan for the iPad is much more.

The interesting challenge for Apple is that their business model is built around charging premium prices for good but not spectacular hardware. All business models have upsides and downsides. The upside here is that Apple has excellent margins on their hardware which drives impressive profits. Not every company can do this. Apple can because they've built a fantastic brand over the past few decades. The downside of this business model is they may be vulnerable on price.

Amazon is the Walmart of the online world. They are not a premium brand but they do a very good job of delivering value to their customers by providing products at the lowest prices around. That is the kind of "service" a lot of people get excited about.

People who care about buying a premium brand are very unlikely to pick Amazon over Apple just as people who value getting the biggest bang for their buck are unlikely to choose Apple. One of the reasons Apple makes as much money as they do is that they deliver great value even at their premium price so Amazon's task isn't exactly easy. I tend to be a value buyer but I've bought plenty of Apple product over the past five or six years.

Apple also makes a nice chunk of change from selling media. This is where Amazon and Apple really intersect. Amazon makes money by selling stuff, and nothing is more profitable than selling digital bits that can be endlessly duplicated and delivered nearly instantly at very low cost.

It's safe to say that Apple is vulnerable on the hardware side if Amazon starts to see big gains in market share. That would threaten Apples profits at a time when tablets are becoming an increasingly important chunk of the personal computing pie. As tablets prosper laptops suffer much like desktop systems did before them. Up until now Apple has been cannibalizing sales both from themselves and PC vendors; Amazon would be stealing almost exclusively from Apple.

Apple isn't without resources in this fight though. They have their own media business in the form of the iTunes store. Rumors have been going around for awhile now that Apple wants to sell their own TV's as well and for that to work well they'll need to secure rights to even more media than they currently have. Apple could counter Amazon by offering their own media at even lower prices than Amazon. This should be doable since as noted Apple's bread and butter is hardware. The problem with this approach is that Apple probably can't undercut Amazon by much since Amazon is used to operating on very small margins. Selling media at cost would probably give Apple only a modest advantage cost wise.

Overall it seems like Apple is more vulnerable here but they have arguably the most powerful brand ever. Maybe Sears and Roebuck back in the late 19th century was as dominant but that was a US only thing while Apple is global. My feeling is that Apple would have to mess up consistently and spectacularly for a year or two to seriously damage the good will they currently enjoy.

Amazon also introduced new e-readers. I'm not going to talk a lot about these but need want to note that they made Barnes & Noble's life a little more difficult. I put in a pre-order on the Paperwhite 3G model. My Kindle 3 has been rebuilt once already and the thought of not having to deal with an external light was to good to pass up. I should get mine the first day they become available. One quibble though, everyone including Amazon quotes eight weeks of reading time. If you read the fine print you'll see that number is based on thirty minutes of reading per day. Lets to the math.

8 weeks * 7 days = 56 days
56 days * 30 minutes = 28 hours

Twenty eight hours of reading with the light on isn't bad at all but it's a whole lot less than most people are thinking when they hear "eight weeks on one charge". This number is also based on the wireless being off.

There has been some press about Microsoft's Bing being the default search in the Kindle Fire browser. I'm not a fan of Bing but so long as I have the option of choosing my own default I don't really care what a browser ships with. Google probably isn't feeling as mellow about this choice though.

I love competition. It's good for consumers and its generally good for the companies that are competing as well. Apple has been getting a wee bit too dominant so the possibility of Amazon emerging as a legitimate competitor in the Tablet arena makes me happy. Google has a vested interest in this battle as well and might want to think about mending fences with Apple if they can because I'm not convinced they can compete any other way.

Finally, while it's insulting to both Steve Jobs and Bezos to refer to Bezos as Jobs heir apparent its still the case that if you're looking for an individual in the tech industry to follow obsessively you could do a whole lot worse than Bezos. He's a good showman and clearly knows what he's trying to accomplish with his company and how he plans to get there. That kind of confident and focused vision is rarer than it should be.
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