Amazon Kindle Fire: Loss Leader(ship) Done Right

I’ve always admired Amazon, and more specifically, their founder and CEO, Jeff Bezos. The story of how he built and sustained a company is phenomenal and lately, he’s made major  changes to the Amazon brand to stay competitive long-term. It’s rare that you can find a founder and CEO that has been able to lead and innovate over several business cycles, and even more rare, to pivot when you’re at the top of the mountain. Amazon is the foundation for most web startups with their Amazon Web Services (AWS) enabling developers a cheap and scalable solution to store and manage the exorbitant storage demands. Their entry into the hardware space with their e-book reader, the Kindle, was largely a success. Many of their competitors failed to gain significant market share and they leveraged their competitive advantages in a nascent market.

Lately, the iPad has been the run away default tablet of choice.  From a recent IDC report:

“Apple’s iOS share will continue to lead by more than 40 percentage points over Google’s Android for the remainder of the year, but we expect Apple’s share to fall closer to 50% by the end of the forecast period as manufacturers bring new tablets to market,” said Jennifer Song, research analyst, Worldwide Trackers.”

On September 28th, Amazon debuted their answer to the iPad with the Amazon Kindle Fire. Without going through all of the bells and whistles of the features, they are very competitive with the other tablets, including the iPad. The big difference: the $199 price tag.  This is significant, and I believe they have won the Android tablet competition with this move. To put it in perspective, theSamsung Galaxy Tab is priced at $350 and above: almost twice the price!

How is this possible when the race just got started?

This is the principle of loss leadership enabling Amazon to operate at a significantly less cost than their competitors. In essence, loss leadership means that you can sell a product less than it cost to provide that service/produce, if you’re able to generate significant margins over add-ons and other complementary products. For example, the cost to produce an XBox is almost twice the price as what they charge for the product. They make their profits over the game licenses. Amazon is using their core competencies in the same way. Amazon doesn’t have to pay the 30% commission that Apple has to pay for every eBook sale. Since Amazon has massive server capacity with the Amazon Web Services, they can store files in the cloud for virtually nothing, once again leveraging their assets. They already have significant relationships with all digital providers of books, music, and videos, and because of this, they can pass off some of these savings to their customers and save the rest for themselves. What we must remember is that the tablet battle is also a battle of digital ecosystems.

I’m excited that Amazon is competing instead of trying to replicate Apple’s model (as everyone else has tried unsuccessfully). They innovated and decided to go after a defined segment. It will be very interesting to see holiday sales, but I imagine that we’ll see a surprising number of Amazon Kindle Fire units sold. For the 21st Century Youth Project, the price tag of the Kindle Fire seems like a no-brainer option, compared to any other tablet device. I’m sure I will not be the only one who will be making that choice. I have an iPad for my purposes, but if given the choice, a savings of $300 is more than significant, especially in these economic times.

Good job Amazon. You’ve just won the Android tablet war.

We don’t think of the Kindle Fire as a tablet. We think of it as a service.

– Jeff Bezos

Update 11/9/2011: Looks like the anticipation for the Amazon Kindle Fire is equal to that of the iPad before it was released.

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