Thursday, September 29, 2011

Fire - A Bold Move by Amazon

As  you have probably heard by now, Amazon will be offering a 7" tablet for $199 this holiday season called Fire.  Critics have complained that Amazon will be losing as much as $70 in hard costs per tablet, more if you include marketing / advertising costs for this new line of tablets.  Furthermore, Amazon's margins are already thin so how will they recover the lost costs?

I, however, believe this is the right move for Amazon for three reasons:

Tablets appear to be well suited to e-commerce
As reported in the WSJ yesterday, conversion on tablets is 4 to 5% compared to 3% on PCs (according to Forrester Research).  In addition, retailers are reporting 10% to 20% larger carts on tablets than PCs.  You bet Amazon is watching these stats and wants to make sure that tablet users are shopping at Amazon!  An Amazon tablet greatly increases that likelihood.

Apple and Amazon are on a collision course
Apple has built up a tremendous franchise selling digital content through iTunes.  At the same time, Amazon knows that in order to keep its growth going, it needs to put more emphasis on digital content.  CDs, books, and DVDs are quickly being replaced by digital music and video downloads.  If Apple continues their dominance of tablets, those consumers will be steered (by Apple) to iTunes or other Apple services instead of Amazon services.  Amazon needs to ensure that the iPad doesn't continue to dominate the tablet market.

Consumers are insisting on innovation
Consumers have no patience for companies that don't move.  Companies like Palm, RIM, Yahoo, AOL, and others that have played it safe and have seen their fortunes fall quickly.  When companies like Apple and Google are innovating at a ferocious rate, there is no room for hanging back and playing it safe.  Fire is just the kind of bold bet that will keep Amazon going.