The Kindle Fire, the online retailer's potential iPad killer, has an advantage because it can be sold at a loss and still make money due to resulting content sales.
Amazon set to slice up Apple's core sale
Amazon is starting to challenge electronics giant Apple with low-cost tablets computers and smartphones.
In a consumer market now dominated by content, Amazon can afford to offer electronic devices at less than their manufacturing price, using the devices to sell users its wide range of content. Apple, on the other hand, relies on profits from its high-priced tablets and smartphones and must aggregate content from third parties.
"It's the most explosive development in the tablet market since the release of the original iPad. The launch of the Amazon Kindle Fire represents a major shot across the bows at Apple … Until now Apple has almost completely dominated the tablet space, rolling past competitors - no more," says a report from a US research company.
According to Sarah Rotman Epps, an analyst at Forrester Research, Amazon has several crucial strengths in its battle with Apple. These include highly competitive pricing, its own content and its established Kindle brand.
"Amazon sells a variety of digital content by subscription and download, including Android apps, eBooks, music, games, and videos. In a move that goes beyond what Apple could offer, Amazon has also invested in acquiring its own custom content through Amazon Studios for film and Amazon's self-publishing platform for eBooks," says Ms Epps.
She adds that quarterly media revenues of US$3.7 billion (Dh13.59bn) account for 37 per cent of Amazon's net sales. But she also points out that, in terms of financial resources, the contest is unequal. Amazon is reported to have just over $2bn in cash and cash equivalents, while Apple reported just over $12bn.
But market reports already suggest that the Amazon Kindle Fire was selling in the millions soon after its US launch and that sales should continue to soar over the Christmas holiday. The chief reason is its low price. It costs $199, whereas prices for an Apple iPad tablet computer start at $499.
"Amazon's proposition is going to prove truly disruptive in the tablet space," says Tim Shepherd, a senior analyst at research company Canalys. "The Kindle Fire's aggressive price point combined with a strong content proposition around not just e-books but video, music and apps too, will prove highly compelling. I expect to see the Kindle Fire see really strong sales through the holiday season."
Although Amazon has managed to develop a significant brand name with its Kindle e-readers, Apple's brand is still far better known globally. If Amazon is really to challenge Apple in the tablet market long-term, it will have to sell its brand in regions outside the US and Europe.
"Its Kindle Fire is only available in the US and much of its content offering is too US-centric," says Mr Shepherd.
"It will need to globalise its offering if it is to have a wider impact, and that will involve significant challenges as it attempts to scale and as it brings its brand into markets in which its retail presence is not yet established."
But the real battle will begin when Amazon takes on Apple in the high-volume smartphone market, which is expected to happen next year.
Although Apple is a leading brand, the price for its latest phone, the iPhone 4S, starts at $199 in the US and is considerably higher elsewhere. As it has proven with its Kindle Fire tablets, Amazon can afford to sell its smartphones at a loss as their adoption would boost content sales.
"I fully expect to see Amazon come to market with a smartphone, providing access to its rich content offering, in the second half of 2012," says Mr Shepherd. "It makes sense for Amazon to deliver products to showcase and expose its ecosystem to more users."
He points out that while manufacturers rely on subsidies from telecoms carriers to sell their phones, Amazon will be able to sell smart phones either through its own website or via the telecoms carriers. He adds that the carriers, who often struggle to subsidise high-end handsets, would be likely to welcome the reduced prices of content-rich Amazon smartphones.
Nor is Apple the only smartphone player threatened by Amazon's disruptive business model. According to technology research company Gartner, smartphones running on Google's Android software now have a 52.5 per cent share of the global smartphone market.
Android phones produced by global electronics manufacturers such as Samsung and LG would also be likely to suffer competition from low-cost Amazon smartphones, as would other leading smartphone manufacturers such as Nokia.
Amazon's business model is set to prove to be disruptive in both the smartphone and tablet computer markets in the coming months.
According to Mr Shepherd. "In 2012, hardware differentiation will not be enough at the high end of the smartphone market or in the tablet space. The strength of content, app and service ecosystems accessible on devices will become increasingly vital, and this puts Amazon in a really strong position."