"At a rock bottom price of $199—which is less than the $201.70 it now costs to make the device—the Kindle Fire has created chaos in the Android tablet market"
Just two weeks after its introduction, Amazon’s Kindle Fire already is shaking up the market, with the device expected to surpass all other iPad rivals to take second place in the global media tablet business in the fourth quarter.
Coming up from zero in the third quarter, Amazon will ship 3.9 million Kindle Fire tablets during the last three months of 2011, according to a preliminary projection from the IHS iSuppli Display Materials & Systems Service from information and analysis provider IHS (NYSE: IHS). This will give the company a 13.8 percent share of global media tablet shipments in the fourth quarter, exceeding the 4.8 percent held by No. 3 Samsung, and second only to Apple’s commanding 65.6 percent portion of the market, as presented in the table attached.
The Kindle Fire’s rapid ascent will help fuel the expansion of the entire market, with the additional shipments contributing to a 7.7 percent increase in the IHS forecast of total media tablet shipments in 2011.
“Nearly two years after Apple Inc. rolled out the iPad, a competitor has finally developed an alternative which looks like it might have enough of Apple’s secret sauce to succeed,” said Rhoda Alexander, senior manager, tablet and monitor research for IHS. “ Initial market response strongly suggests that Amazon, with the Kindle Fire, has found the right combination of savvy pricing, astute marketing, accessible content and an appropriate business model, positioning the Kindle Fire to appeal to a brand-new set of media tablet buyers. The production plans make it clear that Amazon is betting big on the product.”
Amazon lights a Fire in tablet market
IHS now predicts global media tablet market shipments will amount to 64.7 million units in 2011, compared to the previous forecast issued in August of 60 million. The total shipment level represents 273 percent growth from 17.4 million units in 2010. The forecast for the following years also has been increased, with shipments expected to rise to 287.2 million in 2015, up from the previous forecast of 275.3 million, as shown in the figure attached.
Sales of the Kindle Fire alone will account for much of the growth in sales. Dramatically reduced pricing in general in the non-Apple portion of the media tablet market also will play a role in expanding sales.
The Kindle Fire has set a new bar for pricing, bringing the media tablet within reach of a larger portion of the buying public.
“At a rock bottom price of $199—which is less than the $201.70 it now costs to make the device—the Kindle Fire has created chaos in the Android tablet market,” Alexander said. “Most other Android tablet makers must earn a profit based on hardware sales alone. In contrast, Amazon plans to use the Kindle Fire to drive sales of physical goods that comprise the majority of the company’s business. As long as this strategy is successful, the company can afford to take a loss on the hardware—while its Android competitors cannot.”
Amazon’s retail strategy
Millions of Kindle owners will be accessing digital content from the Amazon.com site to play on their tablets. Once these users are on the site, Amazon hopes to sell them all kinds of other goods, ranging from shoes to diapers.
Amazon has taken several steps to promote this strategy. Because of this, the company is willing to take a loss on the Kindle Fire hardware – giving it a market leading price point because it is playing the long game and developing a business model that looks beyond the device.
For example, with each purchase of a Kindle Fire, buyers get a free one-month membership to the Amazon Prime service. In addition to offering free access to movies and TV shows and it allows consumers to use the Kindle ebook lending library, Amazon Prime includes free two-day shipping of millions of items on the company’s site, promoting sales of physical goods on Amazon.com.
In another example, Amazon this week announced Amazon Santa, a free tablet app that allows users to create Christmas wish lists of items sold on the Amazon.com site.
Meanwhile, Amazon is bringing to bear its considerable marketing muscle to promote sales of the Kindle Fire.
Apple strikes back?
While Apple remains dominant in the media tablet market, speculation is rife that the company will respond to the Kindle Fire’s aggressive pricing with a lower-cost version of the iPad.
A far more likely scenario is that Apple also may reduce the pricing on the iPad 2 when the company introduces the iPad 3. This will provide a value alternative for entry-level users in the same way that the company continued to offer the iPhone 3 when it rolled out the iPhone 4. This approach would allow Apple to maintain its target profit margins on both the iPad 3 and the iPad 2, while offering end-users an ever-expanding family of products.
About IHS (www.ihs.com) IHS (NYSE: IHS) is the leading source of information and insight in critical areas that shape today’s business landscape, including energy and power; design and supply chain; defense, risk and security; environmental, health and safety (EHS) and sustainability; country and industry forecasting; and commodities, pricing and cost. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 5,500 people in more than 30 countries around the world.