Making four successive versions of the Kindle e-reader also led Amazon down the path toward the Kindle Fire. For years the engineers at Lab126 tried to create a workable and reader-friendly color Kindle, according to three former employees. In January 2010, the iPad demonstrated the broad appeal of a new kind of color LCD tablet with better image quality, wider viewing angles, and, near to Amazon’s heart, Apple’s own selection of e-books. People close to Lab126 say that work on tablets, including the Kindle Fire, started soon after.
Although the decision to design and build its own hardware is a high-stakes bet, it’s equally true that Amazon CEO Jeff Bezos had no choice but to enter the tablet business. About 40 percent of Amazon’s revenues comes from media—books, music, and movies—and those formats are rapidly going digital. Amazon was late to understand the speed of that transition; Apple, which launched the iPod in 2001 and iTunes two years later, wasn’t. The iPad has only strengthened Apple’s hold over digital media. There’s a Kindle app for the iPad, but Apple takes a 30 percent slice of all content that app makers sell on the tablet and has restricted Amazon from directing iPad users to its website in order to avoid giving Apple its cut. Doing business on the iPad threatens Amazon’s already thin profit margins.
Since March, Amazon has also administered its own app store for Android devices, culling Google’s more comprehensive selection and removing everything that’s offensive and unreliable. Kindle Fire owners will have access to apps from (P)Pandora, Twitter, Facebook, and (NFLX)Netflix. Other competitors such as (BKS)Barnes & Noble can submit their apps, but it will be much easier for Kindle Fire owners to find Amazon’s own content.
That’s one reason Amazon is in the best position to turn the tablet battle into a two-combatant war. The other is price. Analysts speculating on the new device widely pegged the Kindle Fire at $250 to $300. (Samsung, (RIMM)RIM, and others have entered the tablet race with similar devices at those prices and above. Bezos is able to go lower because he can make his profit on media content and with additional subscriptions to Amazon Prime—which then will drive additional purchases of toys, toasters, diapers, etc. He’s also exploiting his company’s popular cloud computing initiative, called Amazon Web Services. Amazon saves money on the Kindle Fire by packing it with only 8 gigabytes of memory (the costliest version of the iPad has 64 gigs), but owners of the device get to store as many books, songs, movies, and personal documents on Amazon’s cloud servers as they like for free.
Unlike a wave of other tablets that have emerged hopefully only to flop, such as the HP TouchPad, the Motorola Xoom, and the RIM PlayBook, the Kindle Fire has a good shot at turning the newest theater of war in high-tech into a two-tablet battle. With a 7-inch display, the Fire is about half the size of the iPad. At $199, it’s also less than half the price of the cheapest Apple model.
Source: Bloomberg BusinessWeek, October 3, 2011
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