Distilling market noise into market sense
The VisionMobile blog is a space where VisionMobile analysts and industry insiders exchange views on the fast-changing mobile market and the trends that define the future direction of telecoms.
The Kindelization of Tablets â€“ Part 1
[Did you think that the Kindle Fire and the iPad are in direct competition? Think again! VisionMobile Product Manager, Stijn Schuermans, disseminates the tablet market and explains why the iPad and Kindle Fire are augmented product offerings, as well as what differentiates them from other tablets and from each other]
This is the first in a series of blog articles where we expose the strategic thinking behind Mobile Innovation Economics. This first issue is a retrospective of the Kindelization of tablets, first released as a report in October 2011, but with predictions that still hold true almost a year later. Back then, we wrote that the iPad (Apple) and the Kindle Fire (Amazon) are augmented product offerings, which differentiates them from other tablets and from each other. They are not in direct competition with each other as they support different use cases and operate on opposite business model polarities. Other Android tablets will continue to struggle as long as they are not use-case differentiated. Almost one year later, our predictions still stand true. You can also download the full, 5-page report in pdf format here.
Amazon announced the Amazon Kindle Fire tablet device on September 28, 2011. Like the iPad, the Kindle Fire is part of a larger content retail and service offering.
Android tablets are commodities almost from their inception, as the basis for competition among them is price. Modular, high-quality components are readily available from suppliers. Device architecture and assembly are well within the expertise of previous PC and consumer electronics makers. Google Android provides a cheap, off-the-shelf operating system, software platform and application ecosystem.
Is the Kindle Fire, technically an Android-based tablet, able to capture the hearts and wallets of users?
Different business models
Two metal-to-cloud players. Both Apple’s iPad and Amazon’s Kindle Fire are augmented product offerings. Apple and Amazon distinguish themselves in the tablet market by being complete “metal to cloud” players. Both companies provide integrated user experiences and complement their device with the retailing of content (books, music, video and apps).
Addressing different use cases. The iPad and the Kindle Fire differentiate from each other by addressing different use cases. They are not in direct competition with each other, because they have different value propositions and distinct target segments.
Polar-opposite business models. Apple and Amazon extract value from these devices using different business models. Both leverage the economic principles of complements, but they are polar opposites in what is the core business and what is the complement, as is evident by comparing the devices’ profit margins.
Sustainable competitive advantage
For both Amazon and Apple, providing an augmented product offering results in a sustainable competitive advantage.
- Only a handful of companies in the world have sufficient content rights, available across multiple regions, technology know-how and retailing experience. It is the combination of all four that creates the value proposition that Apple and Amazon are offering.
- The integrated user experience solves the pain of user journey fragmentation across the steps of discovering, purchasing, downloading and consuming content.
- The heavy customization of the Kindle Fire’s software is directed by a specific use case. This differentiates it from other tablets based on the Android OS. The Kindle Fire therefore is not a direct competitor to other Android tablets.
- The fact that content sourcing requires negotiation with tens of major content producers and that content rights are localized cause substantial barriers to entry for content retailers aspiring to produce their own Kindle-like tablet.
- Cloud storage and synchronization, only available for content purchased from the respective tablet vendor, provides additional customer lock-in.
The Kindelization of Tablets
The tablet market has space for multiple augmented products, led by use cases (like the iPad and the Kindle Fire), and one cost leader. This is the Kindelization of tablets.
- Current generation Android tablets are not use-case differentiated. Therefore they are forced to compete on price and won’t succeed in capturing substantial market share. Tablet hardware and platform features (in particular the Android OS and app ecosystem) by themselves don’t provide substantial competitive advantages.
- Possible content types that can fuel use-case based differentiation for aspiring competitors include: apps, media (books, music, movies, etc.), Internet and user generated content (especially in business contexts).
- To execute a cost leadership strategy, gaining economies of scale is crucial. At this moment, the dominant economies of scale are produced by the iPad as it dominates the market, pre-empting a cost leader from emerging.
10 months since launch…
As expected, the Kindle Fire was not an iPad killer. CEO Tim Cook stated on the company’s earnings call in January 2012 that the Kindle Fire had no impact on iPad sales whatsoever. Cook said that he looked very carefully at Apple’s iPad numbers and he is convinced that Amazon’s tablet didn’t affect iPad sales. As we predicted a year ago, both devices are differentiated and not in direct competition with one another.
In the three quarters following its launch, the Kindle Fire has sold an estimated 5 million units (its initial production order), out of a total of over 22 million tablets sold in this period, according to Asymco. In comparison, the iPad sold over 16 million units in the same period, while Asymco estimates other tablets (presumably mostly Android) at 1,5 million units. These figures support the hypothesis that the iPad and Kindle Fire are the only two differentiated devices. Together they dominate the sales of dozens of other devices combined.
Amazon meanwhile has announced a new series of Kindle Fires: an 8.9 inch version priced at $299 for the basic version, a new 7 inch model for $199 and a basic 7 inch model (a direct successor of the original Kindle Fire) for $159. CEO Jeff Bezos said in an interview at the launch event for the new models that Amazon won’t lose money on the devices even if customers don’t use them to buy digital content from its online store. However, analysts have confirmed the complementary goods-based business model, where the profit margins on the device itself are razor-thin.
- Stijn (@stijnschuermans)