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The Kindelization of Tablets, Part 2: The Silk Strategy

[Is Amazon’s Silk an elaborate attempt at avoiding privacy concerns? VisionMobile Product Manager, Stijn Schuermans, examines Amazon’s strategy and argues the reasoning behind a Kindle smartphone and the likely plans for licensing Silk]

The second in a series of articles where we expose the innovation frameworks behind Mobile Innovation Economics, this issue highlights the trend of of the Kindelization of tablets: specifically, Amazon’s Silk browser. As in our previous article, we believe that our analysis still holds true almost a year after its original release in December 2011.

The Kindle Fire and Silk are important developments that hint to the future of online retailing. The Kindle introduces new techniques to drive foot traffic into Amazon’s retail properties by subsidizing devices, rather than paying for search advertising. In turn, Silk is used to generate deep customer insight and expand shelf space. We expect Amazon to extend the Silk shelf space by licensing this browser to other tablet and smartphone makers, turning handset makers into Amazon Associates.

You can also download the full, 5-page report in pdf format here.

The Story

On November 15th, Amazon launched the Kindle Fire tablet. As we showed in our “Kindelization of Tablets” Mobile Insider part 1, the Kindle Fire is device optimized for a specific use case – media consumption – and designed to drive foot traffic to Amazon’s core retail business.

Amazon is much more than a bookseller. In Q3 2011, it derived only 40% of revenues from “media,” which includes books, music, movies, games, software, and digital downloads. Meanwhile, it derived more than half its revenue from “general merchandise“, in more than 10 categories ranging from electronics to groceries and garden tools. Amazon is a fully diversified online retailer.

Amazon’s website generates the bulk of its sales. To drive traffic there, it spent over $1 billion in advertising during the first three quarters of 2011. Of that figure, it spent nearly $120 million, or about 11%, on search advertising with Google in the US alone.
The Kindle Fire uses Amazon’s Silk browser, with so-called “split browser technology”. As explained by the company at that time, Silk browser software resides both on the device and on the massive server fleet that comprises the Amazon cloud. With each page request, the Amazon cloud processes, caches and optimizes pages for viewing on a smaller, mobile screen. This technique is claimed to shorten the load time of the website and to reduce bandwidth usage.
The split browser concept is not new. It is also used by RIM in its BlackBerry browser, in the Opera Mini browser and by Nokia in its Asha range.

Has Amazon entered the browser wars?

Glad you asked!

Intelligence about user behaviour is what drives Amazon’s core business. Routing the Silk browser’s traffic through its own servers allows Amazon to collect click streams — and not just when the user is shopping on Amazon. Such streams are a source of extremely valuable data — theoretically including the prices others charge for products the user is interested in! Deeper customer intelligence allows Amazon to target customers more effectively, maximize margins, and improve customer conversion (and thus increase sales).

We now know that Amazon is indeed actively using data from this platform. User intelligence from the Silk browser is used to deliver a new feature (launched September 2012): “Trending Now” webpages, as Techcrunch reports.

We also believe that the browser can become part of Amazon’s retail shelf space. Amazon could use Silk to deliver targeted Amazon ads within the browser UI, potentially saving hundreds of millions of dollars in search advertising expenditures.

Silk leverages Amazon’s core technological strength: its cloud computing platform. At the same time this new cloud application pushes the company forward on the technological learning curve. This is similar to Amazon’s earlier move to productize their cloud infrastructure as the Amazon Web Services (AWS).

Avoiding privacy concerns

From a user perspective, the split-browser technology’s value is perceived rather than real. The Kindle Fire’s processor is good enough to render webpages just fine by itself. Furthermore, bandwidth usage is not an issue on a WiFi-only device. Were Amazon to offer 3G or 4G in the future, well… there are already options, like the freely downloadable Opera Mini, for users who really could benefit from split browser technology. Taken all together, it’s hard for the cynics among us to avoid seeing Silk as a slick way for Amazon to slide up a little closer behind unsuspecting consumers. By spinning Silk as a user experience feature, Amazon may simply wish to avoid privacy concerns — which can be significant where user data mining is concerned, as the recent Carrier IQ debacle showed.

A new, asymmetric business model.

We believe that a new business model is emerging where telecom products and services are used as a complement to retail. By driving the price of telecom products down using subsidies, demand for retail traffic will be stimulated. Commoditizing telecom products will put the traditional telecom players in a losing situation. Let’s see an example.

Amazon is likely preparing for the next step: a subsidized, Amazon-branded smartphone. Split browser technology may not be too relevant for tablets, but it is important for mobile phones. In that context, Silk would be a significant asset, as operators embrace browsers that save traffic, one of the cornerstones behind Opera Mini’s success.. Amazon already operates as a virtual mobile network operator (MVNO): users of its Kindle 3G e-Reader download e-books via mobile networks, using data minutes leased by Amazon at bulk rates. Offering an Amazon smartphone would be a natural next step to further drive foot traffic.

We predict that Amazon will go even further. It would make sense to license out the Silk browser to OEM manufacturers of smartphones or other tablets. The handset maker would then effectively become an Amazon Associate by a classic affiliate marketing mechanism. Amazon extends its reach and can drive more traffic to its retail operations, while the OEM gains an additional revenue stream as a broker of Amazon foot traffic.

Meanwhile, Opera and RIM have had split-browser technology in place for years. Why haven’t they been able to capitalize on a similar approach, monetizing customer insights?

Don’t forget to download the full, 5-page report in pdf format here.

– Stijn
@stijnschuermans 

 

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