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Sunday, October 2, 2011

Fire Follow up

It looks like Amazon is pushing even harder on price than originally anticipated. The new Fire is selling for $199, apparently even below the cost of its manufacturing. It is selling as a loss leader. As I have said in previous posts, this makes good sense. Amazon will gain market share with its aggressive pricing and will make money selling media to its customers. This is the strategy I have been advocating. Amazon is well poised to take advantage of it.

As others have pointed out, the Fire is not really an iPad Killer. While the iPad is much more expensive, it offers a lot more than the Fire ever will. Still, the Fire will appeal to a large market segment. Further, it force other Android makers to reduce their prices as well, thus leaving iPad remaining only for those willing to pay a premium price.

There are also rumors that Amazon may be interested in buying Palm from HP, presumably to use WebOS on its devices. This makes little sense to me. First, Amazon has already developed a highly customized version of Android. Forcing early adopters to change to a new OS will only cause problems. Second, Android has become a popular OS. Moving to WebOS would prevent customers from having access to any significant third party Apps.

If Amazon does move to a WebOS platform, it will incur not only the purchase cost but the cost of developing the OS to its own device. Further, customers will be turned off by the lack of third party apps available. Amazon would be moving more toward the Apple model of trying to maintain complete control over its device. That is not something customers want.

Tuesday, September 27, 2011

Will The New Amazon "Fire" finally spark a Tablet Price War?

It looks like Amazon is poised to announce the release of its new tablet, reportedly called the "Fire" tomorrow.

The biggest news is that Amazon plans to sell the tablet for $250, about half of what most other major manufacturers are selling. Customers who buy a tablet will also supposedly get a free membership to Amazon Prime, which gives discounts on shipping for Amazon purchases, and free access to Amazon's ever expanding video streaming library.

The tablet will run the Android OS, although it will apparently be limited in features. It will also have a mere 7" screen, rather than the preferred 10" screen. There is supposedly a 10" version in the works, but that may be a year away, and will likely come with a significantly higher price tag.

This is a smart move for Amazon. A year ago, Jeff Bezos said he had no plans to release an Amazon Tablet. He wanted to focus on the Kindle. But intervening events apparently changed his mind. The Kindle, while great for reading ebooks, was a one trick pony. It could not run many other apps, play video, or even display color images. Because people could read their books on a tablet, and do so many other things, it became clear that would be the choice for many.

Amazon likely got scared by Apple's policy of requiring a 30% cut of all sales made through it's iPad. This is a direct threat to Amazon's ebook revenue as Apple seeks a cut from all those book purchases. That clearly must have focused the attention of Amazon on the need to have its own hardware to sell books. Since consumers wanted more than the Kindle, Amazon turned to the Fire.

By offering a low price and the Amazon name and marketing prowess to the product, the Fire should become a real player in the Table market, assuming the device works well. Amazon can afford to sell the device at cost, or even slightly below cost if necessary since it will make its money selling apps and ebooks to tablet owners. Amazon is also making a big move into video streaming, which it will no doubt market heavily to its new tablet customers. By using the Tablet to steer customers to Amazon Stores, the tablet is not a profit center in itself, but rather a marketing tool for other sales.

I suspect other tablet makers, especially those with the Android OS will fear Amazon's entry, primarily because Amazon's lack of need to make a profit on tablet sales will undercut prices for all competitors. As competitors cut prices to do battle with Amazon, and as the hardware to make them becomes cheaper, Amazon will lower its prices further. I would not be surprised to see tablet costs fall to half of what they are today in the next year or two.

Apple, of course, will not succumb t the price wars. It will seek to retain its dominant position by continuing to innovate and to wow customers with cool features. This will work to maintain a profitable product and significant market share, but its overwhelming control of the market will shrink as price conscious consumers settle for cheaper tablet options.

Consumers should rejoice, however, Amazon's entry will mean lower prices for almost all tablets. Just as Henry Ford made cars cheap and popular, the Amazon Fire may do the same thing for the tablet market.

Sunday, August 21, 2011

HP's WebOS shows how critical price is - too late

HP announced earlier this week that it would abandon its WebOS tablet, which it bought from Palm only a few months ago and which never really caught on.

It is little surprise that it never caught on. The HP Tablet was essentially the same price as the iPad. But the iPad has had a major head start in capturing the market. People willing to spend the money have been generally happy with the iPad. Why would anyone spend the same amount of money to get something that only *might* turn out to be as good? Customers are not going to invest only to wait and see whether HP can built up an App base as good as the iPad, if they can just go buy an iPad. As a result, HP tablets sat on store shelves with almost no interest.

But look what happened as soon as HP announced they were killing the tablet - retailers slashed prices to at little as $99 for what was $399 a week earlier. Tablets flew off the shelves as consumers snapped up the deal, even though they know the tablets will no longer be supported, no one will develop new apps, and they will have to get a different tablet and learn a new OS the next time they upgrade. The cheap price was too hard to resist!

The moral of this story is that if you are going to try to topple a market leader, you have to be very competitive on price. Sell the tablets at a loss for a couple of years, build up major market share, then make your money with app sales, advertising, or some other way. Until you build up a critical mass in the market, you have to give on price. HP refused to take a short term loss in order to make a long term gain. As a result, the billions they invested in this venture are down the drain. Others should learn from this lesson.

So what happens to WebOS now? If they are smart, Microsoft will buy up the division from HP (along with all those patents). MS is going to be the only serious contender to the iPad with an OS that is proprietary (everyone else is using the free Android OS from Google). The WebOS is technically superior to what Windows has been developing, and the HP patents will let MS keep Apple and Google tied up in litigation for years over various alleged violations. MS can probably pick up the WebOS at the fire sale price of a few hundred million dollars. If it uses that to improve its Windows Tablet OS and is willing to take some losses for a few years, it will eventually challenge the iPad for dominance.

The problem, of course, is Android. This free OS has caught on strong. It may continue to dominate the low end market, especially as hardware manufacturers begin to force down their prices. At present, most Android devices are priced similarly to iPads. Until there is a real price war, Apple will continue to dominate.

Learn from HP's mistake. Sell cheap. Sell at a loss. Build market share. That is the only way to win.

Thursday, February 24, 2011

Do Not Buy a Tablet Now

The iPad has remained the dominant tablet for almost a year now. There had been tablets in past years, but the iPad's user interface made it the cool product of 2010. Personally, I think the iPad holds little benefit over a netbook, and has the big negative of not having a keyboard. But I can certainly see why the large screen like a computer, combined with the highly nimble and responsive screen of a smart phone, has captured the imagination of the masses.

That said, I still think the iPad is doomed to fall to a niche portion of the tablet market over the next few years, much like the Mac computer did in an earlier generation. The number one reason for this is Apple's greed. Apple has near total market share right now because it is the only game in town. The company is to be commended for bringing a great program to market that had no equal. But that cannot last. As dozens of competitors seek to take on Apple in the Tablet arena, there are plenty of weak spots for them to attack.

Number one is the price: at around $500-800 depending on the model, the iPad can cost twice what a decent low end netbook costs. This is probably justified given the cool OS and new features. But competitors will soon match those features and sell a similar product for half the price. Apple could engage in a price war, but if past practice is any guide, it will not. Apple will come out with cool new features and offer an iPad 2 at a similar cost. Competitors will offer better deals and pick up more market share, much like Microsoft did in the PC market of the 1980's.

Apple is going to keep its prices for the device high, meaning that many people will not want to go in that direction. In addition, Apple is proving equally greedy in its App Store. It's 30% commission is far higher than the market will bear for very long. It if it wants to make its money on Apps, it should sell the iPad for half the price as a loss leader. If it did that now, it would gut the competition and make itself the market leader for years to come. But trying to make so much money on both the front end and back end is simply not sustainable over the long term. Eventually, other App stores will take a majority of the market, offer better terms to developers, and win the sales war.

Similarly, Apple refuses to share the wealth with other companies. Its refusal to support Flash, or to provide ports on the iPad to let third parties add their own creativity and imagination to the product will stifle its uses. Many users will find the iPad limiting. Apple tries to control how its device is used, rather than leaving that up to the user. That is a major mistake.

So who will emerge the winner? Probably not other players like Blackberry or HP with its WebOS. They are late arriving to the market, unwilling to make serious price concessions, and unable to develop the large App selection needed to build critical mass. They may be very nice products, but that is not enough. Anyone remember the Amiga PC of the 1980's? It was an amazing computer for its time, with many very cool features far ahead of anything else available at the time. But its high price and the inability to build sufficient market share to encourage software developers to build a large stable of programs sealed its fate. Instead, the far less evolved but cheaper and more widely available MS-DOS took over the PC world.

So who will be in the position to be the next Microsoft? Certainly not Microsoft, which has not developed a truly ground breaking program since it introduced MS-Office a couple of decades ago. To me, the winnner appears to be Google. The Android OS, with the Honeycomb version being developed for tablets, looks to be the favorite. Just like MS-DOS in the PC world of the 1980's, Android is a widely available and cheap OS for developers of phones and tablets. It is a high quality OS with enough flexibility to let third parties develop and create new and innovative ways to use it. It is available to a wide number of hardware developers, meaning it will much more easily push its way into a large market share, thus encouraging more App developers, which only continues the cycle up to market domination. The fact that App developers are not shaken down for as much money as possible will also earn Android good will and devoted supporters in the developer community.

This leads me to the title of this piece. Do not by any tablet now. If you wanted to be an early adopter of the iPad, you should have bought six months ago. At this point, you should wait for the iPad 2 to be released in April. Even if the iPad original is all you need, the prices on that will drop considerably as soon as the iPad 2 hits the market.

If you are considering any other tablet, there is not much out there. Google's Honeycomb, Blackberry's Playbook and HP's WebOS are all still months away from release. When they are first released, you will likely see more bugs in first releases than we saw with the iPad. Apple is one of the best in beta testing and getting rid of glitches before going to market, despite its other faults. I would say Christmas 2011 is probably the earliest to consider such a purchase.

If you are concerned about getting value, you will probably have to wait until well into 2012 or even 2013 before the "bleeding edge" pricing goes away and competition forces tablets down into the sub $300 or even $200 level.

If you want something right now that is cheap, reliable and that is small and easy to carry around, buy a netbook. You can get a pretty good one for around $250. It will have a screen as big as the iPad, an OS as good as any PC, and it will even have a keyboard to make writing much easier.

Ten years from now, we will look at an $800 tablet the way we look at the $5000 PCs or $1000 CD players that were sold in the 1980's. A device made in 2021 will be much cheaper (probably under $150 in today's dollars) and will do much more. Sure, most of us won't wait until then since life is short and we want to enjoy the latest technologies now. But the next two years will see the largest decreases in price and the highest growth in improvements. Patience is well worth it.