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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.

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