Amazon’s Hardware Strategy Mystery

Ben Bajarin recently tweeted a chart showing how tablet market shares have changed since 2011.

BenBajarin 2014 7月 25

In Ben’s tweet, he noted how Amazon’s market share has now become very small, and that is certainly true. Although Amazon’s share tends to rise sharply in the holiday season and we can still expect another bump in Q4 of this year, 14Q2 is seeing very very small sales for Amazon.

At this point in time, I think that it is worthwhile to review how Amazon started selling the Kindle Fire, and how its strategy has unfolded.

  1. The Kindle Fire launched in 11Q4 at a very low price of $199 (compared to $499 for the iPad) which was only possible because Amazon subsidized the price.
  2. The Kindle Fire was the catalyst that showed how Android tablets could take market share away from Apple. Up till then, companies like Dell and HP had tried to compete with Apple without any noticeable consequences. The extremely low cost of the Kindle Fire finally allowed Android tablets to start expanding market share, and it became obvious that Android tablets had to be priced in this domain if they were to ever sell well.
  3. The Kindle Fire was a low-end device and omitted many features that were present in the competition.
  4. The success of the Kindle Fire demonstrated for the fast time that Android tablets could compete against the iPad under the condition that the price was kept under 200 USDb (many Android tablets had previously tried to enter the market, but all had failed).
  5. In particular, Google’s Nexus 7, which was released in July 2012, was obviously designed to match the successful formula that the Kindle Fire had pioneered; a 7-inch screen and a price below 200 USD. The Nexus 7 shows up in Asus sales in Ben’s chart, which was significantly elevated since 12Q3.
  6. Amazon released the second generation of the Kindle Fire in 12Q4 with a price reduction to $159. They also released two higher-spec versions, the Kindle Fire HD priced at $199 and $299. With these updates, Amazon saw market share similar to what they saw with the first version.
  7. Amazon released the third generation in 4Q13 for 139 USD, again together with two higher-spec models ($229 and $379). Amazon again saw good sales in the holiday season, but sales dramatically dropped in the next year according to Ben’s chart.
  8. Importantly, the Nexus line of tablets (produced by Asus) also lost steam after the initial introduction.
  9. The only branded tablet that saw an increase in market share during this period was Samsung. Although I cannot find pubic data that explains Samsung’s rise, it is likely that Samsung’s sales were the result of bundling with smartphones and possibly TVs; they weren’t selling by themselves and people got them even when they didn’t really want them.

We can clearly see that despite initial expectations, the Kindle Fire tablets have not really grown to be a strong contender in the tablet market. This is also true of the Nexus 7 lineup. The question is, could Amazon have done better?

We know that a large part of the “others” in Ben’s chart are non-branded tablets, which are generally very cheap, low quality and come out of the Chinese technology ecosystem. These have been selling mostly for watching video. Samsung’s sales also come from bundling which means that the cost to the consumer is very low or maybe even free. What this means is that although the Kindle Fire was just about the cheapest usable tablet when it debuted, that is no longer the case. Kindle Fire languished because it was no longer the cheapest tablet that was barely usable.

This suggests that Amazon could have done better with the Kindle Fire if they had continued to pursue their low-end strategy. Instead of moving up-market with the Kindle Fire HD and HDX, they could have instead gone lower into possibly sub-100 USD price points. They could have even provided the Kindle Fire for free with an Amazon Prime membership subscription. In fact, this is exactly the strategy I had expected Amazon would pursue. I actually wrote a blog post back in October 2011 (in Japanese).

In my old blog post, I expected Amazon to focus on creating a tablet that was so limited in features that the only thing you could do with it was to consume content. I expected that Amazon would continue to omit the camera, mike, gyroscope, and cellular connectivity, because these were not essential for reading books or watching videos. They could even have continued to use Android 2.3 as the base for their OS.

This is not the strategy they pursued. Instead of staying at the bottom, they moved up to the mid-market segment. Even though Amazon’s prices decreased, competitor prices dropped even faster. The Kindle Fire is no longer a product that stands out in price, and as such, it has lost its unique appeal. No wonder that sales are not expanding.

It’s a mystery to me why Amazon is pursuing the mid-market in hardware. If you look at the recently announced Fire phone, they are even trying to sell a high-end phone with a significant profit. My opinion is that aiming for the mid- to high-end does not make any strategic sense for Amazon. I am totally bewildered and I’m suspecting that Jeff Bezos is starting to get confused.