Amazon's Kindle appears to have hit a sweet spot in the consumer wallet with its full-color touch-screen tablet, according to IHS iSuppli. The group reports that Fire has already taken over the No. 2 slot, behind Apple's iPad, by selling below cost.
By selling Fire at a loss, Amazon has attracted more consumers to the touch-screen tablet market, which IHS estimates will grow by almost 8 percent in the fourth quarter as a result of Amazon's ploy. Specifically, the market will grow to 64.7 million units for 2011 over its pre-Fire estimate of 60 million units forecast in August 2011.
"Nearly two years after Apple Inc. rolled out the iPad, a competitor has finally developed an alternative which looks like it might have enough of Apple’s secret sauce to succeed," said Rhoda Alexander, senior manager, tablet and monitor research for IHS. "Kindle Fire, has found the right combination of savvy pricing, astute marketing, accessible content and an appropriate business model, positioning the Kindle Fire to appeal to a brand-new set of media tablet buyers."
The big losers so far are the other touch-screen tablet makers that appear to be quickly losing market share to Fire, which also runs the Android operating system but which sells at less than half the price of its closest competitor, the Samsung Galaxy. IHS predicts that during the crucial Christmas season, Amazon will sell almost three times as many Android Fires (3.9 million) as opposed to either Samsung's Galaxy or Barnes & Noble's Nook (which will sell 1.37 million and 1.32 million, respectively). As a result, IHS forecasts a 13.8 percent market share for Fire in the fourth quarter, compared with 4.8 percent for Samsung's Galaxy and 4.7 percent for Barnes & Noble's Nook, with Apple's iPad at 65.5 percent.
Amazon achieved a materials cost of $201, compared with Apple's iPad materials cost of $320, according to IHS, by dropping Bluetooth, adopting a slightly dimmer and smaller 7-inch touch-screen--compared to iPad's brighter, larger 12-inch touch-screen--and by limiting memory to a built-in 8GB with no expansion capabilities. As a result, Amazon's Kindle Fire trimmed almost $120 off its costs, allowing them to sell at a slim loss for $199, compared with Apple's markup of nearly 35 percent when selling iPads for $499.
In the long run, Amazon's strategy calls for continually bundling services that encourage the use of Fire when purchasing other Amazon products. Currently, Fire comes with one free month of membership to the Amazon Prime buying service, free access to movies and TV shows, free use of the Kindle lending library, free two-day shipping on purchased items, and free Amazon Santa--an application that allows users to share their Christmas "wish lists" with their friends and family.
Regardless of whether Amazon's business model works, IHS predicts that its aggressive entry will increase its projection for touch-screen tablet sales overall, which it has boosted to 287 million units in 2015 from its previous forecast of 275 million units.