The Kindle Fire: Amazon's Go To Market Strategy (2011)


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"In all of Amazon’s commercials and advertisements for the Kindle Fire, the word 'tablet' is conspicuously absent. The only place one can find the word 'tablet' is embedded in the html code for the title of the Kindle Fire page on Amazon’s web site."

So, is the Amazon Kindle Fire a tablet or an overpriced e-reader?

The purpose of this paper is to use several predominant technology strategy frameworks to determine whether Amazon’s market strategy will allow the Kindle Fire to break into the tablet market or just become a higher priced version of its e-reader predecessors. In other words, what is Amazon’s go to market strategy and can it work?

I wrote this paper in 2011 for a Technology Strategy course in my MBA program. We were limited to ten pages, but I got little over zealous as you can see.

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The Kindle Fire: Amazon's Go To Market Strategy (2011)

  1. 1. Kikuyu Daniels MGSM 830 – Technology Strategy October 25, 2011 THE KINDLE FIRE: AMAZON’S GO TO MARKET STRATEGY On September 28, 2011,, Inc., the world’s biggest online retailer, officially announced its latest introduction to the tablet computer market – the Amazon Kindle Fire. 1 2 Despite careful marketing to position the Kindle Fire as a Kindle e-reader and not a tablet, Amazon’s ploy to take market share from Apple and other tablet providers with the Kindle Fire is apparent; however, are they well positioned to do so? The purpose of this paper is to use several predominant technology strategy frameworks to determine whether Amazon’s market strategy will allow the Kindle Fire to break into the tablet market or just become a higher priced version of its e-reader predecessors. In other words, what is Amazon’s go to market strategy and can it work? Background and History Amazon is not known for producing hardware and software. It is best known for selling media products such as books, CDs, apparel, and household items. Since its founding in 1994, it has expanded to offer a whole host of other services such as storage and digital media.3 Amazon introduced its first Kindle, an e-reader, in 2007.4 The Kindle was followed by the Kindle Touch, Kindle Keyboard, and 3G versions (others including Kindle Fire are WI-FI only.) Now, 1 “Amazon's 4Q Validates Sales Growth Estimates, but Also Margin Concerns; Shares Look Overvalued,” Morning Star Equity Analyst, January 28, 2011. 2 “Introducing the All-New Kindle Family: Four New Kindles, Four Amazing Price Points”, September 28, 2011. Business Wire. (accessed October 1, 2011). 3 (accessed October 1, 2011). 4 (accessed October 1, 2011). 1
  2. 2. Amazon has introduced the Kindle Fire for “web, movies, apps, games, reading and more”. 5 It provides access to Amazon content which includes: 18 million movies, TV shows, songs, magazines, and books. Its features include such innovations as: Amazon’s App store for Android games, Amazon Silk web browser (newly developed for mobile devices), and free cloud storage for Amazon content. Analysis In all of Amazon’s commercials and advertisements for the Kindle Fire, the word “tablet” is conspicuously absent. The only place one can find the word “tablet” is embedded in the html code for the title of the Kindle Fire page on Amazon’s web site. Even Barnes & Noble advertises its latest e-reader, the Color Nook, as “the Reader’s Tablet.” 6 Part one of this analysis will discuss the positioning of the Kindle Fire using frameworks such as the Ansoff Matrix, Architectural Innovation, and Technology Lifecycles. It will answer the question of whether the Kindle Fire is a tablet. Part two of this analysis will discuss the entry of Amazon into the table market using frameworks popularized by Michael Porter, D.J. Teece, and Michael Cusumano among others. It will answer whether Amazon can effectively compete in the tablet market. PART ONE Ansoff Matrix Amazon is introducing the Kindle Fire as a new product into an existing market. Following the Ansoff Matrix, Amazon should be focused on product development in order to successfully launch the new product in its existing market of e-readers. Indeed, its careful attention to product development is captured in the many new and different features of the 5 6 See note 2. (accessed October 25, 2011). 2
  3. 3. Kindle Fire. For example, the Kindle Fire has a full color, multi-touch display and dual processor for speed in web browsing using Amazon’s newly developed Amazon Silk browser. 7 The company is using vertical stretching, rather than horizontal stretching, and has positioned the Kindle Fire as its premium e-reader. Kindle Fire’s premium status is reflected in its $199.00 price tag which is at least $50.00 more than any of the other Kindle models. Architectural Innovation Kindle Fire is significantly different from Amazon’s other kindle models in that it, unlike the others, was not built by E Ink, Corporation (now E Ink Holdings) a startup founded on Massachusetts Institute of Technology’s Media Lab technology. 8 9 Instead, it was developed by Amazon’s own R&D organization called Lab126. 10 Its innovation is best classified as an architectural innovation since it builds on components of the earlier Kindle models such as its display, but does so in a whole, new architecture designed by Amazon including its own modified version of the Android mobile operating system (OS). While it is possible that despite investing heavily in developing the Kindle Fire, Amazon mistook the product for an incremental advance on the existing Kindle technology, this is highly unlikely. Given that the company is rolling out Kindle Fire with its new Amazon silk web browsing (promoted exclusively on the Kindle Fire) and is bundling it with a free 1 year subscription to Amazon Prime, its content services platform, Amazon appears to have put quite a bit of thought into its marketing and positioning. Technology Life Cycle and S-curves 7 (accessed October 1, 2011). 9 Email, dated September 30, 2011, from Ana Lopes, E Ink Business Development Strategist confirms E Ink’s involvement in the Kindle Fire. 10 See note 9. 8 3
  4. 4. Amazon must realize Kindle Fire’s disruptive potential and is quietly planning to leverage it to gain entry into the tablet market. According to an article on Geekwire dated August 21, 2011, a U.S. trademark application was filed by Amazon for the name and logo of its Lab126 under the classification “design and development of computer hardware and software.” The article, went on to say that shortly thereafter Amazon began advertising jobs for Android developers in Cupertino, California where both Lab126 and Apple are located. Given the Kindle Fire’s web browsing capabilities and free, unlimited capacity for storage of Amazon media content including movies and TV shows in the cloud, it is much, more than a higher priced, color ereader. The Amazon Kindle Fire is clearly a tablet and likely was developed as such. As a tablet, Kindle Fire represents a leap off the e-reader S-curve into a new S-curve of its own. Amazon has very likely disrupted itself with the introduction of Kindle Fire. The device is remarkable. A quick search on any social media site (like Facebook or Twitter for example) will reveal conversations occurring about the Kindle Fire. Media and tech bloggers, especially, cannot seem to get enough of it. There is pronounced sentiment that the Kindle Fire is a tablet that was developed to challenge Apple’s iPad2. PART TWO Porter’s Five Forces To understand whether the Kindle Fire can effectively compete in the tablet market, it is important to analyze Amazon’s fit within the tablet market as a whole using Michael Porter’s Five Forces framework. The key players in the tablet market are: Competitors such as: Apple, Barnes & Noble, Rim Blackberry, Samsung, HP, Sony, Acer, Dell, HTC, Motorola, LG, Lenovo, 4
  5. 5. NEC; 11 New entrants which include: Barnes & Noble’s Color Nook, ViewSonic, Kobo Vox; 12 13 Makers of substitutes or other products that potential buyers might use instead of tablet such as: Laptops (Apple, IBM & Lenovo, Dell, Sony, Acer, etc.), Notebooks (HP and Lenovo – these devices are laptops with touch screens and styluses), Netbooks (Acer, Toshiba, HP – these devices are ultraportable laptops with flash memory and no hard disk storage which provides a smaller footprint), Smart phones (Apple, HTC, Dell, Samsung, Nokia, Motorola, Blackberry, Palm, etc. ); 14 Suppliers include: CPU and chip manufacturers such (Intel, Micron, and AMD), display manufacturers (such as Samsung and LG), and operating systems (like Google Android, Apple OS, and Nokia Symbian); Buyers include mostly Individual consumers and some retailers such as Amazon and Best Buy. Given the sheer number of companies that are now starting to produce tablets, threat of new entry at first glance appears high. 15 This is demonstrated in the ease at which companies such as HP, Lenovo, Sony and Acer developed tablets to compete with Apple’s iPad (although none of the others have been as successful.) Counter to initial appearances, threat to entry for a company that is just starting with a tablet as its first product is extremely low given that Apple already has over half of the tablet market share and enjoys both economies of scale and very high brand recognition. 16 Thus, a true analysis of barriers to entry to the tablet market requires a careful definition of the term “new entrant.” Consider that none of the recent 11 (accessed: October 25, 2011).;search-results-river (accessed: October 25, 2011). 13;search-results-river (accessed: October 25, 2011). 14 (accessed: October 25, 2011). 15 See note 11. 16 (accessed October 25, 2011). 12 5
  6. 6. entrants to the tablet market produced a tablet as a first product and all are companies that have been around for some time. The vast majority of recent entrants were already producing substitute products such as a laptops, e-readers, netbooks, or smart phones. For example, ViewSonic produced LCD displays and consumer electronics and Kobo was first an open source licensor of e-books and e-reader retailer. 17 Because such “new entrants” have already established themselves in a similar market, they can utilize the same component suppliers and infrastructure as used for the substitute product. Their outlay of capital for producing a tablet then likely resides in producing a hardware design that is compatible with a licensed mobile operating system (such as the open source mobile OS Android) and in getting users to adopt the product through marketing. Because the barrier to truly new entrants (those without substitute products) is extremely high and the barrier is significantly lower for entrants who already make substitute products, characterization of the threat of new entrants is likely to fall between the two and can best be described as moderate. Buyer power is low because tablets for the most part are sold directly to end-user consumers18 and there too many of them with diverse preferences to have a great deal of collective influence on the market. End-user consumers could experience cost associated with switching from and iPad to a Kindle Fire such as loss in compatibility of music files since Apple products, by default, use a proprietary mp4 format rather than standard mp3 formats. Conversion from one file format to another could cause some users enough pain not to switch, but this is likely to have little effect on overall buyer power. Moreover, If only Android based tablets are considered, there is little differentiation among these tablets and buyers have many 17 18 (accessed October 25, 2011). Worldwide and U.S. Media Tablet 2011-2015 Forecast Update. (IDC# 230896, October 2011). 6
  7. 7. choices. Consequently, demand is elastic and the prices of the Android devices have fallen as more Android based tablets are introduced. Apple is the outlier here, but it too has demonstrated that through product differentiation it can demand a higher price. Buyers are willing to pay more for an Apple tablet. There is some demand for tablets by other members in the value chain such as businesses for commercial use, but probably not enough to shift power to commercial buyers. IDC market research forecasts that the primary commercial use of tablets will be for education purposes and that sales of tablets to commercial users overall will grow modestly from 4.2% of the overall tablet market in 2010 to 14.3% in 2015. 19 Finally, tablets are sold through certain retailers. For example, both Amazon and Best Buy sell the Apple iPad2, but no retailer is selling the device at price that is different from that of Apple in its stores or online. This suggests limited buyer power even on the part of retailers. If we assume that suppliers to the PC industry, such as chip and CPU manufacturers, will also supply to the tablet market, then supplier power should be similar to the PC industry. There are few CPU suppliers, but the PC industry is a large buyer of CPUs reducing these suppliers’ power of the industry. Similarly there are few mobile operating systems such as Windows Mobile, Symbian, and Android, but the manufactures of these few are still in the process of trying to get their OS adopted by mobile devices makers. Once adopted, the OS does have a powerful affect on the tablet manufacturers’ final products. Weighing these factors, supplier power is likely best described as medium to low. Finally, threat of substitution is high as consumers can very easily switch to laptop or smart phone usage instead of using a tablet – they have choices and switching costs are 19 See note 18. 7
  8. 8. minimal. Research shows that consumers do not hold tablets out to be laptop replacements and because of the personal nature of tablets and consumers would be unlikely to use a work issued tablet for personal content consumption. 20 Apple recognizes this and touts its iPad as “new way of computing.” 21 Tablets will likely primarily be used as media consumption devices. Further, because the same media can be enjoyed on substitute devices such as laptops, tablet users will switch and use substitutes whenever and as much as they want. The foregoing factors all contribute to a very high competitive rivalry in the tablet market and extreme price wars. For example, Samsung dropped the price of its table to $299.00 where it was previously closer to the iPad’s $499.00 price tag. Furthermore, HP left the tablet market altogether and sold off its inventory at the clearance price of $99.00. The Kindle Fire’s $199.00 sale price places it well below the cost of Apple’s iPad2, which sells for $499.00 and is the current best seller in the tablet space.22 23 The Amazon Kindle Fire is well positioned push out the other Android tablets from the market at this price. It is even positioned to put some pressure on the sales of Apple iPad2 which at $499.00 is a luxury product that many tablet seekers cannot afford. Teece: Appropriability, Dominant Design, and Complementary Assets Appropriability in the tablet market is likely moderate to weak. The difficulty in protecting the design of the tablet hardware from imitators is a big factor in this. This is apparent in recent law suits between Apple and Samsung where Apple has accused Samsung of copying its iPad design. As for the dominant design, it is clearly the Apple iPad family. The shift 20 See note 18. (accessed October 25, 2011). 22 (accessed: October 1, 2011). 23 through_2014.html (accessed: October 1, 2011). 21 8
  9. 9. of focus from design to price among tablets was apparent as tablet makers reduced prices in order to keep up with Apple even before Amazon introduced the Kindle Fire. Given Apple’s brand, first mover advantage, operating system and continued focus on innovative design, Amazon’s Kindle Fire is unlikely to disrupt the iPad as the dominant design. It very well may become the dominant design among Android-based tablets, given its modified Android operating system, newly designed browser (Silk) and ease of access to Amazon content in the cloud. Moreover, Amazon’s strength lies in its complementary assets such as Amazon Prime (free shipping on merchandise and subscription based access to 10,000 movies and TV), Amazon Apps including Android Apps, and free, unlimited storage of Amazon media content in Amazon’s cloud. 24 These assets are tightly linked and integrated into the Kindle Fire. Each Kindle Fire ships with a year free subscription to Amazon Prime and users will pay to continue to access the content with their Kindle Fire. Thus, even if Amazon sells the Kindle Fire device at a loss, it can recoup its costs by selling its content. This is very likely the crux of Amazon’s market strategy. Amazon can easily leverage these complementary assets and use its low price content delivering device, the Kindle Fire, to compete with Apple and gain market share in the tablet space. Platform Strategy There is some potential for Amazon to create a platform especially given the strength of its complimentary assets. In his book Staying Power, Michael Cusumano describes a platform strategy as one that encourages innovators external to the company to adopt the company’s 24 (accessed September 30, 2011). 9
  10. 10. platform as their own and to design complementary innovations. 25 For example, Microsoft, Google, and more recently Facebook have each opened their application programming interfaces (APIs) to allow others to develop applications that interact with their products. 26 Apple did this too most notably with the iPod, iPhone, and iPad by leveraging iTunes. Each hardware product is made much more valuable with the external media content offered through iTunes. Moreover, Apple shares revenues with the content owners. Given declining prices of hardware and software products due to commoditization, Cusumano predicts that “the most valuable part of the Apple franchise might end up being iTunes.” He further predicts that “hardware products may simply become platforms to sell high-margin automated digital serves, including music and video content.” Amazon may not be able share its revenues with content providers to the same extent as Apple especially if, as some industry experts suggest, it loses money in manufacturing the KindleFire. 27 Amazon can and has, however, amassed a good amount of external content to offer on the device. A May 2010 NPD market research report indicates that while Apple’s iTunes led music retailers in 2009 with 28% of all U.S. music purchases, Amazon grew in both CD and digital music sales during the same period and tied with Walmart in second position with 12% of U.S. purchases. 28 Moreover, Apple’s iBook App which carries over 200,000 digital books already trails Amazon’s Kindle Fire at over one million books. 29 30 Given Cusumano’s predictions, Amazon’s ability to turn Amazon Prime and the 25 Cusumano, M.A. (2010). Staying Power: Six Enduring Principles for Managing Strategy & Innovation in an Uncertain World. (Oxford: Oxford University Press). Ch. 1. 26 See note 25. 27 (accessed October 25, 2011). 28 (accessed October 25, 2011). 29 (accessed October 25, 2011). 30 (accessed October 25, 2011). 10
  11. 11. Kindle Fire into platforms to deliver its vast array of digital media content could be a major advantage for it in the tablet market. The next few subsections will discuss some additional steps Amazon could take to become a platform. Scope and Relationship with Complementors Cusumano introduced four strategies called “levers” 31 for pursuing platform leadership, two of which are discussed here. These are scope of the firm (or what it makes in-house) and its relationships with external complementors. Amazon has defined its scope to enhance the performance and user experience with Kindle Fire. Instead of using the Android browser, it created its own browser for the Kindle Fire called Silk to allow delivery of flash content, higher speeds, and smoother integration with the device. Amazon Silk is one example of a complement that Amazon produced for its own platform. It also produces an app called Amazon Kindle for virtually every operating system of mobile device including Apple OS. The app allows users of other devices to purchase digital books available only on the Kindle. Apple allows the Amazon Kindle app because it increases the amount of books to which iPad and iPhone users have access. By becoming a platform for the delivery of its own creations and for others and by maintaining beneficial win-win relationships with complementors, Amazon is potentially one-step closer to creatng a platform. To become a platform leader, it will have to continue to create economic incentives for companies to add their complements to the ecosystem that it is building. Open v. Closed 31 See note 25. 11
  12. 12. The openness of the platform’s API is also important in a platform strategy. 32 The Kindle Fire smartly uses a modified version of the Android OS and controlled gateway to the Android App market. The former allows Amazon to control the distinctiveness of user interface look and feel and to keep it more tightly integrated with the hardware (namely memory and processing speed) features of the device. The latter allows Amazon to 1) vet Android Apps for smooth operability with its device, 2) readily offer the better Apps as a main feature in the UI, and 3) still provide users with a way to access any Android App through the Android market. While it is too early to tell how well the modified OS and controlled gateway will work technically and feel to a user, such a strategy is likely a smart one because it allows the Kindle Fire to be both open and somewhat closed at the same time. Amazon may have taken clues from Apple here as much of the iPad’s popularity can be attributed to tight integration of user interface and hardware. For example, many users in the iPad forum on comment on its smoothness and speed such as no lag time between typing and the letters appearing on screen. In a rush to get a tablet to market to compete with the iPad, many early Android tablets just ran with Android OS seemingly almost “out of the box” which offered little differentiation between these early products. This combined with a poorly reasoned attempt to match the market leader (Apple) in price is likely the reason for their often quick demise. Coring and Tipping Cusumano indicates that successful coring often requires resolution of “a major technical problem affecting a system-like product with industry platform potential.” 33 Although Amazon’s creation of its own mobile browser is excellent for its product strategy, it likely did 32 33 See note 25. See note 25. 12
  13. 13. not solve a major technical problem for the tablet industry. A search in the U.S. Patent and Trademark database for patent applications filed since 2009 revealed two Amazon patents that provide insight into the company’s R&D plans. The first patent solves a problem with electrical grounding of micro USB receptacles caused by the slim profile of certain devices like portable media players. 34 The second patent describes a method for annotating digital works such as digital books and music and sharing the annotations with others.35 The patents' subject matter indicates that Amazon is focused on creating better (perhaps slimmer) devices and new ways that users can interact with its content. Such innovations still may not solve an industry-wide problem, but if Amazon continues in this direction with R&D it could produce a “must-have” feature or application that could effectively tip the market in its favor. Network Externalities Finally, Amazon may increase its potential to become a platform by creating and leveraging indirect network effects like Apple did. Apple secured the largest digital music library for iTunes and then leveraged it to get consumers to use its devices. Once its devices had a critical mass of users, Apple could enjoy indirect network effects from app developers who created content for Apple’s platform primarily to get access to its many users. Amazon should position itself to do the same. It must first figure what type of content or must-have feature will bring a critical mass of users to its platform, then it can enjoy the indirect network effects of app developers, content providers, and advertisers bring as they develop for the Amazon platform. Additionally, Amazon should leverage whatever social media aspects it can build into the delivery of content on its platform since social media has proven itself as a vehicle 34 35 U.S. Patent No. 7901221. Filing date: Jan 9, 2009. U.S. Patent Publication No. US 2011/0184828 A1 13
  14. 14. for direct network effects. The patent for annotating digital medium and sharing ones’ annotations may be a starting point for this. Other ideas would be to leverage its rating and review system used on and gathering of information on user purchases to deliver unique user experiences. Summary and Predictions Kindle Fire is more than an e-reader. It is a tablet and tablets are for content consumption. It is clear that Amazon developed a clever vehicle in the Kindle Fire to deliver its content to the masses. While it may not be a dominant design, the Amazon Kindle Fire already has a few good things going for it -- namely Amazon’s Silk browser and its modification of the Android operating system to work seamlessly with delivering content to the Kindle Fire. It is also clear that among other Android-based tablet makers, Amazon as the world’s biggest online retailer is best positioned to compete with Apple in the U.S. tablet market. It is likely that the Kindle Fire may rid the tablet market of many other Android based tablets given its price point and massive amounts of content available to it through the Amazon Prime service. In this way Amazon Kindle Fire could become a major player in the tablet market, as this would split the U.S. tablet market between Apple iPad on the high price end and Amazon Kindle Fire as its affordable alternative. To effectively compete with Apple in this market, Amazon must pursue a platform strategy. Amazon must aggressively pursue collaborative relationships with complementors, maintain an open API and retain enough control over it to produce innovative must have features in its devices. By becoming a platform for the delivery of its own content and that of others, Amazon could compete with Apple and Google platforms. It is a lot and Amazon likely realizes that it is a lot. Perhaps this is the reason behind Amazon’s marketing the 14
  15. 15. Kindle Fire as an e-reader and not a tablet? We may never know. But if anyone can effectively compete with Apple in the tablet market, Amazon can. 15