Wednesday, September 28, 2011

Blog

Kindle Fire fires a pricing shot across the tablet sea

By Rodney H. Brown

The biggest takeaway from today’s launch announcement from Amazon Inc. of its first tablet, the Kindle Fire, is that price will win.

It’s not surprising that Amazon was the first to learn the painfully obvious lesson from the fire sale that happened when Hewlett-Packard Inc. abandoned its webOS-based TouchPad tablet and dropped the prices to $99 and $149 for the 16 gigabyte and 32GB versions, respectively. People want tablet computing, but people want cheap tablet computing more. So Amazon has priced its 7-inch Kindle Fire at $199.

True, you get no 3G cellular connectivity, just wi-fi. You also lose any kind of camera, and only get 8GB of memory, with no indication of any ability to enhance that with SD card storage. But you get a dual-core TI OMAP processor and screen resolution of 1024 x 768 pixels, the same as the 9.7 inch iPad 2. And for $200 less than the BlackBerry PlayBook, also a 7-inch tablet.

Of course, Amazon is losing money selling the Kindle Fire at $199. According to a number of online teardowns of the PlayBook, that device has a cost of materials of between $205 and $271, depending on which analysis you believe. The Kindle Fire, with similar specs, has to have a similar cost of parts. But Amazon knows that a loss leader will bring in revenue from other purchases, just like any retailer such as K-Mart has known from the days of the Blue-Light specials. In Amazon’s case, it is books and movies and music, all purchased conveniently through the Kindle Fire and stored conveniently in the Amazon Cloud service, and carrying a healthy profit margin.

Any tablet maker has to now accept this as the default pricing model. If you can’t afford to sell the device as a loss leader like a retailer such as Amazon can, make sure it has cellular connectivity and sell it subsidized through the wireless carriers like AT&T or Verizon. After all, with a subsidy, a 16GB iPhone 4 will run you $199 at Verizon Wireless. Prepare to pay between $450 and $600 for one not with a carrier’s price cut. This pricing model has worked since the introduction of the smartphone, and should for the tablet as well.

A $249, 3G-connected and carrier subsidized, 16GB basic tablet with an 8 inch or better display would dominate the market – or at least end the domination of the market by Apple Inc.’s iPads. Let’s hope that when Amazon’s next tablet, which GDGT.com founder Ryan Block says will come in Q1 of 2012 and be the tablet they really wanted all along, will continue to be priced under the same loss-leader model as the Kindle Fire, and be the market’s first, full-size, full-feature tablet under $300.