Amazon and the tablet market’s 7 / 10 split

September 6, 2012

Amazon is going where few have dared to tread, announcing a “full size” tablet that takes on Apple directly — and has the gall to be cheaper than the iPad. The tablet highway is littered with the remains of wannabe iPad killers from big hardware names — Motorola, Blackberry, Samsung. Even Google, whose Android software powers the Amazon tablets, didn’t bother to poke the Cupertino giant when it released its Nexus 7, choosing to make a tablet a smidge under two inches smaller than the iPad.

Amazon’s new large tablet, the 8.9-inch Fire HD, has a slightly smaller screen than the iPad’s 9.7 inches. But the entry-level price, announced today, is $300 — $200 less than the iPad equivalent, and only $100 more than the industry standard price for the new 7-inch interlopers, pioneered by Amazon.

Why bother overtly taking on Apple? Because Amazon can — and almost only Amazon can.

Apple is expected to sell 73 million iPads this year, about 61 percent of the global tablet market, Gartner Group estimates. There’s plenty of gold in them thar hills, even if you believe (as I do) that seven inches will become the dominant tablet size in the next year or so.

Amazon has pricing power that the Motorolas, BlackBerrys and Samsungs of the world don’t, accepting margins that Apple doesn’t (yet) have to contemplate. It’s convinced that the best way to mine the gold is by selling picks to the miners at a discount.

“How are these prices possible?” Bezos mused rhetorically near the end of a news conference announcing the new line of tablets. “We want to make money when people use our devices, not when they buy our devices.” (How things have changed. Remember that the original Kindle, released five years ago, was priced at $400, $100 more than the far-more-versatile Fire HD tablet announced today.)

Amazon’s tablets are positioned to sell plenty from the Amazon store that Kindle users always have with them — books, electronics and, increasingly, streaming media. For a big-picture venturist like Amazon CEO Jeff Bezos, it’s easy to justify making little or no money on hardware. It’s an instinct that’s also tempered by his penchant for the meticulous, and for making hardware that people actually crave. That description should remind you of a certain other tech visionary.

Speaking of Apple, it’s widely expected to enter the 7-inch tablet sweepstakes this year, uncharacteristically late to the game it invented and saw Amazon expand. Apple CEO Steve Jobs castigated the idea of this smaller size, but he was often against things before he was for ‘em.

Jobs made cracks about having to sandpaper your fingers to work a smaller keyboard and use pinch-zoom effectively, but his money quote is really about money (and to an extent, the user experience). “The reason we [won't] make a 7-inch tablet isn’t because we don’t want to hit [a lower] price point,” Jobs said during a now infamous 2010 earnings call. “It’s because we think the screen is too small to express the software. As a software-driven company, we think about the software strategies first.”

Why is Apple going small when big is still such a big business? Because it can sell it for less. Even Hewlett-Packard’s much-maligned TouchPad flew off the shelves when HP cleaned house with a price reduction to $100 (from $500).

The race to not-too-big, not-too-small, but just right, has been the story of every kind of computer. Desktops ruled for a couple of decades until laptops became powerful, and cheap, enough to replace them even among people who weren’t particularly mobile. Cellphones went from bricks to devices only slightly bigger than a book of matches and now back to handsize smartphones.

Amazon, which can drive this discussion like no other company because its thriving business model is about selling consumables and not hardware, is making a bet on 7-inch tablets. Moreover, it’s doubling down and suggesting that their price should be only marginally, not materially, higher than e-readers. The 8.9 HD version is just a sucker punch to make Apple’s blood boil. If Apple does indeed go small, both companies will sell more 7-inch models than any other before too long. If it doesn’t, then Amazon will champion this niche with very little competition.

The only thing standing in the way of Amazon’s domination of this new slice of the tablet pie is for Apple to start to meet Amazon on its terms. And that means, in advance of an iPad mini, there are some interesting decisions being made in Cupertino about price — assuming they don’t cede the battle before it starts.

PHOTO: Amazon CEO Jeff Bezos holds up the new Kindle Fire HD 7″ and Kindle Fire HD 8.9″ (L) during Amazon’s Kindle Fire event in Santa Monica, California, September 6, 2012. 

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