Amazon’s announcement yesterday of their Kindle Fire tablet differentiates the tablet market in one discrete jump. Anticipated for months, the Fire does indeed compete head-to-head with the iPad, but not by mimicking its feature-rich and flexible platform. Amazon has made a strong Schumpeterian move to differentiate the market.
Amazon’s move follows a storied path in economics, the path of razor-razorblade. Gillette will make lots of money selling you razorblades, so it sells you the razor for a song, or even at a loss; the razor thus becomes a platform for selling you complementary razorblades. The fact that Shick razorblades won’t fit your razor due to strict complementarity makes this strategy possible, and profitable. Printers and ink cartridges are another example of complementary products where the firm can price low on the hardware to create the anticipated revenue flow from selling the ink cartridges.
In this instance Amazon is sensibly leveraging its comparative advantage, which is the breadth and depth of its media content, its extensive customer relationships, and its cloud storage services. It can charge a low price of $199 for the Fire (and the new lower-priced Kindle readers) because Amazon profits from your purchase and use of its content. The tablet is no longer a physical device; it is a media platform in a way that differs significantly from the iPad. The Fire is a 7-inch and not 10-inch device, it doesn’t have a camera, and it only has 8GB of storage, which indicates that Amazon expects their customers to use their already-extensive cloud storage services to stream media content rather than downloading it onto the device. In fact, this excellent Bloomberg article on Amazon’s move points out that Jeff Bezos is pitching the Fire as a service, not as a tablet.
Several commenters see in this product differentiation the death knell of the full-featured Android tablet, and predict that the market will bifurcate between the high-priced, feature-rich iPad and the bargain Fire. I’m not convinced; I think it will depend on how many customers (like me) want more features and capability, don’t want to rely so heavily on wi-fi streaming from cloud storage, and aren’t thrilled with Apple’s walled garden approach to digital rights.
Other good analyses of the Fire that touch on the points I raised above are from Erik Brynjolfsson and Joshua Gans at Digitopoly, a new (welcome!) economics blog focusing on the digital economy. Given the overlap in our interests in technology, I will read with great enthusiasm.