Amazon vs. Apple? No, it's Amazon and Apple vs. Everyone Else

To me, there's something magnificent about a well-executed product strategy.  Features and price and marketing all come together to delight a particular type of customer, and everyone wins.  The developer gets to sell a lot of products, and the users get something that improves their lives.

In the tablet market right now we have the privilege of watching two companies do great strategy, Apple and Amazon.  The press wants to label the Kindle Fire an iPad killer, but really it's the first sensible iPad counterpoint, a tablet device with its own unique design center and business model.  I don't think either one's going to kill the other, but I think together they're likely to chop up almost every other company that gets in their way.  In particular, that means Microsoft, RIM, and Google.

Let me start by talking about the new Kindle line, and then its likely impact on the market.


Two tablet paradigms

When Apple entered the tablet market, it asked "what can we do to redefine computing for tablets?"  It re-thought the user interface, application model, and an endless set of other details to create a unique new computing experience.  Apple has been rewarded with explosive sales growth.

With the Kindle line, Amazon asked a different question: "What can we do to redefine content distribution?"  The answer led it to a tablet computer, but one with very different hardware specs, user experience, and a vastly different business model.  None of the Kindles can match the iPad feature for feature (link), but they're not intended to.  At $499 and up, the iPad is a serious investment for most people, a lifestyle statement.  At $199 and down, the Kindles are impulse buys, the sort of thing people will get under Christmas trees or just buy for themselves because it looks neat and why the heck not?

Apple makes money from the sale of the iPad and its accessories, with a bit more coming from applications and content.  Given the breath-taking pricing for the Kindle line, Amazon will probably lose money on the hardware, or at best break even.  Its main profit will have to come from the sale of ebooks and movies and all sorts of other media products, plus some apps.  Those revenues may take years to fully develop, so Amazon is playing a very long game.  That's why I see Kindle as a strategy rather than just a product.  The company is betting that by subsidizing the Kindle now, it can dominate electronic media distribution for the indefinite future.

To keep iPad successful, Apple will need to continue to add wonderful new features to it, constantly refreshing the "magical" experience.  It will also continue to drive it into markets where tablet computing can make a big difference.  Apple is already making a huge push in education; some people tell me Apple has almost completely refocused its education salesforce on selling iPad to schools rather than Macs.  And there are plenty of reports of iPads moving into other verticals like aviation.

I'm sure the Kindle Fire will also show up in schools, but at heart the Kindle line is a Volkspad, priced to be the tablet thing that everyone eventually gets for basic content access.  Already about 40% of tablet owners also own e-readers according to Pew Research (link), and I expect that percentage to increase. 

Over time we might see Apple and Amazon compete more directly; it all depends on how much Apple is willing to subsidize hardware to get long-term revenue from content.  There is also potential for product line conflicts -- if Apple makes a lower-priced iPad, it might cannibalize iPhone sales.  In the past Apple has tried to keep its product lines separated in price, and it hasn't used the subsidy model.  This is a very interesting test for Apple's new CEO Tim Cook, and I'm glad Steve Jobs is still on the scene to advise him.

But in the meantime, it's very likely that iPad and Kindle will coexist nicely in the market.  The losers, I think, will be everyone else trying to play in the tablet space.


Hammer and Anvil

Companies trying to sell tablets against Apple were already suffering from slow sales.  Now instead of just being pounded by the iPad hammer, they've been undercut by the Kindle anvil.  For most of them, there's no place to go.  It's very hard for me to picture how somebody like Samsung is going to get market traction with its current tablet line, and I think the RIM PlayBook, due to its size, is going to suffer against Kindle Fire.  Between slow sales of its current phones and now the PlayBook's dwindling prospects, I hope RIM has been very very careful about managing its inventory of parts and finished devices.  Otherwise it could end up with a massive inventory writedown in a couple of quarters.

I will be very interested to see what Barnes & Noble does next with its Nook Color tablet.  Nook Color is similar in many ways to Kindle Fire, but B&N was reluctant to add a lot of Android apps because it was afraid people might buy it as a tablet rather than an e-reader.  Amazon appears to have overcome this fear, and there's a danger that B&N may have let its opportunity for leadership slip away.  On the other hand, if the next Nook Color has better features than Kindle Fire, Amazon's announcement might validate B&N's product and help it sell.

And then there's Microsoft, which has a beautiful-looking new Windows 8 tablet interface coming maybe late next year.  I'm excited, I hope it'll be wonderful, but I'm starting to wonder if any customers will still be available by the time it ships.

There is still plenty of room in the market for competing tablets, but they'll need to be aimed at different usages than the iPad and Kindle.  The biggest opportunity is for a stylus-equipped business productivity tool, an info pad (link).  But none of the major hardware companies are working on that; they seem to prefer to bash their brains out competing directly with the iPad.

You're not the licensee Droid is looking for.  Google's reaction to Kindle Fire speaks volumes about its goals for Android.  Kindle Fire is based on Android, and will run Android applications.  Android has been struggling in the tablet space, so you'd expect that Google would be delighted to have Amazon on the Android bandwagon.  But you'd be wrong.  Let's look at the press release Google issued today to welcome Amazon to the Android family.  Wait a minute, there is no press release.  Okay, so let's look on the Google blog.  Nothing at all.  Maybe a tweet from Andy Rubin?  Dead silence.

The problem is that Amazon is using Android as just an OS, not using the Google-branded services and application store that Google layers on top of the OS (link).  Although Google touted the openness of Android when it was first launched, the reality is that Google is using it as a Trojan horse to force its services onto hardware.  What Amazon did with Android is very threatening to Google, and so you're not likely to hear a lot of supportive words from them.

Silken dreams.  Speaking of threats to Google, we should discuss Amazon's new Silk browser.  It supposedly integrates Amazon Web Services with the browser to produce a faster, more efficient browsing experience on Kindle Fire.  Given the inefficiencies of web browsing over the wireless networks, this is potentially a compelling innovation that also might make it possible for future Amazon tablets to browse over 3G networks using less bandwidth than competing devices.  That might lock in a structural cost advantage for Amazon's tablets.

Kindle Fire today is a WiFi only device, but I'd be very surprised if we didn't see a 3G version sometime in 2012.

Silk potentially gives Amazon a very powerful position (link).  I can picture a couple of ways it could be used to disrupt the mobile market.  First, Amazon could tie the browser to its own content services and distribute it to other hardware vendors.  Basically, it could try to make Silk the content layer on Android that Google wants to be.  This could be a good business move for Amazon, since it's not making money from the hardware anyway.

Google would hate this passionately, but with the company already under antitrust scrutiny, it would have to respond very carefully. 

Amazon's other play could be to expand Silk into an enhanced platform for mobile web apps.  I've been waiting for someone to make web apps work properly on mobile, and many smart people have been getting more and more depressed about the lack of leadership in mobile web APIs (link).  Amazon has the expertise and the incentive to fill that gap.  The question is whether it wants to. I think it should, I hope it will.  If it does, Silk could become the platform for the next great generation of applications, giving Amazon enormous power in the computing market.

This will be a fun space to watch. Apple and Google will both feel pressure to respond to Silk to prevent Amazon from getting a decisive lead in mobile web apps.  Maybe just the threat of Silk will be enough to finally drive some innovation in the mobile web platform.

I may be indulging in wishful thinking, but there's a possibility that ten years from now we'll look back on Silk as the single most important thing in today's announcement.

Or not.  It depends on what Amazon's agenda is, and they're not telling.

Slouching toward Bethlehem.  One revolution I'm sure is coming is the remaking of the print publishing industry.  As I've said before (link), once about 20% of the reading public has electronic devices, an established author can make more money bypassing print and selling direct through e-readers.  I think the new Kindle line, and especially the entry-level Kindles at $99 and below, will finally push us past the 20% threshold.  It will take a couple of years to play out, but this will force the long-awaited restructuring, or destruction, of the traditional book publishing industry.

(Note:  I wrote this before I read John Gruber's take on the new Kindles.  He and I are thinking along similar lines. link )