Bringing the Spark Back to the Fire
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This summer Google (NASDAQ: GOOG) set the bar for Android tablets with their $199 Nexus 7 tablet. The Nexus 7 is packing some serious heat especially with such a modest price. Powering the seven inch tablet is an Nvidia 1.3 GHz quad-core Tegra 3 processor supplemented by a 416 MHz 12 core graphics processor and rounded off with 1GB of DDR3 Ram. The Nexus 7 has a 1.2 megapixel front facing camera capable of taking videos in 720p, a 1200 by 800 seven inch screen and a 4,325 mAh battery capable of powering the Nexus 7 for up to 8 hours. The 8GB version of the Nexus 7 is $199, and the 16GB model is $249. Google’s Nexus 7 is running the latest version of Android, 4.1 Jelly Bean and as it is a Nexus device it will get faster updates and better support than most Android devices. Google quickly sold out of the 8GB model and one estimate from Tech-thoughts.net had Nexus 7 sales hitting 8 million by the end of the year, though other estimates range between 3-4 million.
Prior to the launch of the Nexus 7 Amazon (NASDAQ: AMZN) reigned supreme in the $199 tablet space with their Kindle Fire tablet. The Fire has a dual-core 1 GHz processor, 512MB of Ram, 8GB of storage, a 1024 by 600 seven inch screen, a 4400 mAh battery and no cameras. Though the Kindle Fire is an Android device it is running a highly customized version of Android 2.3 Gingerbread. It has Amazon’s Appstore, the Amazon Silk web browser, Amazon’s cloud storage, Amazon’s cloud music service, The Amazon Kindle bookstore and Amazon’s video on demand service instead of the equivalent Google services that most Android devices ship with. The Android operating system has also been skinned by Amazon and looks significantly different from standard Android, the grid of icons and widgets is replaced with a carousel of content as the main screen. Amazon is very tight lipped when it comes to sales figures of their Kindle devices but they have stated repeatedly that the Kindle Fire is the bestselling item on Amazon.com. The Kindle Fire and the Nexus 7 are both being sold at or below cost, an initial cost estimate for building the Fire was $201 and a Google Exec stated that when all costs were accounted for there was no margin on the 8GB Nexus 7.
However Google proved with the Nexus 7 that you can make a much better tablet than the Fire for the same price. The Nexus 7 has better hardware and better software and came to the market less than a year after the Kindle Fire. Because of this Amazon is rumored to be launching a new Kindle Fire on September 6th. Amazon has sent out invitations to a press conference they will be holding in Santa Monica and they have launched new Kindles this time of year before. Amazon doesn’t hold very many press conferences like this one and when they do they are usually for a new Kindle.
There are also reports that Amazon will launch not only a refreshed seven inch Fire but a larger 10 inch Fire and maybe even a smartphone. An updated seven inch tablet is a definite; they need something better than what they have to compete against the Nexus 7. A 10 inch variant of the Fire isn’t too much of a stretch, it would compete with the iPad, larger Android tablets and upcoming Windows 8 tablets, and it could be cheaper than most of the competition. Google does not have a larger version of their Nexus 7 so Amazon could again play the low cost leader for larger tablets, as they did with the Kindle Fire before the Nexus 7 launched. Even if there are other larger tablets that are significantly cheaper than the iPad, none have the brand recognition that Amazon does.
However an Amazon Kindle smartphone does seem like a stretch. The deals Amazon would need in place with carriers if they want their smartphone to catch on, at least here in the US, would have resulted in more detailed leaks than the speculation we have seen as well as more FCC filings. Additionally smartphones are already subsidized here in the US so competing on price would probably result in Amazon losing significant money on every sale. Amazon would have to make a decent smartphone hardware and software wise, which would cost them several hundred dollars. Then they would have to have deals in place with carriers, who would have to be willing to subsidize the Amazon smartphones price down to something close to free. All of this would have to be combined with a heavy marketing campaign if the Amazon Smartphone is going to take market share away from the iPhone and Android. Smartphones are also sold after they have been replaced, the iPhone 4S and iPhone 4 will be sold at a lower price after the iPhone 5 is released. This means it would be even harder for Amazon to compete on price with an Amazon Smartphone. Windows Phone 8 may also provide greater competition in the coming year as Microsoft (NASDAQ: MSFT) re-launches their mobile strategy. There is the potential that Android handset will diversify into Windows Phone because of the intellectual property cloud hanging over Android.
With a new Kindle Fire, possible two, launching within a month Amazon should have them shipping in time for this holiday season. However even though we are less than one year from the original Fire’s launch the market is very different. Not only has the Nexus 7 added competition in the $199 space but Barnes & Noble has lowered the prices on the Nook Tablets to match the Fire and Nexus. In September Microsoft is launching Windows Phone 8 followed by Windows 8 in October. Windows 8 will herald Microsoft’s entrance into the tablet market with their Surface tablets and dozens of third party Windows 8 tablets from Microsoft’s hardware partners. Apple (NASDAQ: AAPL) also has an event in September at which they will most likely announce the iPhone 5, there is a slim chance they will also announce a smaller iPad. Should this come to pass it will have a lower price and compete more directly with smaller tablets from Amazon and Google.
All of this added competition and noise in the tablet market will result in a smaller slice of the pie for Amazon; however Gartner has projected that nearly 120 million tablets will be sold in 2012. Double the 60 million sold in 2011 so even with a smaller share of the pie Amazon should sell more tablets. With a full line of low priced tablets packing excellent hardware and software and a projected 182 million tablets being sold in 2013 the Fire will help Amazon become a consumer electronics and digital services company alongside their retail business.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.