How Amazon Will Keep its Kindle Fire Sales Hot

By Stephanie Taylor Christensen  DEC 20, 2011 11:20 AM

Geo-targeted ads are expected to help make the tablet the second-best seller on the market.

 


Exact sales figures for the Amazon (AMZN) Kindle and Barnes & Noble (BKS) Nook have been lacking since the tablet's releases in 2007. Both companies allude to success. Amazon recently released a statement noting that “for the third week in a row, customers are purchasing well over one million Kindle devices per week.” 

In its financial results release for the second quarter of 2012, Barnes & Noble said “the consolidated Nook business across all of the company’s segments, including sales of digital content, device hardware and related accessories, increased 85% in the second quarter to $220 million.” The company also recently announced a partnership with Overstock.com (OSTK) , to make buying paid content for refurbished Nooks a seamless experience.
 
Information and analysis provider IHS (IHS) predicted in early December that the Amazon Kindle Fire would “take second place in the global media tablet business in the fourth quarter.” But once the buzz dies down, how will Amazon keep sales of the Kindle Fire hot -- and how can you transfer some of that heat to your own portfolio? Here’s what to know.
 
One major draw of the Kindle Fire is its price point of $199, compared to Barnes & Noble’s Nook Tablet, which is priced at $249. (The Color Nook is $199). While the iPad is still in a class of its own, it costs more than double what its competitors do, potentially pricing out a certain market segment that Amazon and Barnes & Noble can capture. Apple’s (AAPL) market defense strategy for a smaller tablet remains to be seen, though rumors are swirling that a smaller 7.85-inch iPad might be released before the end of 2012, in response to the success of the Kindle Fire, according to DigiTimes.
 
Amid all the competition, Amazon’s ultimate success might rest in its overall strategy, led by cross-sell, marketing, and leverage of its own purchasing power. Unlike many e-readers and tablet devices, which use a combination wireless module, the Kindle Fire uses a W-LAN module that represents a fast-growing trend in laptops and e-readers -- partly because the solution is less expensive to suppliers.

IHS' ISuppli market intelligence estimates that the Kindle Fire’s technology results in a materials savings to Amazon of about $1 per device. ISuppli notes the involvement of Amazon partner Texas Instruments (TXN), which it says is likely the sole source for the Kindle Fire’s major integrated circuit slots, speculating that every Kindle Fire sale represents about $24 in revenue for Texas Instruments.

The Amazon business model for its Kindle Fire is itself a bit unique from that of other tablet makers, many of which look to hardware sales to contribute to profits. Like smartphone providers AT&T (T) and Verizon (VZ), Amazon is taking a loss on the cost of the hardware it sells. But the long-term relationship with the consumer -- who will pay for the data used by the hardware -- is worth more than the loss.

The ongoing value to Amazon within the Kindle Fire segment is in both paid content and in spillover sales to Amazon.com’s other product segments. To promote the spread, Amazon is offering Kindle Fire buyers a free one-month membership to the Amazon Prime shipping service this holiday season, in addition to free access to movies and TV shows.

Based on a patent that was granted to Amazon on December 6, 2011, the next revenue stream for Amazon’s mobile products appears to be in targeted advertising driven by geolocator technology. As the patent abstract outlines, “a mobile device user's recent movements may be analyzed to determine trails or traffic patterns for device users among various locations.” Essentially, the patent allows Amazon to serve real-time ads on mobile devices (like Kindle Fire) that are targeted to your real-time movement. For example, if the Amazon mobile device recognizes that you are in a specific zip code, you could be served advertising or coupons for nearby stores, based on your movement patterns and past purchase preferences.
 
Though Christmas both present and future appear to be promising for the Kindle Fire, all the news hasn’t been positive. Because of the lower price point, the market segment for the Nook Tablet and Kindle Fire is increasingly appealing to those who intend to use it only for occasional entertainment purposes and share it with family members. As a result, Amazon Fire’s “one-click purchase” system has generated some security criticism. Though meant to increase convenience (and sales for Amazon), the feature allows users to buy paid content in a single click, charging their purchase to the credit card number that is stored in the Amazon account -- without adding an additional password for authorization.

But the feature doesn’t provide security backup if the Fire is stolen, nor does it prevent another user (like a child) from purchasing items. The Fire also shows recent activity on the home page screen -- which may concern users sharing the device. Though Amazon has not committed to a date, company representatives have released statements indicating a security software improvement can be expected in coming weeks.
No positions in stocks mentioned.

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