I've spent an awful lot of time exposing some ugly truths about the sorry state of the Google
(GOOG) Android tablet market. In fact, I believe this is some of the best work I've done here at Minyanville. (Please read Why the Google Android Tablet Market Is Far Weaker Than It Seems
and IDC's 1% Tablet Forecast Increase Masks a Huge Decrease in Expectations for Google Android.
And unfortunately, things are about to get worse, courtesy of Amazon's
(AMZN) new Kindle Fire HD.
Some quick background: Upon its release in November 2011, the Kindle Fire became one of the most popular Android tablets on the market. According to Amazon, it took 22% of the US tablet market during its run on the market -- a number with which I generally agree, though Amazon still hasn't bothered to call me to discuss it. (See: Did Amazon Fudge Its 22% Market Share Number for the Kindle Fire?
Now, it's important to note that the Kindle Fire performed much more strongly out of the gate. According to IDC, its global market share was as follows:
Q4 2011: 17%
Q1 2012: 4%
Q2 2012: 5%
Now why did it decline? First, Barnes & Noble (BKS) released the competing Nook Tablet in February 2012, providing direct competition at the $199 price point.
Secondly, Apple's (AAPL) new iPad was a major game-changer with its spectacular screen, and that drew a lot of new folks into the tablet market.
However, I think that the Kindle Fire HD is going to do a whole lot better.
My rationale is simple: Amazon's going all-in on low pricing that no tablet maker is likely willing to, or capable of matching.
There are now four Kindle Fire models on the market.
The plain-Jane Kindle Fire model with 8 GB of memory and a 7-inch screen goes for $159, which is $40 cheaper than the Google Nexus 7.
The Kindle Fire HD, with a 7-inch screen and 16 GB of memory, is $199, the same price as the 8 GB Nexus 7. Meanwhile, the Samsung Galaxy Tab 2, with a 7-inch screen and 8 GB of memory, is $249.
But here's where it gets really interesting.
The bigger Kindle Fire HD with an 8.9-inch screen and 32 GB of memory is just $299. The cheapest iPad and Galaxy Note models are $499 and have half the memory!
Plus, the 32 GB 8.9-inch Kindle Fire HD with 4G/LE wireless is just $499, while the basic 4G iPad is $629 and again, has half the storage space.
This is a new paradigm in tablet pricing -- Amazon is now the Wal-Mart (WMT) of the industry!
And why would they do this?
Well, it's simple.
Amazon is vertically integrated, and the Kindle product line (both the e-readers and the tablets) is not a profit center in and of itself -- the devices are designed to push Amazon's digital content offerings and its overall storefront.
Think about it.
The Kindle Fire line runs a highly-customized version of Android and this is a big, big problem for Android.
First and foremost, it gets people used to using Amazon's customized interface instead of Android itself. Why do so many people still use Windows? Because they're used to it.
Secondly, the devices funnel end users not to the Google Play store, but to Amazon itself.
From a broader industry perspective, Amazon's bargain-basement pricing lowers the floor for what people can expect to pay for a high-quality, well-spec'd tablet. This is awful for companies like Samsung trying to make a buck on a tablet in the $199 to $249 price range. And it makes things really tough for Microsoft (MSFT), which doesn't even have a horse in the running yet.
Apple might lose a few customers at the margins. But on average, the type of person who is willing to shell out $499 for an iPad isn't price shopping. iPad buyers are paying for stunning design, ease-of-use, easy integration with other Apple products, and sexy branding.
In fact, I think that Amazon just did Apple a big favor, because it just threw the rest of the industry -- and particularly Android -- into a greater state of flux.
In the vast majority of cases, Apple buyers do not measure gigabytes and megahertz per dollar -- that's for the Android/Windows crowd that is forced to choose between multiple commodity-type brands. And that's why Apple has sky-high margins.
Amazon is the Wal-Mart of tablets. And Apple is the Tiffany's
(TIF). Both strategies can work. I just feel bad for whoever's caught in the middle.
Position in AAPL
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