So Where Are the Profits?

November 22nd, 2011

When HP released the failed TouchPad for the same price as the iPad, few lined up to buy any, and no wonder. It was clearly rushed to market with an unfinished operating system, a severe lack of apps, and no real-world advantages over any of the existing tablets. However, after abruptly discontinuing the product, and putting the WebOS on the chopping block or hoping to pawn it off on some unsuspecting handset maker, HP had a fire sale. For $99, you could get your own TouchPad, while they lasted, and suddenly customers swooped in to get one.

Indeed, when my son visited us from his home in Madrid in August, one of his friends wrote him and asked him to try to get a TouchPad. He was too late to find one at the local stores, and not inclined to waste a lot of extra time in hunt for one online. It’s not that the TouchPad was such a big deal, other than a now-cheap curiosity.

With the $200 Kindle Fire, parts tear-downs indicate that Amazon is taking a small bath on every unit sold. But that’s not their game plan. They expect you to buy e-books and other products, hoping to make up the difference. If they attract enough new business to compensate, it’s a win. If not, the Fire might be an endangered species.

Right now, the Fire, assuming the reports of an unfinished and somewhat buggy OS doesn’t put off potential customers, stands to benefit by being a potentially credible and far cheaper alternative to the iPad. If you cannot afford a minimum price of $499 (or somewhat less for a refurbished product if you can find one), and you absolutely must have a tablet, no harm in getting a Fire, right?

Now selling a featured product at a loss is not a new marketing gimmick. Gillette does that with razors. If you’re not buying disposables, you have to feed the thing with new blades every so often, and suddenly the profit margins are high, high enough to compensate for a loss leader.

The biggest offenders in the expensive replaceables or consumables space are printer makers. You can get a pretty decent inkjet model for next to nothing. But replace the ink a few times, and the costs swell to levels far beyond the original cost of the product. Sure, some companies promise more pages from a given ink supply at a lower price of admission, but if you haven’t succumbed to that alleged paperless revolution, prepare to pay and continue paying until the thing wears out. Then it’s cheaper to buy a new one.

Apple is in a different business. Every single product is meant to be sold at a decent profit. Smart inventory management, and reported preorders for loads of components, results in keeping the costs as low as possible. Indeed, the iPad came in at hundreds of dollars less than those so-called analysts expected, sending the competition scrambling to keep up. Throwing the conventional wisdom that Apple sells gear at a luxury price on its ear, the iPad’s popularity continues to soar. Indeed, if you combine iPad sales with Mac sales, Apple is poised to become the number one PC maker on the planet in 2012. At the same time, Mac sales, by themselves, continue to outpace the growth rate of most PC makers, even in that so-called post-PC era.

Yes, Apple sells you apps for their mobile gadgets too, but those gadgets are perfectly functional if you never download any, or if you restrict yourself to free apps. Yes, Apple derives profits from their 30% share of app and e-book sales, but the margins aren’t very high. They’re in the hardware business.

For Amazon, their loss-leader scheme may pay off, despite the Fire’s acknowledged bugs. Early indications are that Amazon might move a pretty decent number of them this holiday season. One particular target will be customers who might appreciate a seven-inch tablet over a 9.7-inch tablet simply because of the greater portability. Other customers simply cannot afford an iPad, and find the existing lineup of Android-based gear to be totally unacceptable. If they are existing Amazon customers, the Fire may be a great choice for e-books and video playback. Or at least that’s the theory, because I’ve read reviews that point to fuzzy text and ragged video playback. If Amazon can’t deliver a software update to release those 1.0 bugs, they might be in trouble on the long haul.

At least the traditional Kindle, within its feature contraints, continues to fare well anyway. Even though performance is tepid, the E Ink display is great for reading a regular black and white books. In fact, it’s considered superior to the text on iPad, despite the fact that the page turning process is slow. With customer patience, and a cheap price, the Kindle has literally changed the publishing world. These days, it’s said that more people buy e-books than the printed versions. To Amazon, it doesn’t matter. They will continue to sell both. What’s more, the very existence of the Android-based Kindle Fire may put the nail in the coffin as far as other Android tablets are concerned, at least for this holiday season.

Whether the Amazon Fire will eat into iPad sales is an open question. Some surveys show a small possible loss, but that won’t be known until the holiday quarter numbers are tallied, although the impact may be obvious if store inventories of iPads seem to swell.

But the onus is still on Amazon to make sure their new tablet can deliver a smooth, elegant user experience for its low price, and you know that old saw about bad first impressions.

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