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Amazon: iPad Killer

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Yesterday I discussed the astounding success of Hewlett-Packard's (NYSE: HPQ  ) one-day, "350,000" sale of TouchPad tablet computers, and how it proved people will buy tablets-that-are-not-iPads ... if the price is right.

There are, however, two problems with that game plan. First, the price HP chose to move its merchandise was far too low for the company to have any chance of earning a profit on the hardware. Second, it was essentially a one-day sale. Announcing the liquidation of its tablet inventories in preparation for exiting the computer biz, HP basically "emptied its clip." It sold off its merchandise in one quick explosion of deal-making. After another batch hits, HP should be ready to leave the tablet market.

If anyone's going to challenge Apple's (Nasdaq: AAPL  ) dominance in the tablet PC market, though, they're going to have to take a less ad hoc approach to tablet production. They're going to have to make mongo sales, and keep on making sales until they've developed critical mass, attracted the attention of app designers, and achieved production scale to permit those mongo sales.

In short, to be a contender, a company will have to  develop a true ecosystem to rival Apple's.

Hewlett can't do it. (Nasdaq: AMZN  ) can.

Bezos, Bezos, he's our man! If he can't do it ...
That, at least, is the theory put forth in a new report from Forrester Research this week. According to Forrester, if Amazon can just do two things right, it can succeed where HP almost did. It can create the kind of iPad killer that Dell (Nasdaq: DELL  ) , Research In Motion (Nasdaq: RIMM  ) , Hewlett-Packard, and Cisco (Nasdaq: CSCO  ) have all tried to create -- and thus far have failed. (Speaking of, where's the Cius already, Cisco?)

As Forrester sees it, success here requires Amazon to do two things right. First, it must price its tablet "significantly" below iPad's entry-level price. Second, it must manufacture its tablets in sufficient quantity (hint: more than 350,000 units) to satisfy demand and feed a growing ecosystem. If Amazon can scale up quickly, and price its product aggressively, the analyst believes Amazon could sell 3 to 5 million of these iPad-killers in its first three months, "Easily."

Easy rider
Of course, it's not quite as easy as Forrester makes it sound. We need to attach a rider to this particular promise. The big problem with Apple's rivals to date is that they've tried to walk and chew gum at the same time. They've tried to both gain scale in tablet sales and at the same time price their products at a level where they can earn a profit. As I argued yesterday, and as HP's TouchPad fire sale last week demonstrated, that's not necessarily the best plan.

What Amazon really needs to do is "sell hardware at a loss, as it did with the Kindle." Avers Forrester, if Amazon can do that, it will become a truly "nasty competitor" to a suddenly Jobs-less Apple. But that's just the point: In the Kindle, Amazon has already demonstrated a willingness to sell hardware at either a loss or very slim margins in anticipation of making its profits farther down the road, selling digital "ones and zeros" to run on that hardware.

If you've visited the Kindle store lately, you know that Amazon is currently hawking 6-inch Kindle e-readers for anywhere from $189 all the way down to $114 apiece. But according to tech data cruncher iSuppli, the components alone on the second generation Kindle cost not less than $185. There's a good chance Amazon cuts costs in its newest Kindle, but these price points leave little to no room for margins. Not to put too fine a point on it, Amazon is selling Kindle for a loss, and making its profits on the aftermarket. It's doing precisely what Forrester says it will need to do to build a great tablet computer and steal Apple's market share.

Foolish final thought
Forrester sees a path forward for Amazon to tackle the Cupertino Colossus -- and I agree with its reasoning. But then Forrester goes one step further.

According to Forrester, once Amazon has begun selling tablet PCs in bulk, Google's (Nasdaq: GOOG  ) Honeycomb tablet OS "will suddenly appear much more attractive to developers who have taken a wait-and-see approach" on it so far. Once developers begin coding for Honeycomb, the supply of apps for devices running the software should explode from their current level of just 300 apps, thus creating a true alternative ecosystem to finally challenge the iEmpire on tablets.

This, Fools, is when things should really get interesting. And it's why everyone other than Apple should be rooting for Amazon to succeed.

Will succeed? Add it to your Watchlist and find out.

Fool contributor Rich Smith owns shares of Google. The Motley Fool owns shares of Google, Apple, and Research In Motion. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Dell, Apple, Google,, and Cisco System, as well as creating a bull call spread position in Apple.  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.

Read/Post Comments (13) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2011, at 9:46 PM, candrsn wrote:

    I typically comment on the iPad market and the tablet market on technical blogs. However, I have to put in my two cent's worth here, as well.

    The trouble with the tablet market has not been the pricing so much as it has been the lack of apps on the Android platform; and, frankly, a lack of quality and performance in most Android tablets. Yes, the HP TouchPad did sell very well at $99, but its first problem was the lack of an ecosystem and market presence -app and media-wise- in webOS.

    The other thing is that Apple has a huge following and a good reputation, and this lead many to go and purchase an iPad, as well as an iPod in earlier years. On the whole iPod/iTunes thing - that is worth mentioning here as well: The iPod/iTunes ecosystem had 10+ years to build in the minds of consumers and the iPad was a natural extension of that ecosystem (as was the iPhone and newer Macs). Amazon simply does not have as great a history here with the Kindle.

    As for profit margins: Many Android buyers go for the 'free' content and/or content from their computers that they may side-load into the tablet, phone, etc. Amazon may need to lock down their tablet to prevent this sort thing (so that they can actually sell content), so then what is the customer left with but a locked down system like Apple's - but with LESS apps! So, either Amazon leaves the tablet 'open' or they lock it down to make up their loss on the hardware.

    Honestly, I do not see this going much further than the Nook Color - and you can take that to the bank.

  • Report this Comment On August 31, 2011, at 9:53 PM, candrsn wrote:

    Oh, one more thing: the Amazon tablet will have ZERO presence in education where Apple really gets the chance to shine to kids of would-be customers. Did Forrester think about that?

  • Report this Comment On August 31, 2011, at 9:54 PM, HawaiiHaze wrote:

    This article talks about the creation of new apps as the key to rounding out the "eco-system" for Android / Kindle. However, it's not the apps by themselves that make for Apple's compelling eco-system. It's the iPhone, iPod, iMac, Apple TV and who-knows-what in the future that is the eco-system. With my iPad and iPod Touch, I can control my Apple TV, access content on my iMac and much more. Just having more apps for Kindle won't replace the hardware eco-system Apple has, so until Amazon is ready to tackle those other components, Kindle will not become an "iPad killer".

  • Report this Comment On August 31, 2011, at 10:02 PM, dmvcal wrote:

    Forrester? They, my man, are NOT credible. How does HP's cleaning out the attic confirm pent-up non-iPad tablet demand? (As a viable business). Oh, I get it: give it a way & make it up on volume...RIGHT. Bet Bezos is way too intelligent to go up against iPad -- the guy is as smart as can be -- bet he'll mine segment that does NOT confront iPad. And, he'll do it at a profit.

  • Report this Comment On August 31, 2011, at 10:37 PM, skippywonder wrote:

    We're not just talking about selling a tablet at a loss. If the Amazon Tablet in question is similar in features and design to the iPad, the loss would be huge. The Touch is being sold at about a $300 loss. Imagine how many books and apps Amazon would have to sell to make taking a $300 hit on every tablet reasonable.

    They could price the unit at less of a loss, of course. But the HP demonstration did not say anything about whether a tablet that's $75 or $100 cheaper than the iPad would be compelling. The price of Amazon's tablet would need to be dirt cheap to do what HP is doing now. And that means a huge deficit to make up in book sales just to get back to even. Dumb move and I bet Amazon knows this.

  • Report this Comment On September 01, 2011, at 4:41 AM, RetoHartinger wrote:

    Why should Amazon want to sell Kindle at loss to sell books later if they can sell books on the iPad without loss? And how big can this loss be to make a profit on books later?

  • Report this Comment On September 01, 2011, at 5:19 AM, DRHBio wrote:

    The reason that I have not bought an iPad (and that my brother, an IT professional, handed his back before he left the Apple shop) is the ludicrous difficulty of data transfer. I wanted an HP because it has a standard USB connection. It now seems that I cannot have one. But having had the data transfer issue with an iPhone 3GS I have no intention of landing myself with an inaccessible tablet. For me it is not price, it is practicality. To pitch competition entirely on price misses this important point.

  • Report this Comment On September 01, 2011, at 9:40 AM, czrnk wrote:

    The difference between Amazon and the rest of the iPad competitors is that their Management Team and Board are smart and patient and, more importantly, their INVESTORS are smart and patient.

  • Report this Comment On September 01, 2011, at 11:49 AM, 1984macman wrote:

    I've seen some foolish Foolish articles before, but this one takes the cake! Talk about building an argument on nothing but sheer guess-work, with a healthy dose of fantasy thrown in on top!

    First and foremost, Amazon is not going to have a direct competitor to the iPad this year. Word is that they'll be coming out with a 7" device, and the 10" device won't appear until first quarter of 2012.

    Second, Apple is reportedly selling between 6 and 7 million iPads a month. And you idiots are suggesting that Amazon sell their tablets at a loss??? That's like walking in front of a freight train traveling at full speed and expecting it to stop for you! Amazon would NEVER get their investment back!

    I could go on, but I'll lot others have a chance to pin the tail on the Foolish donkey....

  • Report this Comment On September 01, 2011, at 2:09 PM, daillengineer wrote:

    To the guys who said it's impractical to transfer data to the iPad: the cord for the iPad/iPhone/iPod has a USB terminal at the end of it. Duh? Your IT professional brother handed his back at the Apple store while entire corporate IT departments deploy iPads to employees. Thanks for trolling, fool.

  • Report this Comment On September 01, 2011, at 4:16 PM, twiddler69 wrote:

    It's too late for Amazon! The firesale from HP has pretty much saturated the market with tablets along side iPad owners and other tablet makers. By the time Amazon releases their new tablet, there will be no buyers left.

  • Report this Comment On September 01, 2011, at 8:06 PM, softgen wrote:

    2012 Apply's Ipad....will be killed by Ipad

  • Report this Comment On September 02, 2011, at 10:21 PM, baldheadeddork wrote:

    @candrsn: "the Amazon tablet will have ZERO presence in education where Apple really gets the chance to shine to kids of would-be customers. Did Forrester think about that?"

    Probably not, but I bet it's not because they're stupid. If anyone at Forrester over the age of 45 had a hand in this report they've heard this song and dance before.

    Apple itself tried to push this reasoning when Steve Jobs pushed to get Macs in every classroom starting back in the mid 80's. They got the sales to schools, Apple dominated education sales until the beginning of the last decade. But nearly all of those early users (and their parents) failed to turn into Mac buyers. For all the effort they put into seeding this future generation of customers, OS-X is still playing limbo with a 10% market share.

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