How Amazon's Hardware-as-a-Service Strategy Is a Major Disruptor

Forget about the old "razor and blade" model. That time-tested business strategy dates back more than a century, but it's a new millennium now, so let's use a somewhat more elegant phrase that's been floating around for the past few years: Hardware-as-a-Service, or HaaS.

Surely tech investors are very familiar with Software-as-a-Service, or SaaS, by now, after salesforce.com (NYSE: CRM  ) made the term popular. Who could have imagined that a software company whose motto was "No Software" would be so successful?

When it comes to HaaS, Amazon.com (Nasdaq: AMZN  ) has taken the notion to the next level in more ways than one.

"Kindle Fire is a service"
When Jeff Bezos announced the e-tail giant's army of new Kindle Fire tablets to the world last week, the company's HaaS strategy was present every step of the way. One of the ironic messages during the presentation was when Bezos said that consumers "don't want gadgets anymore," right before he showed off a handful of new gadgets to buy. But he clarified:

They want services that improve over time. They want services that improve every day, every week, and every month. Kindle Fire is a service.

Source: The Verge. Emphasis added.

The device may look like just another nondescript tablet -- which it is -- but at its heart is Amazon's deeply engaging array of various content services. "Hardware is a critical part of the service," he added. It's rather telling that the first-generation Kindle Fire, which was about as boring as hardware gets with its uninspiring appearance and reminiscence of Research In Motion's PlayBook, dramatically outperformed Google (Nasdaq: GOOG  ) Android rivals like the Asus Transformer Prime that had bleeding-edge specs and sleek industrial design.

Of course, one contributing factor could easily be that the Kindle Fire was half the price of the Transformer Prime, but even still, you can't ignore the significance of Amazon's services that help drive unit sales of its tablet. Bezos even quoted Gizmodo's review of the device, written by Sam Biddle: "The Kindle Fire is a spigot, and Prime tastes delicious."

That's why it's so important for Amazon do whatever it takes to get the device into people's hands, be it selling it at cost or subsidizing its price with integrated ads that can be removed only with a $15 opt-out fee.

Near the end of the presentation, Bezos aptly summed it up: "We want to make money when people use our devices, not when they buy our devices."

The cloud is a service
You could also consider Amazon's Web Services, or AWS, division as a HaaS business. AWS is bundled into Amazon's generic "other" category, which was just 4.3% of revenue ($554 million) last quarter, so while the segment is relatively smaller it's still transforming the Internet as we know it.

Amazon's Elastic Cloud Compute, or EC2, hosting service lets companies tap scalable cloud power without needing to build up their own expensive infrastructure. AWS is one of the primary competitors to Rackspace Hosting (NYSE: RAX  ) and, in characteristic Amazon fashion, works aggressively to have the lowest prices. Last quarter saw the 20th time AWS has lowered its prices since it launched in 2006.

The entire division is another perfect embodiment of Amazon's HaaS strategy.

Two can play
Turning just about everything it can into a service is the key to Amazon's disruptive potential. Nowadays, the world of consumer electronics is a big platform game. The hardware will always matter to a certain extent, but Amazon is clearly looking to diminish its role in the value chain while emphasizing the service side of it where the company excels.

This is in stark contrast to Apple's (Nasdaq: AAPL  ) strategy, where the iPad maker generates profit primarily on the integrated hardware and software package, while breaking even on content services that are offered mostly to sell the device itself.

With both companies recently tapping fresh all-time highs, it seems that both strategies are working out just fine.

The Motley Fool has just launched premium ticker-specific research services that include a comprehensive report and free updates for a year. Sign up today for the one on Amazon and the one on Apple to always stay up to date.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Amazon.com, salesforce.com, and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Rackspace Hosting, Apple, salesforce.com, and Google, creating a bull call spread position in Apple, and shorting salesforce.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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