Amazon Gets Aggressivehttp://www.fool.com/investing/general/2013/03/14/amazon-gets-aggressive.aspx Evan Niu, CFA
March 14, 2013
Just yesterday, e-tail kingpin Amazon.com (NASDAQ: AMZN) decided to get even more aggressive than usual. The company permanently slashed the price of its 8.9-inch Kindle Fire HD tablet and expanded country availability.
The larger version of its popular tablet can now be had for just $269 for a Wi-Fi only model, while the LTE-equipped model now starts at just $399.
The change comes shortly after Amazon was offering a promotion last month with similar price points, but now the price changes are here to stay. Why the sudden change of heart?
A little white lie?
When Amazon offered the promotion last month, I instead hypothesized that the 8.9-inch Kindle Fire HD didn't sell too well over the holidays, and that the company was stuck with a glut of inventory that it needed to clear out. The 7-inch model is still likely doing well at the tempting $199 price point, but the original entry-level price point of $299 for an 8.9-inch Wi-Fi model put it squarely against Apple's (NASDAQ: AAPL) iPad Mini.
For an extra $30, the iPad Mini is pretty compelling since it has higher build quality and a more robust app ecosystem, even if the Kindle Fire HD features a much better display. That seems to be a trade-off that many consumers were willing to make, since the iPad Mini is off to a strong start and expected to sell upwards of 55 million units this year.
History does not repeat itself
That was a whole nine months after launch, and Amazon's component costs inevitably decreased over that time, yet it did not offer any type of price reductions. Fellow Fool Rick Munarriz entertained the idea of a $149 Kindle Fire after IHS iSuppli compiled a bill of materials for the Nexus 7, with the justified assumption that Amazon was facing a similar cost curve as Google.
Amazon's strategy has always been to sell hardware at or near cost, but it would be another three months until Amazon cut the first-generation model's price to $169 when it launched the second-generation models.
What's the difference? Why did Amazon feel it could wait three months last year before a competitive response but is now suddenly feeling generous? Weaker-than-expected sales are a possible explanation alongside inevitable cost reductions. If the shoe fits...
We don't sell and tell
Recipe for a price drop