Exclusive update by Joe Magyer
Amazon hit a home run with the launch of its new slate of Kindle e-readers and tablets on Thursday. The revamped and extended line includes new versions of its Kindle e-readers along with three tablets: an updated Kindle Fire, two sizes of a souped-up Kindle Fire HD, and a 8.9-inch Kindle Fire HD with 4G capabilities built to compete head-to-head with Apple's iPad. Each product Amazon CEO Jeff Bezos delightfully unveiled was sleeker, faster, crisper, and more polished than previous iterations. And cheaper. Much cheaper.
A tablet price war is upon us, which is great for consumers, good for Amazon, and bad forApple. As Jeff Bezos put it, "We want to make money when people use our devices, not when they buy our devices." Amazon's tactic of selling Kindles as the razor in the razor-and-razorblade model allows it to aggressively undercut competitors – namely Apple – on price, because they make up the forgone profits on the hardware with long-tail sales of books, media, and other assorted Amazon goodies.
Cost-conscious shoppers will gravitate to Kindles in droves this fall. The entry-level Kindle Fire is not only faster, sharper, and boasting better battery life than its initial predecessor, but Amazon has slashed the price from $199 to $159. A parent with a $500 budget on holiday gifts might struggle to justify the price of one iPad for $499 when they could buy 3 Kindle Fires with lunch money to spare. Amazon's line is significantly cheaper than Apple's across the board and puts major pressure on the rumored launch of Apple's iPad Mini this fall.
But enough about Apple. Amazon proved that it is a force to be reckoned with in tablets, as both an innovator and champion of lower prices. Kindles will sell like hotcakes over the next couple of quarters, which will boost sales but dampen gross margins. And that's great by me. Amazon is trading smaller profits today for bigger profits tomorrow — exactly the mind-set we Fools love to see. I'll hold off on updating my valuation until after third quarter results are posted and we have a sense of how the new Kindles are selling, but Amazon shares remain a great long-term holding even with their unconventionally nosebleed valuation.
