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"Confusing" Really Is the Perfect Word to Describe Amazon's Hardware Strategy

By Evan Niu, CFA - Sep 20, 2015 at 12:00PM

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Why doesn't Amazon push Prime more aggressively within its hardware devices?

When it comes to first-party hardware devices, (AMZN 1.73%) has quite the mixed record.

The Kindle was a massive success, and the Kindle Fire tablet soared in popularity initially (although unit sales have plunged recently, according to IDC). Amazon hasn't devoted all that much attention to its Fire tablets in recent years, although it did refresh the whole lineup last week without much fanfare. Fire Phone was an abject failure, and while Echo is interesting on a few levels it's unclear how well the Alexa-equipped speaker is actually selling. Fire TV products are compelling at their attractive price points, and Amazon is gaining share in streaming media devices.

But beyond all of that, it still feels like even when Amazon enjoys a hit new product, it's still missing out on some opportunities.

Amazon should be pushing Prime harder
That's what Macquarie Research analyst Ben Schachter thinks. The analyst put out a research note last week (via Business Insider) expressing frustration with Amazon's hardware strategy, saying that overall it's "confusing." Even when Amazon has a popular product on its hands, the company doesn't seem to capitalize very well on it, in part because it doesn't position Amazon Prime as aggressively as it could be.

Considering Amazon's long-standing model of selling at cost with the hopes of profiting on digital and physical sales later on, this is rather peculiar. Ideally, anyone that purchases an Amazon device will go on to load up said device with digital content and hopefully use that device as a shopping portal to order everything from rechargeable batteries to socks to flat screen TVs, but that isn't always the case. Amazon devices exec Dave Limp told BI that "a large percentage" of tablets are sold to non-Prime members. Limp didn't elaborate on how many customers don't convert to Prime.

If Prime isn't the differentiating factor, then what is?
Schachter's concerns are particularly potent when you factor in how intensely competitive the tablet market has become. Not only does Amazon have to compete with the iPad's dominance, but even within the Android camp there are quite a few strong contenders.

In fact, buying a regular Android device instead of Amazon's forked Android device is typically a better bet anyway, since regular Android devices have access to all of the apps in Google Play, while Fire tablets only have a very limited subset. From this perspective, you could argue that Kindle Fire tablets are inferior to all other Android devices, which have all come down in price since the original Fire's early success.

Prime should be the differentiating factor. To some extent it is, since Amazon features its content front and center on its hardware, but it's more of a gentle nudge than a convincing push. We already know that Prime members are considerably more valuable to Amazon over the long run by just about any metric you want to measure, and hardware should just be a delivery vector for Prime.

Schachter also notes that all of Amazon's major peers appear to be working on virtual or augmented reality technologies, but it doesn't appear that Amazon is doing likewise. Amazon was similarly late to the virtual assistant gain, but that's probably fine since virtual assistants haven't shaken things up all that much in recent years.

Push Prime more, Amazon. You know you want to.

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