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Amazon's New $50 Fire Tablet Is More Profitable Than You Might Think

By Jamal Carnette, CFA - Sep 23, 2015 at 9:00AM

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Amazon's tablet monetization strategy is different from those of Apple and most other tablet manufacturers. Here's why manufacturing a $50 tablet is smarter than making a $650 phone.

Amazon's new $50 Fire tablet. Note the cross-marketing for the Amazon Original Series, available as a part of its Amazon Prime bundle of services for $99 annually. Source: Amazon.com.

Amazon.com's (AMZN 5.73%) much-anticipated entrance into the smartphone market could best be described as a disaster. After the initial success of its Kindle tablets and e-readers, the company decided to bring its Fire Phone to market in an attempt to compete with high-end manufacturers Apple (AAPL 3.19%) and Samsung. But anticipation never quite led to strong sales, and the company recently exited the smartphone market and parted ways with a number of developers and engineers at its secretive Lab126 facility.

In the end, it seems the Fire Phone had two distinct disadvantages compared with its earlier Kindle Fire tablet success. The first was a decision to go high-end with the Fire Phone, as the company took an essentially new and undefined product and forced itself to compete with entrenched competitors with strong value propositions.

The second had to do with timing: The Kindle Tablet took advantage of a then-growing tablet market with few strong entrants by offering a low-cost option to Apple's iPads. And while the tablet market has noticeably cooled since Amazon's entrance, the company appears to have learned from the Fire Phone debacle.

A Fire tablet for $50
In an attempt to properly market Lab126's work, Amazon has recently introduced seven new Fire-branded devices. Included in the new lineup are three derivations of Amazon's Fire TV and four new tablet form factors. The most intriguing of the latter is Amazon's 7-inch entry-level Fire tablet, which Amazon is selling for $49.99. And in an apparent attempt to lure early holiday shoppers, the company is offering a "buy five, get the sixth for free" deal.

The Fire Phone was simply too expensive. Source: Amazon.com.

To bring a device to market at such a low cost, the company faced trade-offs. Most notably, the device has only 8GB of internal storage, although the company has a microSD card slot and allows users to store pictures and Amazon content on Amazon Cloud (more on this later). That said, it's good to see Amazon return to -- and even expand upon -- its low-cost, value-focused device strategy.

A consumption device
Unlike Apple, whose business model is monetizing its ecosystem (mostly) through high-margin device sales, Amazon's device strategy is the exact opposite. Essentially, Amazon seeks to monetize low-margin device sales with higher-margin ecosystem-driven transactions.

After bringing in new users with these bargain-basement tablets, Amazon will attempt to convert these users to its online marketplace and Amazon Prime service. And although Amazon Cloud will allow free storage for Amazon Fire content, the company charges for non-Fire photos and documents and will have a somewhat captive audience for upgrade sales.

Simply put, each new tablet is a potential Amazon Prime and increased marketplace shopping opportunity. Source: Amazon.com.

Essentially, the Fire tablet can best be thought of as a content and consumption device, with Amazon exclusively providing these products and services. And that's what makes Amazon's tablet so profitable -- not the actual sale itself, but the consumers it brings into Amazon's ecosystem.

With the Fire Phone, the company seemingly forgot about the aforementioned device monetization strategy and attempted to make money on the device itself. In the end, that ended poorly, as the company didn't sell enough units to expand its shopping base. It's good to see Bezos and Co. return to the strategy that made its Fire tablet so popular in the first place.

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