The mighty Amazon

In the world of technology, there’s hardly anything as dangerous as missing the boat on the next big thing. Take Microsoft and Nokia. The two behemoths dominated the high-tech universe in the 1990s, but only two months ago they were dubbed “two unpopular kids in high school with rich parents” by an analyst in the pages of the New York Times when they announced an alliance for a joint push into smartphones.

And there’s no shortage of criticism directed at the other tech titans scrambling now to catch up to Apple’s stream of life-changing devices, from the iPod to the iPhone to the iPad. Most who have tried to duplicate Apple’s success with trendy products have failed—think of hardware giants such as Motorola, Samsung and Sony. Google, which has had surprising success with its Android operating system for smartphones, and Research in Motion, an early innovator with its BlackBerry, are the rare exceptions so far. But there’s still another player that stands a chance of standing up to Apple and playing a big part in the way we’ll buy and consume digital entertainment in the future: Amazon.

The Seattle-based online retailer is perhaps best known to Canadians as a place to buy cheap books online. But increasingly, there are signs that it has much bigger ambitions. Amazon already has the world’s most popular digital book reader, the Kindle. Though the multi-purpose iPad tablet, with its Internet-browsing, video-playing and even video-phone capabilities, has outclassed e-readers, it hasn’t eroded their popularity. People still like the Kindle—a lot. Sales reached eight million last year, compared to 2.4 million in 2009, according to estimates. Some prefer its easy-on-the-eyes display, as opposed to the iPad’s backlit screen; others own both devices. Most of all, people appreciate the Kindle’s start price of US$139, compared to US$499 for the iPad 2.

Some analysts are now suggesting that if recent price cuts for the Kindle are any indication, Amazon could soon be virtually giving away its e-readers—all in a bid to lure more and more book lovers to buy digital books from its online store.
But Amazon is also in a unique position to build a cheaper tablet, notes a recent report by Forrester Research, a technology and market research company. “The mass market of consumers wants cheap tablets,” Sarah Rotman Epps, author of that report, wrote on the company’s blog, and Amazon has the assets to deliver precisely that. Just as the company is doing with the Kindle, Epps explains, it could sell the new tablet at or below cost, and make up for that by selling content for the device, such as music and videos. Amazon also has the distribution channel it would need to advertise and deliver the new tablet to millions of consumers through its popular website, writes Epps.

That strategy has also already worked for the Kindle, says Colin Gillis, a technology  analyst at BGC Partners. Amazon promoted the e-reader on its home page, and it became its bestselling product. “If you put a pet rock on their home page, it would probably sell a lot,” he quips, so why not do that with a tablet? And, he adds, Amazon is “definitely spending some money” right now—and many suspect the cash that’s not showing up in dividends is financing a new device—call it the super Kindle.
“There’s a lot of reason to believe that Amazon will come out with a full-feature tablet,” says Mark Tauschek, IT research director at Info-Tech Research Group. Just last week, Amazon opened its “Appstore” to sell applications for mobile devices like tablets. If that sounds familiar, it’s because it echoes Apple’s already popular “App Store.” Apple has filed a lawsuit stating that it has applied for copyright protection for the name “app store.”

Ultimately, Amazon may have little choice but to take on Apple. The company derives about 40 per cent of its business from sales of physical products like music CDs, movies and books, says BGC’s Gillis. That’s a revenue stream that will almost certainly wind down as people turn to downloadable or streaming versions of those media. Amazon has been working to become a digital media destination. But beyond books, it’s had mixed success so far. It lags in music, where it is “a very, very, very distant number two” after Apple, which sells music through its iTunes online store, says Russ Crupnick, vice-president and senior industry analyst at NPD, a market research firm. While Apple controls about 70 per cent of the market, Amazon has only around 10 per cent. And the company’s foray into downloadable video “had no impact at all,” says Crupnick. Amazon has tried to recreate the iTunes experience by providing consumers with both movies and TV series as well as a downloadable viewer with which to watch them, called the Unbox. But the whole thing got no traction in the U.S. Meanwhile, others, like Netflix, are busy making deals with Hollywood production companies in a push to revolutionize how people watch TV online.

In both music and video, what Apple has proven with its various i-gadgets is how useful it is to control the whole consumer experience, providing everything from content to the hardware on which to enjoy it. That explains why so far Amazon has triumphed in the realm of paperless books (and why it might want its own tablet to boost video sales). The company was ahead of most when it created the first e-reader with mass-market appeal, which was key in launching and developing the Amazon e-book market. Now, though, competition from Apple’s iPad and online iBooks store threatens to erode that stream of revenue as well, says Gillis at BGC.

Still, Apple’s incursion into digital books presents some advantages for Amazon. The wave of nearly 15 million iPad sales that Apple registered in 2010 also helped lift Kindle sales. It got people talking and thinking about the Kindle, says Carmi Levy, an independent technology analyst. And Amazon has also benefited from the fact that Apple users can buy and read Amazon’s books on their iPhone or iPad through a Kindle app—though Apple is moving to force buyers to use the Apple App Store for all their purchases, a system that will allow it to charge Amazon 30 per cent of the price of each book it sells there. Indeed, the move probably triggered Amazon’s decision to launch its own app store, experts say.

While Apple and Amazon’s worlds are colliding, consumers could be the big winners. If Amazon does produce its own tablet, the rivalry could trigger a price war, says Info-Tech’s Tauschek. On the other hand, the battle is already bringing much-needed diversity to the market. In the case of app stores, for example, Amazon’s entry represents a welcome alternative to the two models proposed by Apple and Google. The first meticulously vets apps, and is known for rejecting not only the ones that are technically flawed, but also those it deems “inappropriate,” such as porn—a moralistic stance that has irritated some. Google, on the other hand, left the doors of its Android Market wide open, creating a lack of oversight that recently enabled a producer of malicious apps to spread its malware to a quarter of a million users. Amazon, in contrast, has adopted a middle-of-the-road approach, curating content, but not to the degree that Apple does.

It may not succeed in toppling Apple, but Amazon’s ambition is at least speeding along the push to a digital world. So sit back, relax, and enjoy the clash of tech titans.