Amazon (NASDAQ:AMZN) unveiled the 7-inch Kindle Fire tablet on Wednesday for a $199 price tag, less than half of the lowest version of iPad version that comes for $499.  Some may believe that Kindle Fire’s attractive price could cause Apple’s (NASDAQ:AAPL) customers to defect to Amazon en masse, but we do not think so. Although we believe that Apple (NASDAQ:AAPL) will be safe from the price wars happening in the tablet world (Amazon’s Kindle Fire is Cheap But No iPad Killer), non-iPad players like Research in Motion’s (NASDAQ:RIMM), Motorola Mobility (NYSE:MMI) and Android based tablets are the biggest risk.
If we compare the recent quarterly results, RIM and Motorola Mobility could only ship 200,000 and 440,000 tablets respectively while Apple sold 9.25 million iPads. Hence we believe that these struggling players will suffer even more after Amazon’s launch of Kindle Fire as it further crowds the field and is a cheap option for those looking for something other than an iPad.
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Amazon’s Low Cost Strategy
Kindle Fire’s attractive price point of $199 will appeal to consumers looking for a low cost tablet device. Amazon can afford to charge less because it will make up the difference by selling books, movies and popular television shows through Amazon. Customers may also be more inclined to pay $79 a year for Amazon Prime, which gives them access to Amazon’s movie streaming service and free shipping, which in turn, encourages more shopping at Amazon’s website. With this sort of ecosystem in place, Amazon has much more to gain from ensuring meaningful penetration of its tablets by selling them cheaply.
Others Cannot Replicate Amazon’s Model
RIM PlayBook tablet has a similar design as Kindle Fire and is also a 7-inch tablet, but it does not have the similar content that it can sell to cover up the losses on the hardware. Hence, RIM would be forced to cut PlayBook prices to such levels that will make it compromise on already razor thin margins.
In our earlier note titled Retailers Cut Playbook Prices as Kindle Lights Fire for Cheaper Tablets, we discussed that although retailers have slashed PlayBook prices to $299, we believe that the price needs to be reduced even further if RIM wants to compete with Amazon.
Our $26 price estimate for RIM stock is about 20% above market price.Notes: