Kindle swot analysis

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©2014 by the Kellogg School of Management at Northwestern University. This case was developed with support from the June 2010 graduates of the Executive MBA Program (EMP-78). This case was prepared by Professor Mohanbir Sawhney and Joseph R. Owens, PhD, and Pallavi Goodman. Cases are developed solely as the basis for class discussion. Some facts in the case have been altered for classroom discussion purposes. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 847.491.5400 or e-mail cases@kellogg.northwestern.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing.

REVISED APRIL 25, 2014

MOHANBIR SAWHNEY, JOSEPH R. OWENS, AND PALLAVI GOODMAN 5-413-751

Kindle Fire: Amazon’s Heated Battle for the Tablet Market

In January 2012, as Jeff Bezos reflected on the early sales success of Amazon’s Kindle Fire device, he was oddly troubled. In a little over three months, Amazon had sold nearly 5 million Kindle Fires and had captured half of the non-Apple tablet market share. Worldwide sales of e- books since the introduction of the Kindle product line had grown from less than 1 percent of all books sold to 15 percent in 2012. But Bezos was not ready to call it a success yet.

As he anticipated Apple’s imminent announcement of the third-generation iPad and its entry into the textbook market, Bezos knew he would have to refine his strategy for the Kindle Fire. In addition to Apple, new entrants such as Samsung, Motorola, and Google were beginning to enter the tablet market. Furthermore, Amazon’s long-time competitor in the E Ink1–based e-readers, Barnes & Noble, was now selling a device nearly identical to the Kindle Fire called the Nook. Bezos had told investors that the Kindle Fire was the key to Amazon’s future in the hardware space. The markets seemed to agree. Amazon stock had dropped $40 since the launch of the Kindle Fire. Analysts were concerned about the Kindle product line’s economics because Amazon was selling the hardware at cost, betting that content and commerce revenues would make up for the hardware price subsidy.

Bezos was wrestling with several issues with the Kindle Fire strategy. How should Amazon modify the positioning of the device in response to the new entrants in the tablet market since its launch? What was the most promising target market for the Kindle Fire, and how should it be positioned against competing products? How could Amazon turn the sales success of the Kindle Fire into business success? Would revenues and profits from commerce and content justify selling the hardware at cost? What were the likely responses of the competition?

History of Amazon

In 1999 Amazon accomplished its founding mission of becoming the world’s largest online bookstore. Two years later it turned its first profit. By 2011, just fifteen years after the company

1 E Ink was a specific proprietary type of electronic paper manufactured by E Ink Corporation and commonly used in mobile devices such as e-readers.

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AMAZON’S KINDLE FIRE 5-413-751

2 KELLOGG SCHOOL OF MANAGEMENT

started out of Jeff Bezos’s 400-square-foot garage, Amazon had 25 million square feet of warehouse space, reported $50 billion in revenues, and controlled 10 percent of the North American e-commerce market (Exhibit 1 and Exhibit 2). Competitors struggled to transition from brick-and-mortar–based businesses, but Amazon had repeatedly been at the forefront in the e-commerce market. From its pioneering use of user-based reviews for product comparisons to its development of 1-Click® ordering on its website, Amazon had continued to innovate. The company’s marketplace for third-party vendors, introduced in 1999, helped grow its selection rapidly.

Bezos’s 2010 annual letter to shareholders touted that “invention is in [Amazon’s] DNA” and that the long-term interests of its shareholders were perfectly aligned with the needs and wants of its customers. This focus on the long-term, however, with repeated innovation and thrusts into new markets, had created tension with the short-term interests of investors. The $45 fall in stock value between Q3 2011 and mid-Q1 2012 illustrated this tension between Amazon’s visionary investments and public market investors (Exhibit 3). Investors were doubtful of the margins Amazon would attain on the new streams of revenue that it was betting would flow through its new devices.

When Amazon began offering its spare server computing power and storage space as a service in 2006, the cloud-based information technology services field was still nascent. Under the rapidly expanding Amazon Web Services (AWS) division, Amazon rolled out its Elastic Compute Cloud (EC2) platform and the Simple Storage Service (S3). AWS was expected to make up just 3 percent of Amazon’s revenues by 2012, but AWS revenues were expected to almost triple in the following three years. Amazon called its “service-oriented architecture” the “fundamental building abstraction” for all Amazon technologies.2

This focus on internal technology development had led to significant benefits for customers. Through the widely popular Amazon Prime express shipping subscription service, the company had built a customer base that was motivated to always shop at Amazon.com first before they went elsewhere. This service, which for an annual fee of $79 provided two-day express shipping on most items sold directly by Amazon, was made possible by the company’s logistics innovations. Through its marketplace partners, Amazon had outsourced its long-tail3 offerings while lowering its overhead. Without the technical advancements that made the logistical infrastructure run smoothly, customers would not have embraced these partners as a seamless extension of the Amazon brand. Additionally, the advanced algorithms driving the popular product recommendations that were integrated into every product page relied on sophisticated management of the underlying data infrastructure.

Amazon, since its founding, had a strong history of investing in emerging opportunities years ahead of revenues or profitability. It took the company six years to become profitable primarily because of its commitment to innovation. It was this commitment to innovation that drove Bezos to found the Lab126 hardware development group, which developed, in extreme secrecy, the future of e-commerce: the first successful e-reader, the Kindle.

2 Amazon.com, 2010 Letter to Shareholders. 3 Long tail, a term popularized by Chris Anderson in The Long Tail: Why the Future of Business Is Selling Less of More (New York: Hyperion, 2006), describes the retail strategy of selling a large number of unique items in relatively small quantities while selling fewer popular items in large quantities. Underpinning this strategy is the belief that the sum of many small markets is worth as much, if not more, than a few large markets.

Downloaded by Jessica Steiner on 10/20/2015. Nova Southeastern University, Dr. Russell Abratt, Fall 2015

5-413-751 AMAZON’S KINDLE FIRE

KELLOGG SCHOOL OF MANAGEMENT 3

The Emergence of E-Readers

Although the attractive prospect of reading long-form texts digitally had led to many e- readers coming to market over the years, e-books had remained a niche curiosity. The original “killer app,” the paper book, remained largely unchallenged until the advent of E Ink technology in 1997, which made reading possible in any light condition and with minimal power usage. The new crop of e-readers was born.

In 2007 the market leader was the Sony Reader. It could hold a library of up to one hundred books and was sold for $299–$399, depending on the accessory bundle. More than 10,000 titles were available for purchase at 75 to 85 percent of the retail price of a physical book. However, the Sony Reader was clunky to use and difficult to load content onto. Even the simple act of page-turning was slow and difficult to manage one-handed.

For more than a decade, various competitors offered iterations on this basic business model, and had sold a combined 400,000 units by the end of 2007. The Iliad by iRex, larger than the Sony Reader, was sold for $799 and could adequately display full-sized PDF files but had similar drawbacks in content acquisition for customers. Many early adopters also used the tiny screens of a variety of personal digital assistant devices such as the Palm III and V, as well as early- generation iPhones, to read e-books. Critics cited the slow and clunky operation and general poor usability of early e-readers as book replacements as well as the inadequate e-book distribution and promotion model as reasons that the e-book had yet to jump the chasm on the innovation curve.