What Amazon’s new Kindle line means for Apple, Netflix and online media

1. Summary

On Wednesday, Amazon introduced color screens and touchscreens to its Android-powered Kindle lineup. At $199, the color Fire model is aggressively priced, and the low-end products set a new tablet entry point at $79. With these offerings, Amazon brings a combination of three critical elements to the tablet marketplace that no company — not even Apple — has matched: a full product line, a powerful business ecosystem and a unique combination of revenue streams. This research note examines the prospects for Amazon’s new product line — from its effect on book publishers to how it might compete with Netflix and whether it actually competes head-to-head with Apple’s iPad.

From a hardware product perspective, Amazon has a full lineup of Kindle devices differentiated by features and price points but always optimized for media consumption rather than aimed at general-purpose computing. Ironically, this consumer electronics product line approach comes from a retailer. At the same time, and without its controlling the operating system, Amazon is building a platform that makes a more logical use of a thin-client-to-cloud architecture than Google’s Chromebook.

Amazon may not have the variety in its ecosystem that Apple does, but it provides a rich environment for itself and its partners. Amazon’s existing retail customer relationships are an enticement for publishers, studios and record labels, and its data on customer tastes and buying habits will aid in promotions and merchandising. The Amazon Prime package has already evolved from a shipping option into an on-demand video package. It will further evolve, possibly into book rentals.

Like Barnes & Noble, Amazon can dabble in “razors and blades” trade-offs, where content and services subsidize hardware and, for Amazon, 3G access. But Amazon also has a budding advertising and daily deals business that both adds revenues and acts as a powerful promotional vehicle for content partners smart enough to take advantage of it.

Multiple authors have contributed their thoughts to this research note. Ryan Kim writes about how the Kindle is an optimized media engine, and Ryan Lawler calls the Kindle Fire the “gateway drug to wider Amazon Prime Instant Videos usage.” Mathew Ingram, meanwhile, notes that while book publishers should welcome another viable device, Amazon is the one in control of the relationship — and it has publishing ambitions of its own. And though Amazon is using an off-the-shelf OS, Barb Darrow shows how it is adding a browser and cloud cacheing to the platform. Darrell Etherington thinks the Kindle Fire kept its cost low with too many feature compromises to be a head-to-head iPad competitor.

But, of course, Amazon is not playing the same game as Apple. At the risk of oversimplifying, Apple uses its ecosystem to power its hardware business. Amazon uses hardware to accelerate and lock in its content retail and distribution business.