Today's Amazon Event Was About Its Ecosystem As Much As Its Hardware

By Michael Carney , written on September 6, 2012

From The News Desk

After all the speculation leading up to today’s Amazon press event, the company didn’t announce a smartphone. It did however release a bevy of new hardware devices, ranging from upgraded ereaders to iPad-challenging tablets. It would be easy, given this, to get lost in the glossy screens and bargain basement price points, thus concluding that today was all about hardware. If you did, you'd be wrong.

Today was about an ecosystem. It was about a combination of software, services, and infrastructure. It was about Amazon CEO Jeff Bezos saying to the world once again, “We don’t want to make money when you buy our hardware. We want to make it when you use it.”

To back up this position, Bezos spent more than an hour on stage, describing the software and services that his team has built over the last decade to take advantage of today’s improved hardware front ends.

"Innovation doesn't stop with hardware,” the CEO says. “It begins with it... More than two dozen Android tablets hit the market last year, and no one bought them. Why? Because they're gadgets and people don't want gadgets. They want services. Services that improve every time they use them. Services that get better every day, every week, every month, year after year after year.”

It’s possible Amazon has built just that. At the forefront of its Kindle presentation is the digital content marketplace of books, music, movies, TV episodes, and mobile apps. Beyond that the company has a cloud computing infrastructure to store and manage users’ ever-growing content libraries, and one of the world’s best, most agile real-world fulfillment infrastructures.

Tying all of these services together is the company’s $79 per year Amazon Prime rewards program which affords members unlimited, instant streaming of select video content and free two-day shipping on millions of physical goods, among other benefits.

Today's product announcements were the strategic distillation of this broad, complementary ecosystem into a small number of public facing products. Better screens, richer sound, and better connectivity then, are all tools to more strongly connect users with the Amazon ecosystem. The too-low-to-be-true price point is a strategic decision to put this portal in as many users’ hands as possible.

The difference is apparent when comparing the mobile device strategies of Apple and Amazon. Apple, as judged by its product design and pricing strategies, is a hardware company, first, second, and finally. The company makes top of the line, high-margin mobile devices and cultivates an ecosystem of internally developed and third party services only to enhance the experience delivered by the devices.

Amazon wants to be the world’s marketplace to a different kind of physical product, everything from digital content to fashion, consumer products, household items, and groceries. It sees its flagship Kindle Fire devices as the gateway and concierge to these everyday goods. The reason Amazon subsidizes the mobile broadband on its 3G Kindles is that owners of these everywhere-connected devices read 36 percent more than owners of the WiFi only models. Ultimately, if cheap connectivity equates to more sales, then its absolutely in line with this broader ecosystem strategy.

The company has taken a similar approach with its newly announced Kindle Fire HD 4G LTE tablet. The flagship device comes with a wireless data package through AT&T that costs $49.99 a year for 250MB of data per month, 20GB of cloud storage, and a $10 Amazon AppStore credit. After the app store credit, the service costs under $3.50 per month, making it effectively free. Why? Bezos wants to remove as many obstacles as possible between Kindle Fire HD users and the paid services from which Amazon makes its real money. Without this ecosystem of services, Amazon’s hardware strategy – and particularly its radical pricing strategy – makes no sense.

Amazon’s newest TV ad says, “We’re the people with the smile on the box. We’re the reinventors of normal. We dream of making things that change your life and then disappear into your everyday.”

It’s a rosy picture and one the company is pushing hard. But it has yet to prove this to be a viable long term strategy. During today’s event, Bezos said from the stage, "This is not the razor and blades model" where you lose money at the outset with the goal of making it up later. Amazon is essentially selling devices at their cost of goods – excluding marketing expenses – with the expectation that commerce revenue will more justify the model.

Selling hardware at cost is a big risk, especially when the physical and digital goods it’s counting on to monetize are often themselves sold at razor thin margins. It seems like Bezos’ strategy is a long term one of grabbing as much market share as possible today while drowning out the remaining bricks and mortar retailers and as many niche online retailers as possible. Then, presumably, one day when the company has an even more dominant position in the market than it does today, it will look to extract greater profits from its sales of goods and services.

The services are certainly plentiful, but are they sufficiently appealing to stuff Amazon’s pockets with cash? In a discussion about the quality of Amazon’s services I had today with PandoDaily colleague Nathaniel Mott, he smartly concluded, “I think that Prime is the real draw here. Without it, they'd have a hard time selling any of their services, like the Instant video service – I can already get that from iTunes. I don't turn to Amazon for my movies – or I wouldn't anyway – because it's ‘better,’ I do it because it's part of the package.”

With the approachability and affordability of the new Kindle ereaders and tablets, we may soon look back and realize that they were the gateway drug that got us hooked on the Amazon ecosystem. Or, we may end up saying that Bezos left billions of dollars of hardware profits on the table with his radical, loss-leader strategy.

[Image source, International Center for Tropical Agriculture, Flickr]