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Why Amazon can't win a tablet price war against Google

Mike Elgan | April 2, 2012
Google and Amazon are about to go to war for the future of non-iPad tablets, but Amazon's business model can't be sustained. Here's why, according to columnist Mike Elgan.

The Wall Street Journal reported this week that Google plans to sell co-branded tablets made by several category-three companies in a new online store.

But buying Motorola for patent protection, co-branding tablets, selling them in a store and even the existence of the Android mobile platform are all means to an end, which isn't big bucks from the hardware business, but revenue from Google Play digital content, online services and advertising.

Google is the only player in category two that's in the position to profit from the bits without stressing about the low- or zero-margin hardware business. That's its greatest advantage. Google can grow the market with reckless abandon because every new customer brings additional revenue, but not additional costs or risks.

Amazon and Barnes & Noble? Not so much.

Why Amazon's tablet business model isn't sustainable

Everyone seems to think that Amazon will continue to succeed in the tablet market. I'm not so sure.

Amazon's $199 Kindle Fire tablet launched the company into the number-two spot for tablets. It appears to be a successful product. And it is. But that success can't last with Amazon's current business model.

The big draw for the Kindle Fire was the price , which Amazon achieved by selling at a loss. Every time someone buys a Kindle Fire, Amazon loses money -- somewhere between $10 and $70. The strategy is to get new and more active customers with the tablet, then make up the difference over time through sales. It's the same business model as printers, which are sold at a loss with the expectation of massive profits through the sale of ink cartridges.

The idea that Amazon and Google are competitors needs to be addressed.

Amazon appears to be a partner with Google as an Android hardware maker. But remember: Neither of these companies is in the hardware business. They are competitors in the digital content and online services business. That Amazon is shamelessly exploiting the software platform of its most direct competitor doesn't change the fact.

Here's the problem for Amazon. As prices come down, Google's partners will be able to sell tablets -- without losing money -- at or below Amazon's $199 price.

To stay ahead in the race to the bottom, Amazon will need to continue subsidizing tablets. So when, say, Asus and Google are selling a co-branded $149 tablet, Amazon might sell a comparable device for $99. When the Asus-Google tablet drops to $99, Amazon would need to sell a comparable one for $69 and so on.

It's a losing proposition.

The lower prices go, the broader the audience. You get a lot more people who are unwilling or unable to spend a lot of money on things.


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