Why Does Amazon Do Hardware?

Recent news indicates that the Amazon Fire phone is dead. Rumours abound that Amazon may be releasing a $50 tablet. Is any of this surprising? Not really. Perhaps a bigger question is why would Amazon bother with hardware (particularly since it appears they sell the stuff more or less for cost)? There is a good reason, and part of those reasons are why their phone effort can be shut down.

What is Amazon?

On the surface, Amazon is basically an on-line retailer. In some cases, they are a direct-to-consumer distributor. And for a big chunk of their business, that is exactly what they are. They are a network of warehouses with strong ties to manufactures and shipping companies to get product from their suppliers to consumers. As a retailer, they are reasonably successful. They are the largest on-line retailer of physical goods. Granted, they are dwarfed by bricks-and-mortar retailers like Walmart, but Amazon offers a broader selection of product.

But if you dig below the surface, Amazon isn’t just an on-line retailer. Their job isn’t to just schlep boxes from a warehouse to your door. They are a distributor of content. Some of that “content” is physical: print books, shirts, batteries, DVD’s. But they also sell digital content like books, apps, movies and music. Their network of content providers includes their own in-house production company to make their own TV shows. It is in Amazon’s interest for all of that digital content to become a bigger part of their business.

Why? Because it doesn’t require a massive capital investment in warehouses and supporting infrastructure. It doesn’t require nearly as many people to make the thing work. Sure, they still have to invest (a lot) in servers and places to house them. But, relative to the amount of content they hold, this is a far cheaper investment. And with services like EC2, they can share their infrastructure with other for a price. But the real value for Amazon is digital content, because the costs and risks are lower, and the margins are ultimately higher. So how do you increase your presence in digital content?

That’s Where Hardware Comes In

For Amazon to sell a lot of digital content, they need a hardware platform that allows people to consume it. They can rely a lot on existing platforms like iPad and Galaxy Tab. Their cost to play on those platforms is to build their own apps, and someone else takes care of the distribution of it. So why bother with their own hardware?

Simply because not everyone ones to buy a tablet or smartphone just to consumer Amazon content. In the tablet market, a decent tablet is still pretty expensive, relatively speaking. To fill that gap, Amazon has their Fire tablet, and offering an ultra-cheap version that is still capable enough to handle Amazon content gives Amazon access to customers that they might not otherwise have.

Their dedicated e-reader Kindle still sells pretty well (and I use one for my own reading, if only because the battery lasts longer and I prefer the non-glare screen. If my iPad had a non-glare screen, then I’d likely stop using the Kindle). It is a cheap and easy way for people to consumer electronic books, and given that e-books are generally outselling print books (at least on Amazon), that bodes well for the platform.

Phones Are A Bit Different

So Amazon’s tablet and e-reader still do well enough for them to continue on. But why would they abandon the phone? I think there are two reasons for this. First, a lot of Amazon’s content isn’t ideally suited for smartphones, except perhaps for music. Sure, you can read books or watch TV/movies on a smartphone (and plenty of people do). I’ve done it from time to time. But a tablet or laptop is a nicer venue for that.

The other reason is that getting a smartphone is actually pretty cheap, and there are enough subsidized smartphones that you can get for “free” (basically, you pay for it through the life of your contract) that Amazon offering their own isn’t compelling. People who want to consume Amazon content on their phones are doing it. Those who want it can get a smartphone for pretty cheap. There isn’t really a gap for Amazon to fill in.

It’s About Filling Gaps

Ultimately Amazon hardware is about filling in gaps in the market. In segments like tablets, there is enough demand for a decent, low-cost tablet dedicated to consuming Amazon content that it makes sense for Amazon to sell one. If someone comes up with a decent, low-end tablet that sells in serious volume, it is entirely possible Amazon will get out of the tablet market.

The Kindle fills a gap for those that want the convenience of e-books but without having to buy a tablet to get it. There are enough choices in terms of price and features that a dedicated still makes some sense. That may change in the future, but for now, there’s a gap and Amazon has filled it.

But there isn’t a gap in the smartphone segment. You can get iPhones and decent Androids for free (with a contract). The smartphone is now in wider use in North America and Western Europe than feature phones. They continue to gain in other markets. Why bother making your own device, when other companies are covering the need already?

Amazon is about the content. Hardware is just a way to move content, and if someone else is providing enough of the hardware, then it makes sense to back away from that segment.

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