"We want to make money when people use our devices, not when they buy our devices," said Amazon CEO Jeff Bezos yesterday at a company press conference in Los Angeles. There, Bezos showed off Amazon's latest products, from the Kindle Paperwhite e-reader to the Fire HD tablet. But what really stole the show Thursday wasn't the "gadgets" themselves (a term Bezos dislikes) but Amazon's services and low prices: the 32GB 4G Fire will cost just $499 with a $50 data plan; a comparable iPad would cost $729 with a $230 annual plan, according to Amazon. In undercutting competitor prices and sacrificing short-term profits, Amazon has revealed a strategy (the so-called "Amazon Doctrine") that puts other hardware makers at a serious disadvantage.
"People don't want gadgets anymore," Bezos explained yesterday. "They want services."
Amazon isn't even trying to hide the fact that it's losing money on tablet sales. ("How are these prices possible?" read one slide in Bezos' presentation.) The simple truth is Amazon sees far more potential revenue from services and content than it does on hardware margins: via sales of e-books, music, cloud storage plans, and so forth. It's why when Barnes & Noble CEO Williams Lynch tried to downplay the threat of Amazon's media tablet, he disparagingly referred to it as a "vending machine for Amazon's services."
Other OEMs are not in as fortunate of a position as Amazon and Apple, which, while certainly generating significant revenues from hardware sales, also relies on its service ecosystem: iTunes, iCloud, its robust app market. Hardware makers, such as HP and HTC, are increasingly pushing services and even accessories to make up for declining hardware margins. Only this week, for example, we saw Nokia focus not so much on its seductive Lumia 920 itself but on its mapping, commerce, and content services—Nokia just launched its streaming music app in the U.S.—as well as NFC-enabled and inductive-charging accessories.
As Box CEO Aaron Levie, who aims to take advantage of the cloud opportunities afforded by hardware makers, told me recently of Apple's integrated approach to the tablet space, "It used to be that vertical integration was hardware and software. Now it's hardware, software, and services."
But as Amazon and other popular hardware makers continue to subsidize their products, OEMs face an impossible dilemma when it comes to spiraling product price tags. They can't compete with the quality of Apple's high-end products, and therefore cannot sell hardware at such traditionally high margins; and they can't subsidize their lower-end products as much as Amazon, because their services lack ubiquity and consumer awareness.
Said Bezos of Amazon's pricing strategy, "We are not building the best tablet at a certain price. We build the best tablet at any price."
[Image: Flickr user TC Morgan]