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Case 1: Kindle Fire: Amazon’s Heated Battle for the Tablet Market
C-13
CASE 1
Kindle Fire: Amazon’s Heated Battle for the Tablet Market
Mohanbir Sawhney, Joseph R. Owens,
and Pallavi Goodman
Kellogg School of Management, Northwestern university
In January 2012, as Jeff Bezos reflected on the early sales
success of Amazon’s Kindle Fire device, he was oddly trou-
bled. In a little over three months, Amazon had sold nearly
5 million Kindle Fires and had captured half of the non-
Apple tablet market share. Worldwide sales of e-books
since the introduction of the Kindle product line had
grown from less than 1 percent of all books sold to 15 per-
cent in 2012. But Bezos was not ready to call it a success yet.
As he anticipated Apple’s imminent announcement of
the third-generation iPad and its entry into the textbook
market, Bezos knew he would have to refine his strategy
for the Kindle Fire. In addition to Apple, new entrants
such as Samsung, Motorola, and Google were beginning
to enter the tablet market. Furthermore, Amazon’s long-
time competitor in the E Ink-based e-readers, Barnes
& Noble, was now selling a device nearly identical to the
Kindle Fire called the Nook. Bezos had told investors
that the Kindle Fire was the key to Amazon’s future in the
hardware space. The markets seemed to agree. Amazon
stock had dropped $40 since the launch of the Kindle
Fire. Analysts were concerned about the Kindle product
line’s economics because Amazon was selling the hard-
ware at cost, betting that content and commerce revenues
would make up for the hardware price subsidy.
Bezos was wrestling with several issues with the
Kindle Fire strategy. How should Amazon modify
the positioning of the device in response to the new
entrants in the tablet market since its launch? What
was the most promising target market for the Kindle
Fire, and how should it be positioned against competing
products? How could Amazon turn the sales success of
the Kindle Fire into business success? Would revenues
and profits from commerce and content justify selling
the hardware at cost? What were the likely responses of
the competition?
History of Amazon
In 1999 Amazon accomplished its founding mission
of becoming the world’s largest online bookstore. Two
years later it turned its first profit. By 2011, just fifteen
years after the company started out of Jeff Bezos’s 400-
square-foot garage, Amazon had 25 million square
feet of warehouse space, reported $50 billion in reve-
nues, and controlled 10 percent of the North American
e-commerce market (Exhibit i and Exhibit 2).
Competitors struggled to transition from brick-and-
mortar-based businesses, but Amazon had repeatedly
been at the forefront in the e-commerce market. From
its pioneering use of user-based reviews for product
comparisons to its development of 1-Click ordering
on its website, Amazon had continued to innovate. The
company’s marketplace for third-party vendors, intro-
duced in 1999, helped grow its selection rapidly.
Bezos’s 2010 annual letter to shareholders touted
that “invention is in [Amazon’s] DNA” and that the
long-term interests of its shareholders were perfectly
aligned with the needs and wants of its customers. This
focus on the long-term, however, with repeated innova-
tion and thrusts into new markets, had created tension
with the short-term interests of investors. The $45 fall
in stock value between Q3 2011 and mid-Q1 2012 illus-
trated this tension between Amazon’s visionary invest-
ments and public market investors (Exhibit 3). Investors
were doubtful of the margins Amazon would attain on
the new streams of revenue that it was betting would
flow through its new devices.
When Amazon began offering its spare server com-
puting power and storage space as a service in 2006, the
cloud-based information technology services field was still
nascent. Under the rapidly expanding Amazon Web Services
(AWS) division, Amazon rolled out its Elastic Compute
Cloud (EC2) platform and the Simple Storage Service (S3).
AWS was expected to make up just 3 percent of Amazon’s
revenues by 2012, but AWS revenues were expected to
©2014 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Mohanbir Sawhney and Joseph R. Owens,
PhD, and Pallavi Goodman. Cases are developed solely as the basis for class discussion. Some facts in the case have been altered for classroom discussion
purposes. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies
or request permission to reproduce materials, call 847.491.5400 or e-
mail cases@kellogg.northwestern.edu. No part of this publication may be reproduced,
stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or
otherwise-without the permission of Kellogg Case Publishing.
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
C-14
Part 4: Case Studies
Exhibit 1 Amazon Financials
Year Ended December 31
2011
2010
2009
NET SALES ($ in millions)
North America
Media
Electronics and other general merchandise
Othera
Total North America
International
7,959
17,315
1,431
6,881
10,998
828
5,964
6,314
550
26,705
18,707
12,828
Media
9,820
11,397
155
8,007
7,365
125
6,810
4,768
103
21,372
15,497
11,681
Electronics and other general merchandise
Other
Total international
Consolidated
Media
Electronics and other general merchandise
Othera
Total consolidated
17,779
28,712
1,586
14,888
18,363
953
12,774
11,082
653
48,077
34,204
24,509
16
57
73
43
15
74
50
46
11
43
23
25
19
YEAR-OVER-YEAR PERCENTAGE GROWTH (%)
North America
Media
Electronics and other general merchandise
Other
Total North America
International
Media
Electronics and other general merchandise
Other
Total international
Consolidated
Media
Electronics and other general merchandise
Other
Total consolidated
23
55
24
38
18
54
22
33
53
9
31
19
56
66
41
17
66
46
40
15
47
20
28
20
16
47
56
YEAR-OVER-YEAR PERCENTAGE GROWTH
EXCLUDING THE EFFECT OF EXCHANGE RATES (%)
International
Media
Electronics and other general merchandise
Other
Total international
Consolidated
Media
Electronics and other general merchandise
Other
Total consolidated
18
57
24
34
18
31
19
33
16
53
16
48
16
67
46
40
22
66
37
29
CONSOLIDATED NET SALES MIX (%)
Media
Electronics and other general merchandise
Other
Total consolidated
52
45
37
60
3
100
43
54
3
100
3
100
Includes non-retail activities, such as Amazon Web Services, miscellaneous marketing and promotional activities, other seller sites, and Amazon’s co-branded credit card
agreements.
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or Chapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Case 1: Kindle Fire: Amazon’s Heated Battle for the Tablet Market
C-15
Exhibit 2 Amazon Earnings Report
amazon.com
AMAZON.COM ANNOUNCES FOURTH QUARTER SALES UP 35% TO $17.43 BILLION;
KINDLE DEVICE SALES NEARLY TRIPLE DURING THE HOLIDAYS
SEATTLE—(BUSINESS WIRE)— January 31, 2012—Amazon.com, Inc. (NASDAQ: AMZN) today announced financial results for its
fourth quarter ended December 31, 2011.
Operating cash flow increased 12% to $3.90 billion for the trailing twelve months, compared with $3.50 billion for the trailing twelve
months ended December 31, 2010. Free cash flow decreased 17% to $2.09 billion for the trailing twelve months, compared with $2.52
billion for the trailing twelve months ended December 31, 2010.
Common shares outstanding plus shares underlying stock-based awards totaled 468 million on December 31, 2011, compared with 465
million a year ago
Net sales increased 35% to $17.43 billion in the fourth quarter, compared with $12.95 billion in fourth quarter 2010. Excluding the $101
million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales would have grown
34% compared with fourth quarter 2010.
Operating income was $260 million in the fourth quarter, compared with $474 million in fourth quarter 2010. The favorable impact
from year-over-year changes in foreign exchange rates throughout the quarter on operating income was $5 million.
Net income decreased 58% to $177 million in the fourth quarter, or $0.38 per diluted share, compared with net income of $416 million,
or $0.91 per diluted share, in fourth quarter 2010.
“We are grateful to the millions of customers who purchased the Kindle Fire and Kindle e-reader devices this holiday season, making
Kindle our bestselling product across both the U.S. and Europe.” said Jeff Bezos, founder and CEO of Amazon.com. “Our millions of
third-party sellers had a tremendous holiday season with 65% unit growth and now represent 36% of total units sold”
Full Year 2011
Net sales increased 41% to $48.08 billion, compared with $34.20 billion in 2010. Excluding the $1.09 billion favorable impact from year-
over-year changes in foreign exchange rates throughout the year, net sales would have grown 37% compared with 2010.
Operating income decreased 39% to $862 million, compared with $1.41 billion in 2010. The favorable impact from year-over-year
changes in foreign exchange rates throughout the year on operating income was $53 million.
Net income decreased 45% to $631 million in 2011, or $1.37 per diluted share, compared with net income of $1.15 billion, or $2.53 per
diluted share, in 2010.
Source: “Amazon.com Announces Fourth Quarter Sales Up 35% to $17.43 Billion; Kindle Device Sales Nearly Triple During the Holidays” Amazon.com press release,
December 31, 2011.
almost triple in the following three years. Amazon called
its “service-oriented architecture” the “fundamental build-
ing abstraction” for all Amazon technologies.?
This focus on internal technology development had
led to significant benefits for customers. Through the
widely popular Amazon Prime express shipping sub-
scription service, the company had built a customer base
that was motivated to always shop at Amazon.com first
before they went elsewhere. This service, which for an
annual fee of $79 provided two-day express shipping on
most items sold directly by Amazon, was made possi-
ble by the company’s logistics innovations. Through its
marketplace partners, Amazon had outsourced its long-
tail offerings while lowering its overhead. Without the
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or Chapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
C-16
Part 4: Case Studies
Exhibit 3 Amazon Stock Price Following the Kindle Fire Announcement
Zoom: 1d 5d 1m 3m 6m YTD 1y 5y 10y All
Oct 28, 2011 – Jan 31, 2012 -12.34 (-5.97%)
220
210
200
190
180
Nov 2011
Dec 2011
Jan 2012
technical advancements that made the logistical infra-
structure run smoothly, customers would not have
embraced these partners as a seamless extension of the
Amazon brand. Additionally, the advanced algorithms
driving the popular product recommendations that were
integrated into every product page relied on sophisticated
management of the underlying data infrastructure.
Amazon, since its founding, had a strong history of
investing in emerging opportunities years ahead of rev-
enues or profitability. It took the company six years to
become profitable primarily because of its commitment
to innovation. It was this commitment to innovation that
drove Bezos to found the Labı26 hardware development
group, which developed, in extreme secrecy, the future
of e-commerce: the first successful e-reader, the Kindle.
at 75 to 85 percent of the retail price of a physical book.
However, the Sony Reader was clunky to use and difficult
to load content onto. Even the simple act of page-turning
was slow and difficult to manage one-handed.
For more than a decade, various competitors offered
iterations on this basic business model, and had sold a
combined 400,000 units by the end of 2007. The Iliad
by iRex, larger than the Sony Reader, was sold for $799
and could adequately display full-sized PDF files but had
similar drawbacks in content acquisition for customers.
Many early adopters also used the tiny screens of a vari-
ety of personal digital assistant devices such as the Palm
III and V, as well as early-generation iPhones, to read
e-books. Critics cited the slow and clunky operation and
general poor usability of early e-readers as book replace-
ments as well as the inadequate e-book distribution and
promotion model as reasons that the e-book had yet to
jump the chasm on the innovation curve.
The Emergence of E-Readers
Although the attractive prospect of reading long-form
texts digitally had led to many e-readers coming to mar-
ket over the years, e-books had remained a niche curios-
ity. The original “killer app.,” the paper book, remained
largely unchallenged until the advent of E Ink technol-
ogy in 1997, which made reading possible in any light
condition and with minimal power usage. The new crop
of e-readers was born.
In 2007 the market leader was the Sony Reader. It
could hold a library of up to one hundred books and was
sold for $299-$399, depending on the accessory bun-
dle. More than 10,000 titles were available for purchase
The Amazon Kindle
In a highly successful product launch, Amazon intro-
duced its own e-reader, the Kindle, in November 2007.
The Kindle featured a QWERTY keyboard, an onboard
dictionary, and access to Wikipedia. It had memory suffi-
cient for two hundred titles, which was expandable via an
SD card. Its grayscale, passively lit screen sipped battery
and thus could last for more than a week. The stark white,
10.3-ounce device with a 6-inch E Ink screen was, at first
glance, similar to competitors’ offerings. Under the hood,
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Case 1: Kindle Fire: Amazon’s Heated Battle for the Tablet Market
C-17
though, lay Whispernet, an EVDO cellular antenna with
prepaid Sprint service that enabled wireless content deliv-
ery. At several points during the Kindle’s development,
Bezos sent engineers back to the drawing board to make
Whispernet work seamlessly. Bezos knew the key differ-
entiator for the Kindle would be the capability for cus-
tomers to discover, purchase, and sync content quickly
and easily wherever they happened to be-sans computer.
The first-generation Kindle was priced competitively
at $399. In addition to the more than 100,000 e-books
offered by Amazon, customers could purchase subscrip-
tions to nineteen newspapers (for $5 to $14 per month),
sixteen magazines (for $1.25 to $3.49 per month), and
hundreds of blogs (for $0.99 per month) that would self-
update wirelessly. Customers were also provided with an
e-mail address specific to their device that could be used
to load and convert DOC and PDF file formats for view-
ing on the Kindle. This service cost 15 cents per megabyte.
Prior to the Kindle’s release, Amazon sent its repre-
sentatives to knock on doors and cajole the major book
publishers to digitize their offerings for its new e-reader.
By bringing the publishers onboard, Amazon hoped to
simplify the digital rights management (DRM) issues that
were slowing the move toward electronic distribution of
books. The company succeeded in convincing all of the
“Big Six” publishers to rapidly accelerate their e-book devel-
opment and to offer their content through the Amazon
e-bookstore. Amazon subsequently shocked these
publishers by subsidizing the price of new titles, many of
which were offered at $9.99. This aggressive content pric-
ing model, co-announced with the product launch, helped
the first-generation Kindle sell out in the first three hours.
When Amazon started the development of its
first-generation Kindle in 2006, the entire e-book mar-
ket was only $3 million and less than 1 percent of all book
sales in the United States. But both e-book reader device
sales and revenues for e-book readers were projected to
grow substantially in the ensuing years (Exhibit 4). Five
years later, Amazon’s revenues from e-books were esti-
mated to have topped $1 billion. Amazon had likely (it
does not publicly release these metrics) sold a cumula-
tive 30 million Kindle units.
As the Kindle product line evolved, Amazon contin-
ued to enhance the user experience, mostly by improv-
ing navigational features such as page-turn speed,
battery life, and screen resolution, and by reducing the
device’s weight and width (Exhibit 5). To expand the use
cases for the Kindle product line, Amazon developed a
larger version of the device. The $549 Kindle DX fea-
tured a 10-inch screen, making it the ideal e-reader for
displaying figures and tables from textbooks or business
documents.
Exhibit 4 E-Book Market Growth and Projection
33
$3,250
30
$2,750
27
$2,509
24 –
$2,250
$1,961
21 –
19.22
$1,561
$1,750
18
$1,273
15
12.78
$1,250
12-
8.64
9
$750
$398
5.99
6
2.92 2.50
$250
3
2.13
1.81
1.54
1.31
0
$0
2009
2010
2011
2012
2013
Total E-Book Reader Device Sales (Millions)
Revenue per Device (Hundreds)
Total U.S. E-Book Reader Revenue (Millions)
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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