Will Amazon Kindle Another Fire?

1.      Analyze the structure of the mobile technology industry. How has it evolved in recent years?

The mobile technology industry is best characterized as an oligopoly with a few (large) firms, differentiated products, some pricing power, and relatively high entry barriers. Major players include Amazon.com, Google, Apple, and Microsoft, which both compete against and cooperate with one another at multiple levels (strategic interdependence). The next table shows how their product and service offerings overlap across multiple categories.

Current trends indicate a move toward greater convergence, as these companies fill in the gaps to compete directly against one another in multiple product and service markets. For example, Amazon.com released the Kindle Fire, a tablet version of its popular e-reader in 2011, entering the mobile device market once dominated by Apple. It now offers a full line of digital content (books, movies, and video) to compete with iTunes, while challenging Google in the development of web and cloud-based services. Google, which has traditionally focused on software, the web/cloud, and its Android operating system, also recently entered the mobile device market with its purchase of Motorola Mobility in 2012. Microsoft, a relative latecomer, launched the first Windows phone in 2010 and its Surface line of tablets in 2012. Of these four companies, Amazon.com is the only one that does not have a proprietary operating system (Fire OS 3.0 “Mojito” is overlaid on Android).[i]

Given the trend toward convergence, it may be interesting to share this table with students (or have them develop their own version in class) and ask them to predict likely future competitive moves in the mobile technology industry. For example:

·         Should Amazon.com develop its own mobile phone (which the case suggests Bezos is considering)?

·         Would it make sense for Google to invest in a full line of Google devices, or should it stick to licensing Android out to other companies?

·         Should Apple invest more in the cloud/web-services area, or should it maintain its focus on the device/operating system/app markets?

·         Did Microsoft wait too long to launch its Window phones and Surface tablets, essentially ceding the mobile market to its main competitors (i.e., is it realistic to think Microsoft can stage a comeback)?

·         Is it necessary to have a proprietary operating system in order to remain a major competitor in this industry?

2.      In which stage of the industry life cycle is the mobile technology industry? What are the implications for future development of this industry?

Despite the ubiquity of smartphones and tablets, the mobile device industry is still relatively young. Consider the following timeline: the iPhone (Apple) was first released in 2007, followed by the Android-based HTC Dream Phone in 2008, and the Nexus One (Google) smartphone and Windows (Microsoft) Phone 7 in 2010. Amazon’s Kindle e-reader was the first device of its kind when it was unveiled in 2007. Apple’s iPad was the first full-fledged tablet to hit the market in 2010, followed by the Kindle Fire and Google Xoom in 2011. The next year (2012) saw the release of the Microsoft Surface, the Google Nexus 7 (with Asus) and Nexus 10 (with Samsung), and the iPad mini.

With the initial introduction of these disruptive devices to consumer markets now past, current industry activity is more indicative of what happens in the growth stage. Market growth accelerates rapidly, as a large group of buyers known as the early majority leads a large wave of new customers. This is also the point in time when a dominant design emerges, signaling market agreement on a common set of engineering features and design choices. Because demand is so strong, both efficient and inefficient firms survive. Prices fall as learning curve effects and economies of scale and scope are realized. Distribution channels expand and complementary assets (e.g., app stores) become easily accessible. Moving forward, competition is likely to shift away from new product innovations to process innovations that improve upon existing products and features.

One of the things that makes the mobile technology industry so interesting is the current three-way battle to determine the dominant operating system: Apple’s iOS, Google Android, or Microsoft Windows 8. So far, Android has a significant lead in the mobile phone category as the operating system of choice for three quarters of all smartphones sold. Apple’s primary advantage is its huge head start on app development. Even though Google has nearly caught up in the total number of applications, Apple generates 2.3 times more revenue from its app store compared to Google Play. Microsoft lags a distant third with just over 120,000 apps, compared to 700,000 a piece for iOS and Android. Apple was first to market with the iPad and once dominated this sector as well. By 2012, however, Apple’s market share had dropped to 50 percent, while Samsung and Amazon increased to 18 percent and 9 percent, respectively.

Ask students which of the following scenarios is most likely to play out, and why, as a means of generating class discussion:

·         One operating system predominates, squeezing the others out of the market (as happened with Microsoft Windows OS for PCs). Based on current trends, the most likely candidate is Google Android, with Apple maintaining a small but loyal cult of followers.

·         The industry remains multiplatform, with increased mobility for sharing apps and files across operating systems. Competition shifts from the OS arena to focus more on complementary products and services (e.g., apps and devices).

·         A new entrant introduces a superior (discontinuous) technology that overtakes all of the existing competitors.

3.     What type(s)of innovation are featured in this case? What type(s) of innovation are most likely in the future as this industry continues to develop?

The initial e-reader (Kindle in 2007), tablet (iPad in 2010), and smartphone (iPhone in 2007) are best considered as either disruptive or radical innovations based on new technologies. Both types of innovation “draw on novel methods or materials” and are derived “from an entirely different knowledge base or from recombination of the firm’s existing knowledge base with a new stream of knowledge.

The distinction between these two types of innovation depends on whether e-readers, tablets, and smartphones were targeted primarily at existing or new markets. Elements of both apply. Certainly there was a well-developed market for print books that the first e-readers tapped into, just as early tablets cannibalized a sizeable portion of the laptop computer market. Likewise, Smartphones inherited a well-developed mobile phone market, yet expanded it in new and exciting ways.

To truly be considered a disruptive innovation, however, the new technology must begin as a “low cost solution to an existing problem”. Neither the iPhone nor the iPad were considered low cost when they first appeared on the market; they are still sold at a price premium consistent with Apple’s differentiation strategy. The Kindle story is somewhat different. Kindles are still intentionally sold at near breakeven prices, and the e‑reader has served successfully as a platform for Amazon’s subsequent invasion of the tablet market (i.e., the Kindle Fire in 2011).

As the mobile technology industry proceeds past the introduction stage into the growth stage of the industry life cycle, incumbents will place an increasing emphasis on incremental innovation to preserve their strategic position and market power. By steadily improving their existing products and services, companies can extend the time period over which they can extract profits from their prior R&D investments. Examples of such incremental innovations include simpler user interfaces, app development, faster processing speed, and enhanced photo and video capabilities.

As product innovations become more incremental in nature, process innovations tend to increase as firms seek “new ways to produce existing products or deliver existing services”. Continuous innovation—of any kind—is one of the best defenses incumbent firms have against both current competitors and potential new entrants.

4.   Which business-level strategies are being employed by the major competitors in this case?

Apple, Google, and Microsoft position their tablets and smartphones based on unique features while keeping costs at the same or similar levels; this is consistent with a broad differentiation strategy. The goal of a differentiation strategy is to increase the perceived value of goods and services in the eyes of consumers so that they are willing to pay a price premium. Companies typically accomplish this by leveraging one of the following value drivers : product features, customer service, customization, and complements.

In the mobile technology industry, the battle for differentiation has been focused largely on product features (e.g., processor speed, memory, the overall size and weight of the device, weight, user-friendliness, camera features, video capabilities, etc.) and complements (e.g., cross-platform compatibility, applications, digital books/video/music, etc.). Most companies also offer varying degrees of customer service, but only Apple has dedicated company stores staffed with in-house experts. Combined with its first-mover advantage (being first to market with both a smartphone and a tablet), Apple tends to have the strongest brand image and therefore charges the highest price premiums. The other major competitors generally try to match Apple on features while beating Apple slightly on price.  

Of the major competitors, only Amazon stands out with a significantly different (cost-based) approach. It intentionally sells the Kindle at near breakeven prices with the goal of attracting customers to Amazon.com to purchase content. As it adds tablet functionality to its Kindle devices, Amazon is exerting a steady downward price pressure on the tablet market. Few, if any, other device makers have the advantage of Amazon’s vast online marketplace (and revenue stream) to subsidize their manufacturing costs. Apple monetizes sales from its iStore quite effectively, but cannot compete with Amazon in terms of overall retail scale. Google’s reliance on open-source software enhances its market share but significantly handicaps its ability to profit from its innovations. Competitors fear that a similar approach to an Amazon smartphone could likewise eat into smartphone margins (or at least they should!).

In response to increased competition from differentiated (but lower cost) Android devices and Amazon’s infiltration of the lower end of the table market, Apple has recently introduced the downsized (and less expensive) iPad mini. Many other premium brands are following suit by introducing low-end versions of their products and/or slashing prices to remain competitive. 

5.   What pathways (make/buy/ally) have each of the major competitors utilized to innovate?

Embedded within the case are a series of make-buy-ally decisions executed by each of the major firms:

·         Apple—typically produces proprietary products through internal innovation (make).

·         Microsoft—strong history of internal innovation (make), but entered into a major alliance with Nokia (ally) to manufacture smartphones and eventually acquired Nokia’s device and services unit outright in September 2013 (buy).

·         Google—acquired Android in 2005 (buy) with subsequent internal investments in R&D (make), and now licenses its operating system software to companies like Samsung, HTC, Acer, and LG through the Open Handset Alliance (ally). Google initially entered the device markets through alliances (ally) with HTC (Dream Phone, Nexus One), Asus (Nexus 7), and Samsung (Nexus 10), but purchased Motorola Mobility in 2012 to bring manufacturing capabilities in house (buy).

·       Amazon—has experience with a wide range of alliances (ally) and acquisitions (buy) as detailed in the case, but elected to develop the Kindle devices internally (make) and manufacture them in partnership (ally) with Quanta Computer. Although the Kindle’s operating system is overlaid on Android, it has been extensively redesigned and is not party to the Open Handset Alliance. Kindles ship with Amazon apps instead of Google apps and do not have access to Gmail, Google Maps, and so on.

The Google/Motorola and Microsoft/Nokia deals provide examples of vertical integration, which is a form of related-constrained  diversification strategy. By acquiring their respective alliance partners, both Google and Microsoft gained access to a new capability (manufacturing) as well as reshaped the competitive scope of the mobile device industry by eliminating a potential competitor. Google also gained access to Motorola’s vast patent portfolio.

That these alliances were short-lived in nature is not surprising, given the companies continued to compete against one another in other areas even while they were collaborating to produce smartphones. For example, Motorola Solutions (the parent company) still makes enterprise tablets, mobile computers, and program software, while Nokia maintains its networking and mapping divisions. This has been termed coopetition and highlights the difficulty of maintaining alliances with current or potential competitors. Failure to develop trust in one’s partner can lead to a reluctance to make relation-specific investments and limit the development of effective knowledge-sharing routines.

6.  Should Amazon develop a Kindle phone? Why or why not?

One of the rumors circulating around the tech world is that Amazon is collaborating with HTC, a Taiwanese firm, to produce the first Kindle phones. According to an article in The Guardian, the partners have a total of three devices in the works, with the first to be released sometime in 2014. Assuming the phones utilize the Kindle OS, which is a “forked” version of Android because it directs users to Amazon’s app store instead of Google’s, this strategic move could have serious potential consequences for HTC (or any other manufacturer belonging to Google’s Open Handset Alliance who might partner with Amazon).

Participation in the OHA provides companies with free access to the Android software and the opportunity to become Google “certified,” which means their devices can be preloaded with the full Google app suite. Google actively defends its hold on the mobile device ecosystem, and quickly sanctioned Acer when it attempted to produce a forked smartphone with Alibaba (a Chinese company) in 2012. Acer promptly pulled out of its Alibaba alliance to avoid facing expulsion from the OHA. Other reports speculate that any new Amazon Kindle phones might be made available only to Amazon Prime subscribers, which would enable Amazon to preprogram the devices with customer account data.

Invite your students to debate the pros/cons of Amazon launching a Kindle-OS–based phone and the implications for competitive dynamics in the industry:

• Is such a strategic move consistent with Amazon’s vision and mission?
• Does Amazon have the necessary core competencies to carry out this strategic move? If not, can they get them (via R&D investment, alliance, or acquisition)?
• Is there room for a third operating system in this competitive market space?
• Is it necessary for Amazon to have an independent operating system in order to be successful? Why not become part of the Google alliance?
• Is it necessary to have devices or could Amazon specialize as a content provider to all platforms?
• If Amazon invades the smartphone market with a new Kindle device, how are Google, Microsoft, and Apple likely to respond?