Key Points
- Amazon’s Kindle Fire will never account for more than a slice of the tablet market since it's competing against a rising tide of very inexpensive Android tablets. We estimate that in the third quarter of 2013, shipments of the Kindle line, including e-readers, accounted for only 2% of worldwide tablet shipments.
- Amazon's tablet shipments have always been strongly seasonal. We expect that Kindles will take a significantly larger share in the holiday quarter, but likely not reach the 11.5% share of tablet shipments that IDC said it achieved in the fourth quarter of last year.
- But selling more tablets isn't Amazon's only goal, and Kindle Fire should not be overlooked. Amazon is generating revenue as Kindle Fire users engage with content on the devices, download from Amazon's vast digital library, receive ads, and use other Amazon services like e-commerce.
- Morgan Stanley expects the Kindle ecosystem to account for 11% of Amazon's total revenues this year.
- Additionally, Morningstar estimates that there will be more than 10 million total Amazon Prime subscribers this year, another key source of Amazon revenue. Kindle Fires encourage Amazon Prime subscriptions because subscribers receive free unlimited video streaming and e-book borrowing.
- The Amazon Appstore is also generating strong developer revenues. Popular Kindle Fire apps are generating 59 cents of revenue for every dollar earned by top apps in the Google Play store, according to a Distimo study.
- Amazon's platform is in a major global expansion phase: Earlier this year, Amazon began selling high-end Kindle Fire models in 170 countries and brought the Amazon Appstore online in 200 countries. Previously these had only been available in a handful of the largest European and Asian markets. Meanwhile, Amazon's advertising programs on the Kindle Fire also generate nearly $200 million in ad revenue for the company.
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Summary
Amazon is vying to be the "everything store," and that goes for digital products as well as online retail purchases of electronics, household items, or books. The Kindle Fire plays into this strategy by giving the company a device line in the tablet market and a means of capturing even more sales for its enormous digital media library.
The Kindle Fire ecosystem is often overlooked, but it has steadily gained traction among consumers and developers, and is now a pivotal piece of Amazon's overall mobile strategy.
Amazon's Kindle Fire has been widely adopted by consumers since it was first introduced in September 2011.
It now ranks as the third-most popular tablet in terms of traffic, behind only Apple's and Samsung's lines of devices according to an analysis of tablet traffic by Jumptap, a mobile ad network.
Morgan Stanley estimates that Amazon will do $4.5 billion in Kindle Fire and e-reader sales this year, up 26% over sales in 2012.
But revenue from Kindle Fire hardware sales isn't really even the point for Amazon.
The company realizes zero dollars in profit from hardware sales, since it sells these devices at cost.
Instead, the company monetizes the platform through digital media downloads, app revenues, Amazon Prime subscriptions, and its Special Offers advertising program. In sum, the Kindle ecosystem will account for approximately 11% of Amazon’s total revenues this year, according to Morgan Stanley.
This report will explore the Kindle Fire’s sales trends, how the platform's monetization strategy compares to that of its rivals, and look at the major avenues Amazon has developed to make the Kindle Fire a lynchpin of its multi-pronged e-commerce, digital media, and loyalty strategies.
We'll also discuss how Amazon is encouraging further development of the Kindle app ecosystem.
Kindle Fire's Tablet Market Share In Context
Amazon has shipped approximately 18 million Kindles globally since introducing the platform in September 2011, according to BI Intelligence estimates, based on IDC tablet shipments data.
Although IDC includes all Kindles, including e-readers, in their tablet data, e-readers represent a dwindling proportion of tablet sales. So these numbers can be taken as broadly indicative of the Kindle Fire's performance.
In the U.S., the Kindle Fire made a fast advance into the tablet market.
By year-end 2012, Kindle Fire was in use by 24% of U.S. households with tablets, behind only Apple, at 43%, according to comScore.
In platform-to-platform comparisons, however, the Kindle Fire looks much weaker these days. Other manufacturers have been successfully bringing new tablets running the Android operating system into the worldwide market.
Comparing platform share globally, BI Intelligence estimates that Kindle retreated to 2% share of global tablet shipments in the third quarter of 2013, down from a high of 17% in the last quarter of 2011, as other manufacturers have begun selling tablets running the Android operating system.
(Amazon's Kindle Fire runs a fork of the Android operating system, which is modified heavily enough to be categorized separately for our purposes.)
Looking at year-over-year growth, the Kindle Fire's numbers are much lower than Android, but it did manage to keep its growth rate steady in the second quarter of 2013, compared to all other tablets, which saw sharp year-over-year decelerations.
Kindle's share is likely to spike again in the fourth quarter of this year based on historical trends showing a significant uptick in sales during the holidays. The introduction of the Kindle Fire HDX for the holiday season will be a major part of this boost.
But the platform will still continue to trail iOS and Android tablets.
Despite the Kindle Fire's limited share of the total tablet market, however, it performs fairly well in terms of tablet traffic among the major manufacturers.
Jumptap, now Millennial Media, found that the Kindle Fire ranked third in July, at 10.1% of U.S. tablet traffic among the top five tablets, behind traffic on Apple's iPad and Samsung's Galaxy Tablet, but well ahead of activity on the Google Nexus 7 and Barnes & Noble's Nook. This means that Kindle Fire users are especially active on the devices, and thus more likely to engage with the revenue-generating content and advertising available in the Kindle Fire ecosystem.
That said, the Kindle Fire's share of mobile traffic has halved in the past year.
If this trend continues, Amazon's play at monetization of users on the platform could be in jeopardy.
Monetization Is What Really Matters
Unlike its competitors, Amazon does not aspire to generate profits from hardware sales of the Kindle Fire. Rather, Amazon hopes to leverage its robust media library to capitalize on the Kindle’s growing popularity and drive media sales.
The company does not need to vie to be the tablet market leader.
Prior to introducing the Kindle Fire, Amazon was already an established player in the online music and streaming video market, and the tablet device gave the company a new platform on which to sell its digital goods.
- In total, Morgan Stanley estimates that Amazon will reach $3.8 billion in digital media revenue by the end of this year, including e-books, music, movies, TV shows, and apps.
- This revenue is expected to grow steadily, reaching $5.7 billion in 2014, when revenue from media will exceed revenue from hardware sales.
Stacking Up App Downloads
The company has also taken steps to compete with Apple’s App Store and the Google Play store in software distribution and sales.
Since its launch in March 2011, according to mobile app research firm App Annie the Amazon Appstore has grown larger, reaching approximately 75,000 apps this year. That is still far behind Apple's and Google's app stores, but impressive given that the Amazon Appstore was introduced much more recently.
Amazon's Appstore performs especially well in terms of paid app downloads, compared to the Google Play store. While the Amazon Appstore is not exclusive to the Kindle Fire, the devices likely account for a majority of downloads, and is a further indication that Amazon is successfully getting users of its Kindle Fire to pay for content.
- Measuring downloads of only the top 1,000 paid apps, the Amazon Appstore saw about half the number of downloads as the Google Play store, according to data provided to Forbes from Distimo. Given the much higher penetration of Android devices, including smartphones, that difference is surprisingly narrow.
![BII_Amazon App Revenue Google Play]()
And the revenue gap is even narrower.Distimo found that in March the top 200 paid apps in the Google Play store generated 1.7 times as much revenue as the top 200 paid apps in the Amazon Appstore. Put another way, popular Fire apps are generating 59 cents of revenue for every dollar earned by top apps in the Google Play store.- While Google Play will continue to lead based on the sheer volume of users it reaches, Amazon is making a strong case for itself as a platform where users are willing to spend money, an issue Google has struggled with.
And the revenue gap is even narrower.
And Amazon is not achieving those results by pricing its apps higher. In fact, among the top 400 paid apps, the average selling price at the Amazon Appstore was only $1.73, lagging behind the average Google Play, iPhone, and iPad paid apps, at $3.55, $2.21, and $3.39, respectively, according to App Annie data.
Yet Amazon’s lower average app price does not seem to have had an adverse effect on download revenue. Instead, this lower pricing seems to be encouraging users to purchase more apps.
This falls in line with a wider philosophy at Amazon. The company prizes providing its customers with inexpensive goods and services, which then keeps them coming back for more.
In addition to paid downloads, Amazon's also doing a good job generating revenue from in-app purchases. Data from Flurry shows that Amazon's Appstore generates significantly more in-app revenue per active user than the Google Play store.
Indexing Apple's App Store in-app revenue at 100% in early 2012, Flurry found that the Amazon Appstore achieved 89% of Apple’s revenue per daily user, or 89 cents for every $1 spent on the Apple App Store. Google Play reached only 23% of revenue per daily user, or 23 cents for every $1 spent on Apple.
As we'll discuss later on, this is important not only in terms of app revenue flowing to Amazon, but also because it will help the Kindle Fire remain lucrative for developers, and give them incentive to develop their apps on the platform.
The Kindle Fire Boosts Amazon Prime Subscriptions
Amazon Prime is another key means the company is using to unlock value from Kindle Fire users.
The subscription, which costs $79 annually, has proved to be a compelling value for many Amazon users, and especially those using the Kindle Fire. In addition to other online and offline benefits made available to non-Kindle users, Amazon Prime allowsKindle Fire users to access additional content: unlimited free access to a number of popular titles on Amazon Instant Video, and the Kindle Owners’ Lending Library.
- The investment research firm Morningstar reported that Amazon Prime subscriptions increased from fewer than 1 million subscribers in its first year to over 10 million subscribers by the end of 2012.
- The subscriber growth rate increased dramatically after the introduction of the Kindle Fire, jumping from fewer than 6 million to more than 8 million in approximately one year.
- If this trend continues, Amazon Prime is predicted to reach 25 million subscribers by 2017.
- Morningstar estimates that Amazon Prime subscribers contributed nearly $600 million to the company's operating income last year.
Having a Kindle Fire provides a strong incentive for users to pay for an Amazon Prime subscription and creates the positive feedback loop Amazon is always aiming for: more consumers relying on the company for more content and services.
And this works in reverse as well: Some people who already have an Amazon Prime subscription would be more likely to opt for a Kindle Fire when choosing a tablet.
Amazon Special Offers' Ad Strategy
Amazon’s Special Offers program provides the company with another path to monetize the platform. Kindle Fire buyers can opt for full-price devices that do not host any additional advertising.
Alternatively, they can buy discounted devices that show "Special Offers," which are targeted advertisements from Amazon and its partners on both the lock screen and under the app carousel on the home screen.
While Amazon has not released official figures, the $15 higher price of the Kindle Fires without Special Offers suggests that the advertising program, along with increased revenue from these users joining the Amazon ecosystem, is worth at least that much over the lifetime of a single device.
Morgan Stanley estimates that the Special Offers program will enable the Kindle ecosystem to generate approximately $192 million in advertising revenue this year.
Developers Help The Amazon Ecosystem Keep Growing
Many developers who publish their apps on Amazon’s Kindle platform are seeing handsome returns. The Kindle Fire's operating system is a fork of Android, which allows developers to easily port apps from one platform to the other with minimal investment. Like Apple and Google, Amazon passes on 70% of revenue to app developers.
While Amazon still lags behind the Apple App Store and Google Play store in the number of apps available — both Play and Apple's App Store have about 1 million apps — the company is pushing to bring more developers into the fold and make its app offerings more robust.
In October, Amazon announced the Appstore Developer Select program, which will give developers with qualifying Kindle Fire apps access to marketing tools and incentives to help their apps get discovered and purchased.
Additionally, as noted earlier, higher revenue per-user in the Amazon Appstore, compared to the Google Play store, will further encourage app developers to make their apps compatible with the Kindle Fire, despite fewer users of these tablets.
Developers seem largely on board with bringing their apps to the smaller-scale platform. In a survey conducted by App Annie, developers expressed a belief that the Amazon Appstore’s market share will grow, and saw this as a primary motivation for publishing on the platform.
To meet these expectations, Amazon has expanded the Appstore’s availability from seven countries to nearly 200 as of May of this year, reaching beyond both Google Play (132 countries) and the Apple App Store (155 countries). In June, Amazon also made higher-end versions of the Amazon Kindle Fire available in 170 countries.
THE BOTTOM LINE
- The Kindle Fire has achieved brisk sales since its introduction, but its market share has dropped in the past year. Kindle Fire sales are very seasonal, however. We expect shipments to spike in the current holiday quarter.
- Earning revenue from hardware sales isn't what Amazon is really after. Amazon is focused on leveraging its vast digital library and monetizing the platform through digital media downloads, app purchases, Amazon Prime subscriptions, and ad revenue.
- The Amazon Appstore has matured greatly since its introduction, despite still lacking the scale of Apple's or Google's app marketplaces. Amazon has also been especially successful at getting users to download paid apps and pay for content and services. Thanks to the respectable revenues being generated, Amazon is building a platform where developers have an incentive to compete.
- The Amazon ecosystem will continue growing robustly, as more users adopt Kindle Fire devices, Amazon brings the Appstore into new markets, and developers are encouraged to include their apps on the platform.
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