At the heart of Amazon’s 7″ Kindle Fire tablet is a forked version of Google’s Android. Initially, there was much confusion about what exact version of Android Amazon was using. Some sources quoted that it was Honeycomb (which would have meant that Google provided the source code for it; and given what Amazon has done, this scenario seemed unlikely) while others said it was 2.1, 2.2, and 2.3. Apparently, the real answer is it is based on version 2.3 (Gingerbread). Regardless of version, this simple fact had some Fandroids initially dancing with glee that Apple’s dominance with the iPad would soon be coming to an end. Unfortunately for them, they could not be more wrong.
The Kindle Fire and iPad are marketed at two completely separate market demographics. Furthermore, the Fire is a 7″ tablet while the iPad is nearly 10″. Then there is the stuff that is missing like front/rear facing cameras, no 3G or Bluetooth, limited internal storage. That isn’t to say that the Kindle Fire won’t take away some iPad sales…. you’d have to be a fool to think there won’t be some kind of impact in the U.S. (though not at a level where it would significantly cut into Apple’s marketshare). Internationally however, this device won’t be of much interest due to the lack of content (Amazon Japan for example does not have the sort of library their U.S. counterpart has mainly due to the very slow uptake by Japanese publishers in getting their content online). But I can see the product doing extremely well in the U.S. because the price is right for those who mainly want to consume media content, which is how Amazon is primarily marketing the device. Amazon wants to make money on the sales of content whereas Apple wants to make money on its hardware devices (and uses the content as a carrot). Apple on the otherhand has placed a serious push marketing the iPad as a post-PC device and with iOS 5, made a huge point about cutting the cable (since a computer is currently needed to perform system updates, syncing, activation, etc). When Amazon releases their 10″ version, a re-evaluation of the potential impact on iPad sales will need to be revisited. From a macro view though, competition even if it is indirect is a good thing. What is more interesting though is how this will impact the Android ecosystem.
As noted, Amazon utilized and forked Android; essentially sandboxing it for their own needs. Missing are the Google apps which are naturally tied to Google services. Amazon doesn’t really make a big deal that the device is Android powered. That is done on purpose as this isn’t about furthering Android; it’s about furthering Amazon’s own retail reach and providing consumers a low cost entry point for consuming the media which they sell. The hardware provides a turnkey solution which Amazon controls to provide the best possible user experience. In otherwords, they are taking a page out of the Apple vertical integration book. Google on the otherhand makes it money off of search and mining whatever personal information it can gleen when users make use of their “free” software and services in order to provide even finer targeting of their ads. I put the words free in quotes because there is no such thing as a free lunch. Google is a publicly traded corporation and therefore has to make money. The data they are able to gather is worth quite a bit of money to advertisers and advertising revenue is Google’s primary revenue source.
Amazon however has neutered those Google services in favor of their own including their own curated app store (as opposed to the full Android Market). Whatever Amazon mines from customers using the devices will be for their own (and marketplace partners) benefit in targeting what they send out to the user in the form of recommendations, not Google; and I can surmise being cut out of the loop must have some folks at Google tee’d off.
This whole situation is of course ironic as Google essentially makes money off of others peoples content (majority don’t opt out and exclude Google’s search bot from scraping their site because most want their sites to show up in Google). However, when you really delve into how some of this advertisement revenue is generated, the whole thing is akin to a house of cards remiscent of the Internet bubble when one of the measurements of a sites worth was based on easily gamed metrics like pageviews. In similar fashion, a sites ranking in terms of where it shows up in a Google search can also be gamed as there is a whole cottage industry (internet marketing, affiliate marketing, search engine optimization, conversion rate optimization, etc) meant to increase the profitability of the AdWords and AdSense advertisement schemes (and Google doesn’t care because whichever way, they also make money).
On the desktop (Windows and Mac), Google pretty much owns search. In the mobile space though, peoples usage patterns are quite different where it tends to be more about the utilization of services. With iOS, Apple pushed the notion of native applications as a means of providing a higher quality user experience. The monetization scheme was also quite different where the whole paid ecosystem would supplant the need for revenues based on ads. And even with mobile ads being displayed in free apps as a means of monetization for the developer, the dilution of the need for search and ultimately, the reliance on Google services presented a threat to Google’s primary bread and butter in the rapidly and still growing mobile realm. Google of course realized this which is why there was a quick refactoring of Android so that it could become a viable alternative to Apple and ensure that the web would not lose ground to native apps on mobile platforms.
Google’s Android therefore was a way to continue garnering and controlling eyeballs in the mobile realm by making sure that search and Google services (which could mine further for users personal information) would be deployed and used ubiquitously. Google’s method for garnering widespread and rapid adoption was by making it free of any licensing fees for handset manufacturers to use as well as modify. The rest of the story to date is history with the main point being the rapid uptake in marketshare (not going to go into the whole fragmentation thing). What many people just don’t seem fully cognicant of is just how much information Google has at their disposal via search, via the fact that many use Chrome for their browsing, that many use Google Mail for their e-mail (and those messages may contain a wealth of personal information about you and others), and that this whole circle is replicated on Android (which is also why Google is also working on ChromeOS). And yes, I realize the irony of using a Google owned service to deride this aspect knowing Google now has that much more information on me (I don’t have a problem with this as I am making this determination as to what specific bits of information I want Google and Microsoft Bing to index about me).
Digressing, Amazon’s wholesale use of Android to create a new platform for their own purposes while cutting Google out of the loop isn’t much different from how Google has liberally borrowed and refactored others intellectual property when it best suited their own needs when it came to Android. So while Amazon has pretty much hijacked Android, there really isn’t much Google can say without publicly making themselves look like hypocrites. As mentioned by Gartner analyst, Michael Gartenberg, “The loser here is not Apple. The loser, if anything, is Google and the Android ecosystem.”
Why? First of all, it’s the pricing. Amazon has set the new low bar for Android based tablets. Wait, wasn’t it noted earlier that Amazon has downplayed the Android angle? Yes, but that hasn’t stopped the tech media from constantly pushing the point home that the Kindle Fire is based on Android. And as such, there is a small amount of psychology at play where the Kindle Fires become guilty by association. So even though the product isn’t primarily an Android tablet, the $199 price point sets the high water mark for 7″ Android tablets. Which means that competitors will need to price their tablets accordingly. What that also translates to is lower profit margins for Android tablet makers. But unlike Amazon which managed to put a bunch of services into place and building the Kindle FIre around those strengths, the other Android tablet makers don’t really have such an ecosystem which they can leverage as a carrot to dangle in front of consumers. As the PC business has shown, the race to the bottom (as far as pricing goes) while yielding market share gains, has eventually taken its toll on those companies when it comes to margins. One estimate notes that HP had to sell 5-7 PC’s to yield the same amount of profit which Apple garners from 1 iMac. On the mobile platform side, Apple is eating everyone elses lunch in terms of profits.
Does Apple also need to respond with price cuts of their own for the iPad? That really remains to be seen because currently, we’re talking about 7″ tablets versus the iPad’s nearly 10″ screen. And just like on the desktop side, Apple competes on the higher end of the spectrum where the company is considered a premium brand. Having been able to build a broad ecosystem of products and services which ties together the mobile iOS platform with the desktop OS X platform, the company has managed to develop a loyal customer base that is willing to pay a premium for those products. Furthermore, many of these customers have much invested in terms of apps such that it will take something far more superior to result in a decision to actually migrate platforms. This does not mean Apple should overlook what is happening with the pricing of Android tablets or the uptake of the Kindle Fire (based on its pricing). Apple’s does have the economies of scale advantage with its supply chain which likely gives them a bit more elasticity when it comes to product pricing. Furthermore, the iPad 3 with its upgraded specs will likely be out by the time a 10″ Android based tablet (including an Amazon one) comes to market. In otherwords, Apple will be business as usual for the time being and will analyze the holiday sales numbers.
Another reason why the Android ecosystem could be the loser is if the Kindle Fire sells well (and as mentioned, I believe it will do quite well and will likely be one of this holdays season biggest sellers), it will do so at the expense of other Android tablets out on the market including those based on version 3 (Honeycomb). By garnering a large chunk of the non-iOS tablet market, this will give Amazon the leverage to court Android developers to its app store. And developers would be targeting their apps at the Amazon specific fork of Android which as noted earlier, is already well on the path to being its own platform. If Amazon adds its own specific API’s this further muddies the waters when it comes to application compatibility. The point being is that Amazon is in the dominant position to wrestle control of Android from Google; and Google will have little say in that matter.
Finally, it doesn’t take a genius to figure out that the geek crowd will be working to get newer versions of Android onto the Kindle Fire. Amazon has already stated they won’t really do anything to block it so this will lead to additional sales of the device to this smaller demographic of techies. While those numbers won’t add up to much of a material impact, it still translates into lost sales for actual Android tablet makers which aren’t necessarily selling in large numbers. As it is, some manufacturers have already responded by cutting prices; the 16GB HTC Flyer which was previously priced at $499.99 is now going for $299.99 at Best By while RIM’s PlayBook are now on sale for a limited time: $299 for the 16GB model, $399 for the 32MB version, and $499 for the 64GB tablet.
What comes to mind is Google’s decision making over the last few years which has led up to this point. As a somewhat small GOOG shareholder (who is now around 90% divested and waiting to dump the remaining shares), the decision to acquire MMI as a means to fortify Android was the last straw (since this really strays away from their core competencies and only serves to throw shareholder money down the drain). In the companies greedy quest to own it all (with regards to revenues from search), they’ve managed to burn bridges left and right. Google was in a very comfortable position at one point to partner with Apple with regards to being provided priority as far as search and services were concerned. None of Google’s Android partners to date even had a clue as to what it meant to provide a complete working ecosystem. Instead, just like in the desktop realm, it became about features (having the bigger e-weiner) in addition to decisions being made in typical clueless kneejerk fashion to whatever Apple did without fully understanding just how long it really took Apple to put together the ecosystem they had. Likewise, it took Amazon years to put together their cloud based ecosystem surrounded by a content rich library before finally coming out with the hardware and software stack which ties into that backend framework and content.
To make a long story short, Google is reaping what it sowed and is now likely (internally speaking) at a crossroads as to how they’ll approach both Honeycomb and Ice Cream Sandwich. They’ve already screwed the pooch with the MMI purchase as it put their main hardware partners on notice; those partners do have contingencies in place to not be reliant on Google with the notion that Google will likely provide favorable treatment towards it main subsidiary (if the deal is approved and finalized). Furthermore, will Google extend favorable treatment by way of concessions to Amazon by changing the terms of condition for their tablet optimized version of Android so as to not lose control of the platform? I personally can see Google doing something like this behind the scenes at the expense of their other partners, no matter how messy it ends up becoming. But this is the exact kind of mess one can expect when certain past decisions have been made with a level of arrogance and with little regards for respecting others intellectual property. And this is all from the company whose informal motto used to be “Don’t be evil” (which comes from one of its corporate philosophies where they state they can make money without doing evil; something which the decision makers there in recent years have utterly forgotten when it comes to honest and morally correct decisions).
