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By Jeremy Glaser | 09-30-2011 02:27 PM

Room for Two in the Tablet War

What does the Amazon Kindle Fire's debut mean for the tablet business?

Securities mentioned in this video
AAPL Apple Inc

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Amazon ignited a tablet war this week by announcing the Kindle Fire.

I'm here today with R.J. Hottovy, he is the director of consumer research, and Michael Holt, he is a senior analyst at Morningstar, to take a closer look at the tablet space and see what impact the Fire could have on it.

Gentlemen, thanks for joining me today.

R.J. Hottovy: Thank you.

Michael Holt: Thanks for having us.

Glaser: So, R.J., could we talk a little bit first about the Fire. Can you give us an overview of the product and what you think its near-term potential is?

Hottovy: Sure, absolutely, I think this really has game-changing potential in the tablet space. It's a seven-inch touch screen, dual processing, tablet computing device. It really is a compelling product. And thing that surprised us most, I think, was the price point on this. It's $199, which is actually a little bit lower than what we are looking for. I think the combination of this low price point, the content offering that Amazon has, and its already expansive customer base is over 144 million users make this the first serious entrant we've seen in this space to compete with Apple for market share.

Glaser: So, looking at Apple, then, are they running scared from this? Does this really put a big pressure on the iPad's real monopoly on the tablet space right now?

Holt: It is the first legitimate challenger to the iPad, but it's directly in line with what we've been expecting in the tablet market. We've never seen this as a monopoly. We've seen it evolving much like the smartphone market has where there is a strong number two and possibly room for three or four players.

Glaser: So, there are really still maybe more questions and answers when it comes to whose going to win this, but I guess content is another big question here. R.J. mentioned that Amazon's content is a big reason why they want to get this tablet out there. How do you see these relationships with the media companies playing out and does this hardware really matter for those relationships.

Hottovy: Really, the thing that's compelling from our standpoint and in terms of this tablet launch is that Amazon can launch this as a loss leader. They're not going be making any money on the tablet itself. It's all about the content sales, and they already have relationships in place with all the major media companies, the streaming video through it. It really is just more of a customer acquisition tool. So, as you get your Kindle Fire, you're going to be out there going to Amazon's site picking up digital media products and at the same time probably checking out other selections. It really is consistent with our take that Amazon is going to be the clear market share winner in the retail space for several years to come.

We're estimating about 30% top-line growth for the company over the next five years and a lot of that's coming at the share of bricks-and-mortar retailers, especially in commoditized industries. And I think this is really what we're going to see as a result here. I think it's got all the right partnerships in place, media content, it's got a handful of compelling apps. I think this is going to be a really interesting product, and I do expect it to sell very well.

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