(AMZN) Amazon Enters Crowded Tablet Market

Amazon.com Inc.(AMZN) stepped into the intensely competitive tablet market with the launch of its first media tablet: “Kindle Fire”.

This segment is already crowded with tablet makers such as Research In Motion Ltd. (RIMM), Hewlett-Packard Co. (HPQ), Dell Inc. (DELL), Samsung, and Cisco Systems Inc. (CSCO) to name a few. Among the pack, Apple Inc. (AAPL) leads the race with its iconic iPads in terms of unit shipments.

Priced at $199, Kindle Fire comes with Wi-Fi connectivity and a 30-day free trial of Amazon Prime, the company’s $79-a-year membership service that includes streaming video and free two-day shipping. Through this device, consumers can also watch TV shows, listen to songs, read magazines and download apps, books, games and various services that Amazon.com offers. The Kindle Fire runs on Google Inc.’s (GOOG) Android operating system.

Amazon expects shipments for Kindle Fire to start from November 15, 2011, a strategically conceived time as it is right in time for the peak holiday shopping season. The tablet will be sold through Best Buy Inc. (BBY) and other retail chains.

Though popularly referred to as the “iPad Killer”, Kindle Fire falls short of Apple’s iPad in a few respects. The Amazon device does not have a microphone, camera or 3G connectivity. Moreover, the screen size is also small (7 inch) compared to an iPad (9.7 inch). However, with a weight of 0.91 pounds, Kindle Fire is lighter than the iPad (1.33 pounds).

Some analysts expect lower-priced Kindle Fire to gain traction in the tablet market for the varied services and content offerings. Others believe that the company may not gain ground versus Apple just yet, although it could get other tablet makers to review their pricing.

We view Amazon’s tablet launch as a defensive move, designed to protect its leading share of the e-reader market. While e-readers from companies like Barnes & Noble Inc. (BKS) were always expected to eat into this market share, lately there was evidence suggesting that the large number of tablets entering the market would hasten the process. Amazon’s Kindle app was a stopgap, but would not have been enough to ward off this growing competition.

On the other hand, a competitively-priced tablet with a focus on retail would be a very wise strategy, because not only would it help book sales, but also boost sales of physical goods and varied digital content.

Amazon expects to ship almost 4 million units of Kindle Fire this year, but analysts believe that in the long term the company would need to launch a higher version of the product with faster processors and add some hardware if it is to take share from market leader Apple.

In the tablet market, Apple dominated and strengthened its position in the second quarter of 2011 with a 68.3% market share worldwide, up from 65.7% in the previous quarter, according to research firm IDC.

Meanwhile, with an estimated market share of 26.8%, Google’s Android-based tablets were down from 34.0% in the previous quarter. The remaining 4.9% of market share went to the new entrant in the tablet market, Playbook, a Research In Motion product.

Total tablet shipments rose by 88.9% on a sequential basis and 303.8% year over year in the second quarter of 2011 to 13.6 million units. Based on the robust growth, IDC increased its shipment forecast for 2011 to 62.5 million units, up from the previously forecasted estimate of 53.5 million units. Analysts expect the trend to continue in the remaining two quarters of 2011.

Analysts from Pacific Crest expect Kindle Fire to boost Amazon’s sales by 32.0% to $64.6 billion in 2012.

Amid all these possibilities, the company’s decision to significantly increase the number of fulfillment centers to cater to demand across different markets will likely continue through most of 2011, negatively impacting its earnings this year. Stiff competition and the corresponding negative impact on prices are also expected to continue.

We believe that current investments are supported by the strong balance sheet and expect them to drive the next growth phase, enabling international expansion.

We maintain our Neutral rating over the long term (6-12 months). Currently, Amazon has a Zacks #4 Rank, which implies a Sell rating in the near term.

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CISCO SYSTEMS (CSCO): Free Stock Analysis Report

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HEWLETT PACKARD (HPQ): Free Stock Analysis Report

RESEARCH IN MOT (RIMM): Free Stock Analysis Report

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