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It’s all about the content

Amazon is about to turn the tablet market upside down. But can other manufacturers afford to follow suit?

After enjoying an amazing ride of almost two years, during which it has seen little or no competition, the iPad is about to get a serious run for its money. Or make that less than half its money. Because the most striking feature of the new Kindle Fire, which was unveiled last week by Amazon, is its price.

At just $199, the Kindle Fire is $300 less than the cheapest iPad 2, a price differential that isn’t so much a gap but more of a yawning chasm. Not only does the Fire undercut the iPad 2 by over 60 percent, but it also decimates the pricing model of Barnes & Noble’s Nook Color ($249) and a host of other assorted tablets and e-readers.

Component analyst IHS iSuppli estimates that each Kindle Fire costs at least $209.63 to make, which means that Amazon will be selling each one at a loss. And that doesn’t include marketing and distribution costs, which would make the loss per unit even worse.

So what gives? How can Amazon stay the course with the Kindle Fire and compete against the iPad if it’s going to lose money every time it makes a sale?

The first thing to understand is that Amazon is not actually competing against the iPad. Instead, it’s taking a leaf out of Apple’s playbook and trying to create a market of its own. Amazon already knows part of that market extremely well – it’s made up of existing customers who have been buying various versions of the Kindle e-reader for the last several years and who will be only too happy to invest in another Amazon product that does even more.

The other piece of Amazon’s target market consists of all the potential tablet buyers who have stayed away because, at $499, the iPad is just too expensive. It has never made sense to me – or millions of others – that a tablet computer, no matter how nice the screen looks, can be priced higher than far more powerful netbooks that can do so much more.

But the main reason that Amazon can sell the Kindle Fire at a loss is because it doesn’t care. That’s right – it’s not selling the Kindle Fire to make money on the device itself but to sell all the content that goes with it. Amazon has millions of books, movies, TV shows, apps and other goods and services to sell you, and the Kindle Fire is the perfect delivery vehicle. For every Kindle Fire that it sells for a loss, it figures to sell hundreds of dollars of content for a tidy profit.

Owning this kind of pipeline is the holy grail of the electronics industry and it is going to be extremely hard to compete with. Only Apple with iTunes and the App Store has anything remotely close in terms of content offerings and even those pale in comparison to Amazon’s vast treasure chest. Samsung? Zero content to offer alongside a beautiful but now very overpriced Galaxy Tab. RIM? A few weary apps and a broken e-mail platform. HP, Dell, Acer? Nothing but the hardware itself.

Amazon has finally given us a reason to rush out and buy a tablet, and surprise, surprise, it’s our old friend content!

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