Sep 6, 2011 4:10 PM

Amazon's Future Is So Much Bigger Than a Tablet

Amazon has swiftly become the most disruptive company in the media and technology industries. Its potential in this space is simply off the charts: bigger than Apple's, bigger than Google's or Microsoft's.

A few years ago, people laughed at Amazon's Kindle, especially its clunky hardware design and CEO Jeff Bezos' breathless rhetoric about how it would change how customers bought and experienced media. Now that we're getting closer to the unveiling of Amazon's long-rumored, slickly designed multimedia tablet, nobody's laughing any more.

Amazon's competitors are mostly software companies focused on a small number of tent-pole products that they then market to consumers or enterprise. Amazon is a company focused on selling anything and everything, from mass-market paperbacks to infrastructure-as-a-service, or IaaS. In order to do that, it's become a major technology powerhouse, from shipping, sourcing and logistics in its warehouses to the software that powers its web site and e-readers.

The Kindle isn't a book. It's a bookstore. The Kindle tablet extends that principle further, by making it a retail portal and showcase for everything Amazon sells, whether physical or virtual.

It's a mistake to underestimate where Amazon could take this, or to try to put the company in a box. Even though I've been pretty bullish on Amazon over the last few months, I've been guilty myself of underestimating what it might do.

A year ago, writing for Gadget Lab, I was curious but skeptical about early rumors of an Amazon tablet:

On the one hand, again — Amazon sells a lot of digital products online, not just e-books: movies, games, music. And it’s not hard to make an Android tablet. In fact, at this point, Amazon has more hardware-production experience with the Kindle than some of the companies that are coming forward with pretty solid [Android tablets]. Add an App Store and it starts to look pretty appealing.
On the other hand, Amazon’s built up good brand identification with the Kindle, e-books and E Ink. Will it turn around and say, “oh yeah, multimedia tablets are really awesome, but not, um, more awesome than a Kindle, I mean, um, why not buy both?” Just seems a little surprising.

Three things changed my mind:

Anecdotal evidence and empirical research that showed tablets were eating into the netbook market much more than dedicated e-readers.
The Nook Color showed that there were alternate paths to win in the tablet market, other than becoming an OEM for Android or Microsoft or trying to go head-to-head against Apple's iPad. You could go big like Apple or go home with a very tailored experience like the Nook. In particular, it showed that companies with a strong emphasis on book and media sales were best positioned to do this, or to try some hybrid or variation on the two.
I interviewed Richard Linevsky, president of Catalogs.com, who'd just introduced the company's new iPad app.

It was a little story, but it helped me realize what a perfect machine the iPad had become for selling any kind of product. Not just the apps and movies and music Apple was pushing through. Anything. Everything a digital retailer like Amazon might sell.

You sit on the couch and flip your fingers across the screen like you were thumbing through a catalog or a magazine. But every image and advertisement is connected to a digital store, powered by Amazon. With one click, you've bought it: Either it's delivered to your machine immediately, over the air, or is delivered to your door in less than two days.

It's the realization of Steve Jobs' harsh but prophetic vision of the future of the web, voiced in this 1996 Wired interview, a vision he later brought with him to Apple:

Wired: What other opportunities are out there?
Steve Jobs: Who do you think will be the main beneficiary of the web? Who wins the most?
Wired: People who have something --
Jobs: To sell!
Wired: To share.
Jobs: To sell!
Wired: You mean publishing?
Jobs: It's more than publishing. It's commerce. People are going to stop going to a lot of stores. And they're going to buy stuff over the Web!

At that time Jobs was busy at NeXT refocusing his company on building software modules to make it easier for companies to deliver software applications for retail sales, building up the web infrastructure in much the same way that Apple did with iTunes and the App Store, and Amazon has done with AWS. In his introduction to the interview, Wired's Gary Wolf wrote:

The new Steve Jobs scoffs at the naive idealism of Web partisans who believe the new medium will turn every person into a publisher. The heart of the Web, he said, will be commerce, and the heart of commerce will be corporate America serving custom products to individual consumers. The implicit message of the Macintosh, as unforgettably expressed in the great "1984" commercial, was Power to the People. Jobs's vision of Web objects serves a different mandate: Give the People What They Want.

Unless those "people" are states looking to collect sales tax or affiliates caught in the middle, it's hard to think of a better guiding principle for Amazon today.

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Now that Amazon controls the end-to-end relationship between suppliers of goods stacked in its warehouses and consumers of those goods using its devices, Amazon's next opportunity is to eliminate anyone who stands as a bottleneck between the two.

It's already well underway with books. Amazon's long offered authors various models to self-publish, giving them a generous cut in exchange for conditions that help keep e-book prices low. Now it's developing its own imprint to work directly with authors and agents. J.K. Rowling's Pottermore was publishing's "Radiohead" moment, showing that major authors, too, didn't have to play with traditional publishers to deliver e-books to readers.

How far is Amazon willing to take this? Amazon's experience has shown that books can in turn provide a template for all kinds of media and other goods.

For instance, imagine an analog to Amazon's self-publishing services: Why not make an independent movie or television show and release it through Amazon? Once the video is hosted on Amazon's servers, it's available for immediate digital download or streaming through Prime to desktops, tablets or set-top boxes. Both streaming and downloads promise a revenue share for content creators. Customers could buy a Blu-ray or DVD that Amazon burns and ships on demand — no storage, no overhead.

A lot of this video content would be vanity crap. But it could also be the next Funny Or Die or Channel 101. The breadth and independence of buying choices could easily differentiate Amazon from traditional studios — or even for those studios themselves, from competing services like Netflix.

You can extrapolate this to any kind of media, from music to magazines, to physical goods like groceries (one area where Amazon's never really been able to turn the corner), or to software — anything that can be hosted, stored or delivered. All of it fronted by Amazon's user accounts, credit cards and retail systems. It's iTunes, but more.

Amazon will also now be the OS platform business, not just a little bit as with the original Kindle or with its Android Appstore. With its new tablet, Amazon has now reportedly forked Android into a new platform with its own code, app and media stores, cloud services, revamped user interface, and at least partial protection from patent infringement because of Amazon's broad cross-licensing agreement with Microsoft. All of that makes Amazon's platform appealing not just for developing its own products, but to other Android hardware partners who may feel Amazon offers them more than Google.

"In a year from now," Forrester analyst Sarah Rotman Epps writes, "we could see a range of 'Amazon tablets' made by different hardware manufacturers."

Epps elaborated on this projection in a phone conversation last week. According to her sources, there's strong demand from tablet OEMs to offer an alternative to plain-vanilla Android. Amazon's media strength, domestic brand recognition and consumer trust puts it in a better position to compete with Apple than either Google or these manufacturers in tandem. For its part, Amazon is missing two things Apple has: global brand strength and the ability to quickly and efficiently produce high-end hardware.

So the optimal strategy isn't a whole fleet of seven-inch Android tablets competing with each other on trivial price and feature differences on the shelf at Best Buy. That's what's wrong with the whole Android market today already, especially in tablets.

Instead, Amazon produces an inexpensive, subsidized flagship tablet or tablets in those markets where it's already strong. Then, depending on the success of that launch, it could partner with other companies that offer Amazon-powered products tailored to different regions or with very clear differences in form factor, features and price.

It would be somewhat like the strategy Amazon has followed with e-books, where it sells the Kindle, but also apps on other platforms. But it would be very different from the Macintosh model Apple's adopted for the iPad or the Windows model Google's adopted for Android. Amazon wouldn't be going big or going home, but going very long indeed.