Can airbags be used for protecting gadgets as well? According to Amazon (AMZN), the answer is a big "yes". The internet retail giant just won a patent which will allow it to produce gadgets protected not only by air bags but also by small jets of air. These air bags would mean that its gadgets would be able to survive a fall to a large extent. Amazon hasn't given any hint whether it would be using this latest technology in its upcoming gadgets or not.
On the other hand, Amazon has also won an EU e-book pricing battle with Apple (AAPL) and major book publishers. This means that Amazon can now sell its e-books far cheaper than its major competitors. The million dollar question remains the same. Will it have an effect on Amazon's earnings next year? If yes, then how much?
Since the very beginning of its business, Amazon has always cashed in on low prices. Their strategy is the same in today's market as well. But gadgets with air bags don't go with their usual business model. At the moment, Amazon must be over the moon because of this patent but will this new idea help Amazon in generating healthy profits in the upcoming years? The answer might well be "no." Amazon's tablet, Kindle Fire, has a starting price of just $159 while its all-new Kindle Fire HD comes at $299.
If Amazon wants to put this sophisticated technology in its gadgets then it will have to raise the price as well. As a result, they will lose their competitive advantage that has been there for a number of years. Probably, Amazon has been thinking on the lines of different pricing for different gadgets, which will mean that a gadget without air bags would be far cheaper than the fully loaded gadget. If that is the plan, then I'm afraid they are severely mistaken. Putting sensors in its Kindles would certainly come at a cost, which means that the price tag would be greater than Apple's iPad mini. If that happens, will customers buy Amazon's Kindle which has air bags or will they buy Apple's iPad mini? Of course, a large majority will go for Apple's product. Amazon should understand the fact that their success in the tablet market in the last couple of years has been due to its low pricing rather than sophisticated technology.
Pricing The Future Kindle With airbags
In the last couple of years, Amazon has shown a considerable level of growth in its revenues. In 2011, revenue grew by almost 41% but net income went down to almost 83%. One reason for this is that the company isn't making any profits on its Kindle Paperwhite and Kindle Fire HD. How can you make money when you have a profit margin of just 0.07%? Moreover, company's earnings for 3Q 2013 were -0.60 per share. Amazon should decrease its tablets' cost or it should increase its price in order to have any significant impact on this profit margin. Otherwise, it would keep on reporting negative earnings in 2013 just like they did in the latter part of 2012.
Let's have a look at Kindle's competitors and their prices;
Barnes & Noble (Nook HD+)
Google Nexus 7
Amazon - Kindle Fire HD
Apple - ipad mini
At a price tag of $299, Amazon hasn't been able to generate any profits for Kindle Fire HD, so how can it gain profits after installing airbags in its gadget? Installing airbags would mean that either it will have to increase sales price (which means it will lose a lot of market share) or increase their loss on Kindle sales, thus either option won't be acceptable. Kindle sales are almost 12% of Amazon's sales so if this happens, then we could see its profit margins dropping to almost 0.05% in the next year.
Long term Strategy for Kindle and e-books
According to Forbes, Amazon's CFO recently said in an interview that they are selling Kindle Paperwhite and Kindle Fire HD at cost and aren't making any profits on the tablet. The long-term strategy is to sell more e-books and video games through Kindle. So, even if they aren't making profits on Kindle today, they will eventually in the long run. This might well be the case next year. 2013 may well be the year where Amazon's tablets start generating profits for the company. Amazon can mint a huge amount of money from the pricing battle which it has recently won with Apple and other major book publishers. But, in order to do so, they will have to keep their eye on selling low priced gadgets. If they do so, they will do great in the tablet market across Europe.
Amazon should keep on using its low pricing strategy in the tablet market. This can only be done through selling tablets free of sophisticated sensors. Amazon should cash in on this huge opportunity in the e-book market in Europe. More tablets sold would mean more e-books' revenue. In 2013, Amazon can sell a record number of e-books in Europe and can certainly grab the bull by the horns. In short, don't go for airbags, keep it simple.