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I've been getting a lot of questions from retailers and Wall St wondering about our thoughts around the Amazon Tablet. In this post, we'll review some of the materials you may not have seen so we're all on the same page and then dig into what this means for Amazon sellers, Amazon Prime and Amazon's 3P marketplace.

Come on baby, light my fire: Background on the Amazon Fire

Amazon (NASDAQ:AMZN) is widely rumored to be releasing a more general purpose version of the Kindle this week Wednesday at an event in NY (hey Amazon - I didn't get my invite yet). MG over at TechCrunch seems to have the best info, and most of his datapoints have been confirmed from a couple of sources:

  • It will be Android based
  • It will have a 7" screen (Like a Nook, but smaller than a 10" iPad), color and multi-touch
  • It will be in the $250 price range (about half an iPad)
  • It will come with an Amazon Prime membership (remember this)
  • It will of course be fully integrated with the Amazon content system - streaming music, Kindle eBooks, streaming movies, cloud, android app store, etc. One analogy I like to use is Amazon has been building the lego blocks for this puppy for years and it's going to be exciting to see how they all come together in one device for the first time.
  • It will probably be formally announced this Wednesday, September 28, 2011.
  • Amazon 'gets' the importance of Q4 and they learned with the Kindle that they can stimulate a lot of demand, so I suspect they will go earlier and bigger with this device as their confidence is probably higher with a second gen vs. first gen offering.

How many Prime subscribers are there today?

To understand the impact of this device, we need to approximate how many Amazon Prime members there are today. First, Amazon does not disclose this information at all. Trust me I've tried about a bazillion times to get even a ballpark. So any time you hear a Prime number out there, it's a guess.

That being said, we can make an educated guess based on some datapoints we do know:

  • Amazon has 144m active global buyers (active is not registered, it means people that actually purchased something in the last year.)
  • The Prime user spends about 4X of the non prime user

Based on demand data we see when a seller goes from non-prime offers to prime, we believe that 10% of the Amazon active buyers (where prime is available) are on prime, or 10-12m. This may feel high as the latest datapoints out there 2-3yrs ago were in the 5m range, but Amazon has made a concerted effort to both add value to the prime membership as well as push the Prime trial which we think has a very high conversion rate.

Let's call it 10m to be conservative. Remember that the Prime user buys 4X as much, so this audience has the power of 40m buyers, or probably represents 30% of wallet and 8-10% of buyers.

How many Tablets will Amazon sell?

A lot of this depends on how many Kindles Amazon sells and... Amazon doesn't disclose that. Wall St. analysts peg annual Kindle sales in the 21m/yr range.

Another key datapoint is that there are 75m/yr tablets (mostly iPads) sold.

So you can look at this two ways:

  1. Some % of Kindle moves to the new device - e.g. 50% or 10m/yr or 2.5m/Q
  2. Some % of Tablet goes Amazon's way vs. Apples. - e.g. 10% or 7.5m/yr or ~2m/Q

Keep in mind both of these numbers are static whereas both markets (ereaders and tablets) are growing in the 20-30% range easily.

I'm seeing Wall St. Analysts put out there 2m units for Q411 and 6.4m for 2012.

I think they are underestimating this device and Amazon's power to push out a product in high volumes. Thus I'm going to go out on a limb and predict:

  • Q4 2011 - 5m units
  • 2012 - 20m units

Why?

  • I believe Amazon will quickly transition the Kindle models to favor the new tablet
  • As a Prime user, the fact it comes bundled with Prime is actually a negative for me. I don't get value for my prime. The answer? I believe Amazon will offer the device at some discount ($199?!) to existing prime users.
  • I'm sure Amazon has some other surprises for this device (probably unique content and selection and benefits) that haven't leaked that are going to be incrementally exciting on top of what we already do know.
  • HP's discounted Touchpad flew off shelves, admittedly at a $99 price point, but the thing had a dying OS and no content/apps - this proves that there is a clear huge market for a $200-$250 device that undersells the iPad - and admittedly has fewer features. It will be a VW to iPad's Caddy.

What does this mean for 3P and the entire ecosystem?

I believe there are two impacts for sellers and Amazon's e-commerce business from Fire:

  1. A surge in new Prime users (this assumes the device comes with Prime) - Details below.
  2. Pin-action from traffic - As we've seen from the last couple of year's Kindle launches, the device simply brings a lot of people into the front door of Amazon and there's a fair amount of pin action. "Oh, while I'm here, I'll go ahead and order that blu-ray player and soccer gear I was looking for.". I think you'll see a good 2-5m incremental new users coming to the site.

How many Prime users will Fire add? Let's do some napkin work here. So I'm saying 5m+20m=25m for the next 16 months and analysts are saying 2+6.4m = 8.4m. So let's say we have a range of 8-25m Fire users by the end of 2012. To be conservative let's give that a 50% haircut assuming a bunch of the Fire buyers already are in Prime.

That's 4-12m new users to prime - or a mid-point of 8m. With 10m existing prime users that we conservatively say is static, that bumps Prime Subscribers up by 80% to 18m. Those 8m users will spend 4x the average Amazon buyer. Prime today represents 30% of Amazon wallet and a surge in 80% Prime bump incrementally could add 20% new incremental wallet to Amazon over the next 16 months. Even if you assume that these new Prime users are only spending 3X the existing Prime users, this is a huge win and one of the reasons that Amazon can razor blade these devices out there.

For sellers what this means is:

  • The trend towards Prime is clear - every Amazon seller needs to think about supporting FBA
  • Fire should drive some nice incremental Q4 traffic and help potentially layer on another layer of growth in 2012. With Amazon EGM 3P growing at 80%, if the macro-economic picture doesn't change, we could see a bump up towards the 100% range.
  • Translation - if you aren't already selling on Amazon, the train is leaving the station, time to get on board!

Disclosure: I am long Amazon and Google and plan to buy a Amazon Kindle/Tablet the first day possible and regret I won't be able to wait in a long line somewhere ;-) eBay is an investor in ChannelAdvisor where I am CEO.

Source: What Will Amazon's New Tablet Mean For The Marketplace Side Of The Business?