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Originally published September 27, 2011 at 12:28 PM | Page modified September 28, 2011 at 7:48 AM

Move over, Apple; here comes Amazon's tablet

When Amazon came out with the Kindle four years ago, it created the first popular e-reader. But now, it's following on the iPad's heels, and as any analyst will tell you, that's no easy position.

Seattle Times business reporter

Seattle Times technology columnist Brier Dudley is in New York to cover Amazon.com's event, starting at 7 a.m. at seattletimes.com/brierdudleysblog

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A color-screen Kindle tablet, which Amazon.com is expected to unveil Wednesday in New York, could mark a major milestone in the Seattle company's ongoing mission to rule the Internet world.

Or it could be just another turn of the screw as Amazon expands its presence in electronic devices.

The big question is how much market share can Amazon grab from Apple, clear and away the dominant tablet brand with 29 million iPads sold in the first 15 months, including 9.2 million in its latest quarter.

When Amazon came out with the Kindle four years ago, it created the first popular e-reader. But now, it's following on the iPad's heels, and as any analyst will tell you, that's no easy position.

Other consumer-electronics brands have tried and failed to take on the iPad. Just ask HP how hard it is to produce a viable threat to the iPad. HP last month discontinued its TouchPad tablet after only seven weeks of sales.

"Amazon is playing the hand that it's been dealt," said Bill Rosenblatt, of Giant Steps Media Technology Strategies. "After dominating the e-book market, they're faced with a future where e-book devices are becoming commodities, and e-reader sales are not so great compared with the projected growth of tablets."

Amazon's tablet most likely will be priced to undercut the iPad, which costs between $499 and $829. Analysts call it a classic razor-blade model, meaning Amazon will sell the tablet for a loss and try to make money from digital-content sales, similar to how razors are sold for cheap to stimulate demand for disposable and profitable blades.

"Everyone's been throwing tablets against Apple, and Apple has stayed the market leader," said Wayne Lam, senior analyst at iSuppli in El Segundo, Calif. "Someone needs to do something drastic to crack into the market, and this is one way."

The enhanced Kindle — reportedly dubbed "Kindle Fire" — is expected to run a customized version of Google's Android operating system, which will tie into Amazon's own digital-content services, including cloud-based music storage and video streaming. The purpose, analysts say, is to create a one-stop-shopping device for Amazon's core retail business, as well as a tool to watch movies, read books and listen to music.

Amazon comes to the battle armed with a huge online brand presence and an ability to cater to cost-conscious consumers, said Forrester Research analyst Sarah Rotman Epps. Forrester estimates that Amazon will sell as many as 5 million tablets by Christmas, assuming a price of $300 or less.

Amazon has used a similar strategy to maintain its lead against rival e-readers, chopping more than $200 from the price of a Kindle in the four years since its original version went on sale for $399.

Now, an ad-supported Kindle with Wi-Fi goes for $114, while an ad-free Kindle with 3G Internet access sells for $189 — barely enough to cover the production costs, Lam said.

Amazon's willingness to sell the Kindle at a loss makes it "a nasty competitor," Epps wrote in a recent report.

"Apple sells software and services, but the lion's share of Apple's revenue still comes from hardware, which makes it vulnerable to a company, such as Amazon, that isn't seeking profit from hardware sales," she said.

Although Amazon does not give sales figures for the Kindle, it's widely credited with changing the way people buy and read books.

Data firm IDC estimates the Amazon Kindle captured 52 percent of the e-reader market in the second quarter, followed by Barnes & Noble's Nook, at 21 percent.

Amazon dominates the e-book market, but it's less successful at digital movies and music, said analyst Collin Gillis, of BGC Financial in New York.

"Companies that make other tablets are Amazon's competitors in books, music and movies," he said. "That's not a defensible position to be in."

Gillis was referring not only to Apple, but also to Google, which owns video-sharing website YouTube and recently announced plans to buy Motorola Mobility for $12.5 billion.

Lately, Amazon has been adding more video programming to its online retail mix. Monday, it announced a deal with 20th Century Fox to make streams of older movies and TV shows part of a $79-a-year Amazon Prime membership. The move brings the number of titles available on its new Amazon Prime video-streaming service to more than 11,000.

Amazon also is seen as a possible buyer of Hulu, a privately owned video website that makes money by selling ads and subscriptions for online access to TV shows. Amazon launched an Android Appstore in March, and it reportedly has agreements with several major magazine publishers to offer popular titles on its tablet.

The thing about Amazon, analysts note, is that it's first and foremost an online retailer, and a tablet suits its needs regardless of what it does to the iPad.

"One of the goals from Amazon's standpoint is to funnel traffic into its various businesses, whether it's the shopping site or digital services," said analyst Dan Geiman, who follows Amazon for McAdams Wright Ragen in Seattle.

Speaking at Amazon's annual shareholder meeting last June, Chief Executive Jeff Bezos explained that Internet-connected tablets were enabling people to shop online in more ways than ever before.

"Most of our customers shop with us from desktop or laptop computers, but people have a different posture with tablets," Bezos said.

With tablets, they "lean back on their sofa," he added. "People leaning back on their sofa, buying things from Amazon, is another tail wind for our business."

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

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