Amazon's Kindle Fire Heats Up Streaming Video Fight, Too

Amazon Kindle is quickly become the second-fastest selling tablet in the market, just two weeks after its launch, new research shows, and that sets it up to potentially drive huge gains in its Prime Instant Video streaming service.

IHS Research is forecasting Amazon (NAS: AMZN) will ship some 3.9 million units in the fourth quarter, giving it a 13.8 percent share of global media tablet shipments, far beyond the 4.8 percent held by Samsung, and second only to Apple's (NAS: AAPL) 65.6 share.

"Nearly two years after Apple Inc. rolled out the iPad, a competitor has finally developed an alternative which looks like it might have enough of Apple's secret sauce to succeed," said Rhoda Alexander, senior manager of tablet and monitor research for IHS. "Initial market response strongly suggests that Amazon, with the Kindle Fire, has found the right combination of savvy pricing, astute marketing, accessible content and an appropriate business model, positioning the Kindle Fire to appeal to a brand-new set of media tablet buyers."

IHS predicted 64.7 million tablets would ship in 2011, up 273 percent from 2010, and eclipsing the 60 million units shipped it had earlier forecast. And, it said, the growth will continue, expecting 287.2 million units to ship in 2015.

"At a rock bottom price of $199 -- which is less than the $201.70 it now costs to make the device -- the Kindle Fire has created chaos in the Android tablet market," Alexander said. "Amazon plans to use the Kindle Fire to drive sales of physical goods that comprise the majority of the company's business. As long as this strategy is successful, the company can afford to take a loss on the hardware-while its Android competitors cannot."

Amazon is betting big that the Kindle Fire will drive its digital content sales, including those from Prime Instant Video, its nascent instant streaming service that is a free add on to its all-inclusive second-day shipping service, Amazon Prime, which costs $79 annually.

BTIG analyst Richard Greenfield in October said he thinks it's more than likely Amazon CEO Jeff Bezos will follow Netflix's (NAS: NFLX) playbook and eventually break off the streaming business, specifically using the Kindle Fire to fuel growth.

Greenfield said Amazon Prime has helped it establish a recurring revenue subscriber base, and he pointed out that it now offers 11,000 movie and TV titles.

As to when, and if, Amazon will spin off the video streaming business, Greenfield put it this way: "Looking at how Netflix approached its evolution, it is hard not to see parallels with Amazon's evolution, with Amazon essentially incubating Instant Video streaming within Prime," he said. "Given Netflix's bold pricing/packaging moves (which has likely helped open the door for Amazon and other competitors), we would not be surprised to see Amazon offer a standalone streaming video product in the next six-months."

IHS points out that Amazon's willingness to take a loss on the Kindle Fire hardware points to a long-term strategy that's new to the market.

Buyers of the tablet get a one-month free membership to the Amazon Prime shipping service, access to movies and also includes the Kindle e-book lending library.

IHS says Apple isn't likely to sit and watch Amazon erode its market share, expecting that it will eventually drop the iPad 2 price and introduce yet another generation of tablet. But will it have an answer for Amazon's streaming service? Or will it buy one, say, Netflix, and fire its own shot across Kindle's bow?

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