Amazon.com Inc (AMZN) is expected to launch a new tablet on Thursday, the latest salvo in a battle for control of mobile access to the Internet.
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Amazon is expected to announce at least one new version of its 7-inch Kindle Fire at a press conference near Los Angeles. A larger tablet may also be unveiled, along with an update of the company's popular Kindle e-reader.
"The swing factor in the expectation on the upcoming Kindle Fire could be on how much lower pricing can go," said So Young Lee, an analyst at SunTrust Robinson Humphrey.
Amazon is willing to make little or no money selling tablets and e-readers because it wants to get the devices into as many hands as possible, then sell higher-margin digital content, such as e-books, video, games, apps and music, to a more connected and engaged customer base.
More broadly, Amazon is fighting with Apple Inc (AAPL), Google Inc (GOOG) and other technology giants for a foothold in the booming tablet market because these devices are fast becoming the preferred tool to access the Internet. As the world's largest Internet retailer, it is essential for Amazon to have a major presence in this new sector.
"A successful tablet is much more important for Amazon than Google," said Chad Bartley, an analyst at Pacific Crest Securities.
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Amazon is one of the leading sellers of physical books, CDs, DVDs and video games. But these products are going digital, so the company is moving quickly to make sure it keeps its share of this evolving market.
"Amazon has to have devices that let customers purchase and consume digital content," Bartley said.
Last year, Amazon surprised investors and rivals by pricing its first tablet at $199, well below Apple's iPad and less than most other tablets at the time. Despite lukewarm reviews, the device sold well, giving Amazon more than a fifth of the U.S. tablet market.
Since then, Google started selling its 7-inch Nexus 7 tablet for $199 with better specifications, while Barnes & Noble cut the price of one of its Nook tablets to $179. Microsoft Corp's (MSFT) up-coming Surface tablet may also be priced at $199.
"Introducing a tablet below the $150 mark could be compelling and another game changer in the industry where the $199 price point is no longer unique," Lee said.
The cost to make the Kindle Fire has fallen since the tablet was launched last year, giving the company room to cut the price aggressively.
Google's Nexus 7 has a more powerful processor, more memory and a higher resolution screen than the current Kindle Fire. It also has a camera, which the Fire lacks.
"I expect the new Fire to look a lot like the Nexus 7 for the same $199 price," said Colin Sebastian, an analyst at R.W. Baird. "If it falls short, that could be a problem. If they go beyond that for the same price that would be good."
Amazon may cut the price of the new Kindle Fire further by offering an ad-supported version, SunTrust's Lee said.
The company already does this with some of its e-readers. The cheapest Kindle costs $79 with ads, while the same version without ads is $109, according to Amazon's website.
"Ad-supported Kindle Fires mean cheaper devices and therefore a wider audience," said Maria Alegre, CEO of Chartboost, which helps game developers make money through mobile devices including Amazon's tablet.
Game and app developers are keen on the Kindle platform because Amazon customers are used to paying for content and the company's one-click payment system makes purchasing easy.
What's missing is the massive audiences accumulated by Apple, through its iPhone and iPad, and Google, through its Android mobile operating system, Alegre said.
"Volume is the number one thing Kindle Fire needs right now," she added.
(Reporting By Alistair Barr; Editing by Bernard Orr)