Amazon is preparing to launch a new Kindle tablet in November, just in time to give Apple a run for its “iPad” money this holiday season. Clearly positioned to compete with the iPad, this new Kindle is focused on catching that Kindle buyer who ponders – “why not just spend a little more and get all the functionality of the iPad?” Built on an Android platform, this new generation of the original eReader adds a browser for surfing the web, integration with Amazon’s existing Android app store, plus a free Prime membership. And that’s where we think it gets interesting.

Could the new Kindle Tablet be the ultimate customer engagement tool from the retailer that we think is about the best in the world at selling things and creating loyal customers? Could it push customers over that line and make buying from Amazon even more of a habit? Can it do for shopping what Kindle has done for books? Prime members will tell you that they are predisposed to buy from Amazon since the shipping is free (or prepaid depending on your perspective).

Imagine now that they are on an Amazon Kindle, continually connected to that store for all of their entertainment and shopping needs. Keep in mind, that with the bundled Prime membership, users will get unlimited access to Amazon’s streaming video content. Given the recent Netflix changes, this is an increasingly valuable part of the Amazon Prime proposition.

Last, they’ll also go through Amazon for all of their apps, and of course books & magazines. Now play it out one step further, say that customer is reading a magazine and sees an ad for a piece of clothing she likes. One click buying within that magazine (through Amazon of course) can’t be far off.

One thing’s for sure, in order to achieve this sticky nirvana you must first get the product into the hands of millions of customers. While Amazon is notoriously cagey with its sales figures, one estimate is that they sold 8 million Kindles last year. That would put the Kindle at roughly $1 billion of Amazon’s total $13 billion sales volume in 2010 - clearly a revenue stream worth protecting. When you factor the non-Kindle Amazon sales lift, the revenue stream is probably two or three times that amount.

Amazon is betting on demand for a smaller, lower priced tablet alternative to put its store in your hand. With its 7” screen, the Kindle Tablet is expected to be priced at $250 (half that of the entry level iPad). To this point tablet competitors like HP & Motorola have ignored the lower end of the market, focusing instead on a 10” screen and a $500 price point. A recent study by Resolve Market Research seems to back this up with 55% of those considering buying an iPad seeing it as an expensive toy and 46% considering price as the key reason not to get one. Given that 75% of iPad owners use it to read books and Amazon is targeting a potentially underserved market, they just may pull it off.

Cynics argue that Kindle purists will rebuff the product given its backlit display. They see the move simply as a checkmate to Barnes & Noble’s Color Nook. Regardless of the motivation, we see it as a potential game changer (to steal a thought from Steve Jobs). If they can only capture a small piece of the already 25 million unit iPad market or even just prevent the loss of existing or potential Kindle users, Amazon stands to create closer ties to these customers. Ties that will likely mean a much greater share of wallet.

Will the Kindle Tablet dominate Holiday 2011? Too soon to tell. Many questions remain. Is there room for a 7” screen – a product between the tablet and the mobile phone? Will users buy in to abandoning eInk? Can they really get the design right? But one thing’s for sure, the Amazon obsessive focus on customers is not worth betting against.  Apple as well as retailers, including brick-and-mortar/multi-channel ones, should continue to be very mindful of Amazon, just as Amazon is mindful of customers.

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