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Apple: Can it stop the Amazon menace?

Two years ago, I wrote the following:

What I question is how Apple is going to compete in mobile telephones. Don’t let the hype around the Verizon Droid fool you. The phone, manufactured by Motorola, is a very good phone. But, it is only one of many that are now coming to market. There are also phones in the works from Sony Ericsson, Samsung, HTC, Dell,Garmin, LG, and a host of other manufacturers. Even Google is supposed to be coming forth with the much anticipated Google Phone – the phone designed to prevent the splintering of Android which doomed Unix as a consumer-based operating system.

To my eyes, this is looking like a repeat of the Macintosh-PC Wars of the 1990s which Apple lost. On the one side, you have Apple, competing at the high end and very concerned about platform integrity and control, and preventing other manufacturers from building its hardware. On the other side, you have another operating system designed for the lower end and installed on a host of manufacturer systems – which may or may not cause serious platform integrity problems down the line.  Who wins that battle?

In the 1990s it was Intel and Microsoft. And they went on to reap massive rewards as Apple foundered.  Today, Apple risks a repeat of this if it does not come out with a credible solution to deal with its burgeoning Android problem.

-Apple: Can it stop the Android menace?, Nov 2009

I think this view is increasingly being validated by subsequent events. Android powered 56 percent of smartphones sold in the last three months. No wonder Apple is suing the pants off of Samsung; how else will they stop this thing? But even mobile carriers are against this litigation. Verizon says it hurts innovation.

Nevertheless, Apple still dominates the tablet market. We’re talking 80% market share in North America. That’s huge.

But now there’s Amazon and their Kindle Fire.

Amazon just schooled the tablet market. The Fire, a $199, 7-inch color touch-screen tablet may be the first blockbuster Android tablet, though no one will care that it’s running the Android OS.

[…]

In general, the Amazon Fire is an attractive tablet at a killer price point with instant access to all of your stuff. It could be a no-brainer purchase for Amazon customers. Will it beat the Apple iPad? Unlikely. It’s smaller, has access to far fewer apps, can’t scale up on storage and isn’t intended to capture and manipulate personal media. On the other hand, it could be viewed as the best iPad alternative for those with simpler needs, like: reading books, watching TV and movies.

-Amazon Kindle Fire: First Impressions, Mashable

I think Apple should be worried. When HTC launched the G1 Android phone three years ago, it was panned and, legitimately, it was a weak offering compared to the iPhone. But by the next year, it was apparent to me that the deluge of product was coming from other manufacturers. Shouldn’t we expect the same here again?

Moreover just as mobile users with cheapie phones will switch to Android in moving into the smartphone arena, first-time tablet users will be lured by the ridiculously low price of the Amazon Kindle Fire. Ultimately, that will count as a win for Android, especially when developers start making Apps for the platform.

Amazon has been clever about this offering in a number of ways.

  1. Amazon has also tied in their Kindle platform, making an ‘upsell’ for people like my wife who own Kindle’s easier. The product positioning is all about Kindle. Mentally, we should think of this as a souped-up Kindle more than an iPad. I think this is extremely negative for Barnes and Noble and the Nook.
  2. They have released this product at a price point which will sell a lot of units. In fact, one analyst estimates that the Kindle loses Amazon $50 per unit sold. The iPad is much more expensive. If you buy this thing and don’t use it as much as you thought, it won’t break the bank. A lot of people will take a flyer on it. The same goes for other devices in the Kindle family, which were re-priced to as low as $79. Amazon is using this as a loss leader.
  3. Amazon has released this product just in time for the holiday season. Expect monster sales for that very reason.

Bottom line: The Amazon Kindle will do very well and that will set up the Android platform nicely.

For Apple:

Here’s how I see it shaping up. Android continues to make huge inroads and developers start focusing more energy on that platform. Either Apple’s market share erodes or eventually they are forced to compete at a lower price point. None of this is a problem near-term as the growth rate is still high. But when growth in the cloud- and mobile-related computing revolution slows, Apple will be exposed.

I see 2012 as when the slowdown will first be felt for Apple.

For Amazon, they are always willing to introduce loss leaders to build volume. I anticipate they will be successful here yet again. That is a wonderful story for their Kindle book sales, music sales, video sales and for their App store sales as well.

Video via the Wall Street Journal

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

6 Comments

  1. Pete says:

    Edward,

    I would agree that Apple is in for some tougher times, but not just from Android systems, also from Microsoft’s Windows Phone and coming Windows 8. I think Microsoft has the potential to suprise many in the next several years. As many have indicated the next battle will be one of ecosystems, of which Microsoft has phone/mobile/gaming/PC/search/content, etc… It seems it has the makings of being a stronger competitor than most think. It also has patent licensing deals from HTC, Samsung (just announced), and others on Android handsets that are sold. It would behoove you to watch this space more closely if you are not already.

  2. Nun says:

    I guess you have a different perspective. To me Apple is the menace, driving up prices after cornering the market. Take a look at iPod Touch pricing over the past few years. Then iPad. They’re gouging because they can. No one can touch them.

    Amazon is finally offering a tablet to compete, which by the way, is also competition for the iPod Touch in some ways.

  3. Mayson Lancaster says:

    Note: Apple is making a [slow but steady, and increasingly significant] comeback in the Mac vs. Windows war. Also note: according to UBS, Apple iPhone retention rate is ~89%, Android retention rate around 60+%. Windows 8 tablets aren’t likely to be significant for at least a year [if ever]. And, *nobody’s making any significant profit in PC’s but Apple and Microsoft, and Apple’s by far the biggest one in mobile profit share.

  4. David Lazarus says:

    Apple make more profits than the rest of the phone industry combined. The same for the tablet market. Even with a huge discount compared to the iPad this is not a competitor to the iPad. The Kindle is successful because it is an ebook reader. Its long battery life because of its e-ink screen. I doubt that the Kindle Fire will set the world alight, in fact if they are losing $50 on each one sold it will sell but accumulate losses for Amazon. The sale of books for use on it will make it a more attractive bet longer term. Though ultimately Amazon would do best to concentrate on getting a colour ebook reader on the market. Apple do not really compete with the Kindle and these two could coexist quite happily.