It seems Apple (NASDAQ:AAPL) is coming under intense pressure from the runaway success of Amazon’s (NASDAQ:AMZN) Kindle Fire tablet. The latest figures released by research firm IHS iSuppli revealed that Amazon’s Kindle Fire occupied around 14% of global tablet shipments in Q4 2011.  With reported shipments of 3.9 million units, Amazon certainly could not have asked for a better start to 2012.
According to a recent report from DigiTimes, Apple is likely to begin the production of 7.85 inch iPads in Q3 2012.  If Apple indeed does that, this could be to help ward off competition from Amazon’s 7 inch Kindle Fire. Our $550 price estimate for Apple stock is largely in line with the current market price.
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A smaller iPad might not be dead on arrival?
Interestingly, Apple’s Steve Jobs had famously once proclaimed that competitors’ 7 inch tablets are “Dead on Arrival”, citing that tablets should have a 10-inch screen at a minimum for an optimum user interface experience (see Do 7-Inch Tablets Stand a Chance?). Part of this stemmed from the fact that the 7-incher is a tweener — too big to be a smartphone and too small to be an effective tablet. If Apple indeed comes up with a 7 to 8 inch tablet, it will be a significant design change from the current 10 inch screen size of iPad.
Could Amazon launch a 9 inch Kindle Fire?
Amazon has started to capture the tablet market, as its strategy of selling low cost tablets seems to be working. However, the 7 inch Kindle Fire does not compete directly with 10 inch iPad. There was a rumor a few days back that Amazon could be working on a 9 inch tablet design to compete directly with Apple Read (A 9-Inch Kindle Fire Could Drag on iPad 3 Sales). We believe this move will put Amazon in more direct competition with the 10-inch screen iPad, and given the gap in its price point, Amazon could attract more buyers to its tablets and take some of the anticipated momentum from the iPad 3 launch.Notes: