Are Amazon and Apple Really Competing on Tablet Size?

by Trefis Team
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Amazon’s (NASDAQ:AMZN) decision to possibly launch a larger 10-inch variant of the Kindle Fire may be perceived as a sign that the online retail giant is finally ready to take Apple (NASDAQ:AAPL) head on with its 9.7-inch iPad in a bid to gain more market share. [1] But with a much-hyped iPad 3 release on the cards early this year, it will surely going to be a tough task. What is even more paradoxical is the fact that Apple itself is speculated to be working on a “mini” 7-8 inch version of the iPad. [2] The immediate question is – what is prompting both companies to take aim at each other’s markets, especially considering that both their products have been successful in their own right?

See our full analysis for Amazon’s stock here


Small Tablet Does Not Truly Align With Apple’s Strategy

While we do believe that the existing Kindle Fire is not an “iPad killer,” Amazon does employ a very different take on the tablet market. Unlike Apple, Amazon does not rely on hardware margins to turn a profit, instead it relies on e-content and e-commerce revenue that a Kindle Fire user would generate over its lifetime. Although the lifetime operating income figure for the Kindle Fire has been speculated, it will be some time before one can see the tangible benefits it brings to Amazon (for now, it’s a huge cost burden). What is clear, however, is that Apple does not release hardware on this principle and relies solely on brand and feature-laden attributes, commanding high prices.

Considering this, it is unlikely that Apple is really planning on taking Amazon’s market share if it launches the iPad Mini. It is much more likely that the iPad Mini turns out to be just a miniaturized variant of its 9.7-inch version (offering similar features), which would be catering to the same iPad market at much higher prices than the Kindle Fire.

Amazon Might Just be Looking to Enhance Visuals

In an article on ZDNet, explicitly termed “Kindle Fire and why 7-inch tablets suck“, various disadvantages of a small tablet are highlighted, especially the difficulty of precise tapping and accidental activation of apps. Furthermore, these tablets need a lot of optimization for data (like movies, e-books) to be easily presented.

We expect that Amazon has taken notice of these issues, and this is precisely why it might be going for larger 10-inch variant. Visual presentation is very important for Amazon since the company needs to justify the numerous media licensing agreements it struck last year through user consumption on the Kindle Fire.

In conclusion, while both Apple and Amazon seem to be moving into each others competencies, the tablet market probably needs to be viewed more in terms of functionality rather than pure size in order to draw the right comparison.

We have a revised price estimate of $205 for Amazon’s stock, which is roughly 12% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Amazon taps Foxconn for 10-inch Kindle Fire, says report, CNet, 20th Feb 2012 []
  2. Apple iPad Mini: will it be 7 or 8 inch tablet, NVO News, 20th Feb 2012 []
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