How Much Will the Kindle Fire Rock Apple’s Boat?

Amazon (NASDAQ:AMZN) announced Monday that it’s jumping the gun and releasing its entire new tablet lineup early in order to keep up with the huge demand it saw during the pre-sales. The Fire began shipping on Monday, a day early, while the Touch and Touch 3G were shipped Tuesday, six days early. Although the company did not skip ahead by a particularly large time frame, but getting their hands early on the latest gadget would surely have been a pleasant surprise for the millions of eager buyers who had pre-ordered the device. Strong pre-order demand caused Amazon to ramp up Kindle Fire production to more than five million units before the end of 2011, according to news out in the Far East. ^[1] Early signs do point to the birth of Apple’s (NASDAQ:AAPL) strongest competitor in the tablet market, which has everyone contemplating the impact this will have on the stocks of both the companies. In this article, we seek to analyze this impact by delving deeper into the companies’ core and non-core businesses.

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Amazon and Apple rely on different business models

Amazon and Apple are actually two totally different companies when it comes to their core business. Amazon is an on-line retailer selling hard copy and soft copy content such as e-books, movies, CDs and all kinds of merchandise. Apple is a technology company designing and manufacturing MacBooks, iPhones, iPods, and iPads. But they are similar companies when it comes to their non-core businesses, businesses they have forayed into in order to drive their core businesses. Amazon’s non-core business is selling reading devices like Kindle which it uses as a front for selling its content. Apple’s non-core business is selling e-content, songs, movies, apps, etc., through its content and app stores which are available only to their end users, thereby encouraging consumers to exclusively purchase Apple devices. ^[2]

As a result the business models are almost completely divergent; Apple sells its devices at higher price points and allows consumers to access content at low prices, or even for free. On the other hand, Amazon offers devices such as the Kindle at discounted rates and then charges users premium prices to access its content. ^[2] Because of these core differences, the two companies have rarely actually competed head to head. However with the release of the Kindle Fire it looks as though Apple may have to take Amazon seriously as a competitor.

Kindle Fire, A Success?

While we don’t believe that the Kindle Fire is going to unseat the iPad as the market-leading tablet by any means, we think that Amazon can leverage its content advantage to gain ground in more content-rich segments of the industry such as the reader market.

In the device department, Kindle Fire has been subject to negative reviews from people familiar with iPad-standards but we believe that it provides good value for the money considering that it undercuts the iPad by more than a half. We expect that the Fire will take some market share away from the iPad, as the tablet market expands to include more price-conscious customers. However, more than Apple, it will be a major cause of concern for its other Android rivals who will find it exceedingly tough to compete on price considering that Amazon is currently losing $50 for every Fire sold. (see Amazon’s Kindle Fire Threatens Google More than Apple)

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

1. Amazon increases Kindle Fire orders, DigiTimes, November 10th, 2011 [↩]
2. Kindle Fire good for tablet market, TelecomsEurope, Sept 2011 [↩] [↩]