Apple Inc (AAPL) created the tablet industry with the stunning success of their iPad device, but it was only a matter of time before real competition came along to pressure the company's domination. We have been surprised by competitors' inability to generate a meaningful alternative to the iPad. Major players like Dell Inc (DELL), Hewlett Packard (HPQ), Research In Motion (RIMM) and Samsung have tried with limited success. But Amazon.com's (AMZN) Fire Tablet and Barnes & Noble's NOOK tablet could signal an industry turning point and that could be trouble for Apple and its shareholders.
For the first time in several years, the technology stalwart recently missed analyst estimates (article). During the reported quarter, the company sold 11.12 million units compared to 11.5 million units estimated by analysts. On a quarterly basis, maybe this shouldn't be a problem. Business is subject to volatility, but after so many years of exceeding expectations, all investors and market watchers should be open to at least the possibility that Apple is experiencing a turning point. And what was more troubling about the latest earnings report was that the company's miss was based on disappointments for both the iPhone AND iPad lines. While some articles focused on the probability that consumers delayed iPhone purchases ahead of the anticipated iPhone refresh, there was no readily acceptable reason for the iPad shortfall and it's not unreasonable for these results to provide seeds of doubts about the continued strength of demand growth for iPads going forward.
These fears were more recently revisited when Cleveland Research analyst Ben Bollin reported that Apple has been cutting iPad 2 component orders (article).
Sure, consumers get what they pay for and many will agree that Apple still has the world's best tablet device, but the price differences between the Amazon and Barnes & Noble tablets with the iPad are too large to ignore. The Fire tablet sells for $199 and the NOOK tablet sells for $249. Both are 7" tablets with no front facing camera and as such, they should not be viewed as perfect competitors with the iPad but it is impossible to ignore a large overlap in potential consumers.
The large price difference between the iPad and the newest tablet entrants will likely draw some significant interest. Sources are already reporting that Amazon.com has increased orders from manufacturers by one million orders in response to high demand (article). Based solely on technical specifications, the iPad is still the king of the industry, but margins are poised to collapse under the weight of the low priced competition.
NEW COMPETITORS ARE DIFFERENT
Maybe this has been an under appreciated dimension of the tablet discussions, but we feel it is important to mention that Amazon and Barnes & Noble are very different from previous tablet competitors. For companies like Dell, Hewlett Packard and Research in Motion, there was always a sense that the companies were not completely invested in the success of their tablet contributions. While each company's tablet brought its own excitement, they were incomplete. For example, the RIMM Playbook still lacks a native email client, which to almost any unbiased observer will realize this is a stunning deficiency. To us, this always left the impression that it was too easy to walk away if their tablets failed. Dell and Hewlett Packard did eventually abandon the tablet business.
But Amazon.com and Barnes & Noble are different because they know that tablet success is important to their future. Tablets are a vital complement to their e-ink book readers and provide an additional distribution channel for their profitable ebook revenues. For both companies, their tablets are an integral part of their business plans. This ensures that the companies will both have a stronger vested interest in achieving success. Unlike previous tablet entrants, failure here could potentially undermine each company's future (of course this is especially true for Barnes & Noble).
Last but not least, Amazon.com is using a highly customized version of Google Inc (GOOG)'s Android mobile device operating system as the software for their Fire tablet. Up until now, many of the Android tablets have lost some individuality because of their shared O/S but if Amazon can successfully implement their own customized version of the open source O/S, they could provide new inspiration to future Google Android adopters. This can only weaken Apple's position in the mobile device market.
We are Apple shareholders and long time admirers of the company, but we good investing requires us to change our thesis when the data changes. We were frankly pleasant surprised by the ineptitude of Apple's tablet competition up until this point, but we firmly believe that the market is in a turning point and that Amazon.com and Barnes & Noble will negatively affect Apple with their entrances in the tablet market. In the absence of a new product line or a significant revamp of the iPad product line, we think investors should exercise caution regarding Apple shares.