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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.

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 compelling consumers to purchase Apple devices rather than those of their rivals.

As a consequence, Apple’s mobile ecosystem is characterized by general-purpose, premium-priced devices, for which users purchase free or low-price content from the digital content stores. While Amazon’s mobile ecosystem is characterized by more application-specific, lower-priced devices, for which users purchase premium rate content. In short, Apple sells content to incentivise using its costly hardware; Amazon discounts its mobile devices to sell premium content.

For some time, the two companies stayed with their core business, without challenging each other. However, with the iTunes store and the iBooks App, Apple challenged Amazon’s core business. And now, Amazon is stepping into Apple’s core business by launching its next generation of Kindle, the Fire. Will the strategy work? Can an on-line company challenge the company that developed the iPad?

Kindle Fire, A Success?

If the previous failed attempts by Research in Motion (NASDAQ:RIMM) and Hewlett-Packard (NYSE:HPQ) are anything to go by, the answer is definitely no, at least not in the overall market. But Amazon can challenge Apple in a market niche, the market for mobile reading devices, as the company has a content advantage over Apple. When viewing the Fire as an e-reader, this device will undoubtedly be successful. Integrating the Amazon marketplace into the device is going to prove highly profitable for the company. The Fire is meant to bring customers to Amazon.com. In that regard, the Fire is surely going to be a success.

(Chart created by using Trefis' app)

The problem, however, is that Amazon doesn’t own this content. It has to purchase it from the content providers. And as the Netflix (NASDAQ:NFLX) case has demonstrated, it is the content providers rather than content distributors who have the upper hand in this relationship. Just to illustrate, Amazon had been selling books at a loss in 2010—paying $15 for a hardcover bestseller, only to turn around and sell it for $10 on the Kindle. Under its subscription program Prime, Amazon has already been bundling its Kindle with free downloads of thousands of e-books and movies. On the other hand, Apple would never, ever sell content at a loss as it is not their core business. This means that, even if Amazon manages to successful challenge Apple, it is the content providers rather than Amazon’s stockholders who will reap off the benefits.

(Chart created by using Trefis' app)

In the device department, Kindle Fire has been subject to scathing reviews from people familiar with iPad-standards but we believe that it provides a very good value-for-money considering that it undercuts the iPad by more than a half. Amazon’s offering will take some market share away from the iPad, as the tablet market matures to include people that are more price sensitive than the early-adopter crowd. 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)

The way we see it, the tablet market will be a two-player oligopoly in the near-term. Apple will continue to set the standard for innovation with Amazon quickly following behind, waving its price tag.

Notes:

  1. Amazon increases Kindle Fire orders, DigiTimes, November 10th, 2011

Disclosure: No positions

Source: How Much Will The Kindle Fire Rock Apple's Boat?