Amazon Beware: The Google Empire Strikes Back

Includes: AMZN, GOOG
by: Paulo Santos

Back in September 28, (NASDAQ:AMZN) announced the Kindle fire. Unknowingly, it was just starting a war it couldn't possibly expect to win. The Kindle fire made use of Google's (NASDAQ:GOOG) Android operating system. Now, this operating system is supposed to be open source and anyone can use it just like did. However, in doing so, Amazon removed every trace of Google's ability to monetize the operating system it launched and supports - including denying access to Google's app market (now Google play), and installing its own market.

Although Google wouldn't have a problem with a smaller player doing just the same, it simply cannot sit idly while someone the size of Amazon comes and takes advantage of its work and investment, while removing the ability of Google to monetize it. Since priced the Kindle fire aggressively at $199, it managed to take a good bite (14%) of the entire tablet market. In doing so, it sealed its own fate.

Given's success in carving out a relevant slice of the tablet market with a forked Android, it was to be expected that Google would carry out a response to, once again, regain control of that market. Such response has now been leaked: it is now expected that Google will announce - to be launched as early as May - a tablet based on Asus's Eee MeMO Pad 370T running the latest incarnation of Google's Android, Ice Cream Sandwich (ICS). This tablet is to be priced aggressively as well, with rumors ranging from $149 to $249, $199 being the most likely price. Since we're talking about a tablet with much higher specs than the Kindle fire, it isn't too hard to figure that the Kindle fire will be doomed upon its arrival. This tablet, besides running the latest Android, will also have GPS, 3G (probably optional), all the sensors, front and back facing cameras, microphone, etc - it's basically something that makes the Kindle fire obsolete. Granted, it won't have the Tegra 3 SoC that's on the Eee MeMO Pad 370T to keep costs low, but it's still massively superior to the Kindle fire.

Can respond? Yes, it might, by lowering the Kindle fire's price - again taking another hit to margins - or by launching another higher-spec'd Kindle fire. But the fact remains, will now be locked into a war it can't possibly in. It can't compete with Google on the operating system; it doesn't have the technical resources to do so. And it can't compete with Google in terms of staying power regarding the ability to take losses, because Google runs a $14 billion per year EBITDA (and growing), and has $43 billion in cash, to's $1.7 billion in EBITDA (and falling), and $9.6 billion in cash (most of it due to paying suppliers later than it receives from customers - not from earnings).

So, while Amazon might choose to respond, it will in time see how futile that reaction is. Then, it will have to exit the tablet space or face growing losses. Obviously, part of the "Amazon story" today is the Kindle fire, since earnings themselves have been horrible, so once this inevitability becomes obvious the stock is bound to suffer greatly.


Google's impending move into the tablet market is clearly aimed at defeating's Kindle fire, be it on price, form factor, or specs. Google didn't take lightly's use of Android while removing any trace of Google from it, and thus it is to be expected that Google will do anything it can - including selling at cost, as it seems it will be doing - to make's initiative a failure. Such is Google's will to do this, it even hurried up its market entrance by subcontracting the competitive product to Asus.

Since Google's technical resources and profitability greatly overshadow's, it's hard to see how can come out of this battle anything but a loser. And since trades at impossibly high multiples (its 2012 forward P/E is 143), upon seeing the Kindle fire story floundering in the waves, the market is sure to take's stock to the woodshed for a sound beating.

Disclosure: I am short AMZN.