The big news out of Microsoft (MSFT) is that the firm will be entering the tablet wars later this year. At the same time, Amazon (AMZN) is rumored to be cutting the price even further on its Kindle Fire to $149.
What are the implications of these events for the tablet space? A few thoughts:
1. The first and most important implication is that when evaluating the tablet wars, one should not compare the mere product itself, for that is not what is actually being sold; rather, it is the entire ecosystem the tablet is designed to work with that is being sold. For instance, Amazon's products are natively designed to work with the Kindle bookstore, Amazon Instant Video, apps hosted on Amazon Web Services, and so on; likewise, Apple (AAPL) brings its ecosystem -- not only just its iTunes media store but device synchronization as well -- and Microsoft will surely be designing its forthcoming tablet to be compatible with Xbox and to allow for file synchronization across devices.
So, who has the strongest ecosystem? Or better yet: does the company have a marketing strategy that effectively matches its ecosystem with a customer base that will respond? In this regard, if Microsoft can structure its tablet to sell to Xbox gamers or its collection of corporate customers, I think the company may be able to find its foothold in the tablet wars. From this perspective, I think the fact that Microsoft has incorporated a full keyboard into its tablet is a major win, as it will establish the device as a product for serious business users who have significant data input needs.
2. Related to the aforementioned point of tablet wars being more about competing ecosystems than about the actual tablet product is that such an environment is especially conducive towards strategies that centered around commoditized hardware. In other words, the hardware is not the profit center; rather, it is a gateway to sell something else: cloud data storage, apps, and media, wireless data services, and probably other innovations in the future. For this reason I think Apple will increasingly be a niche luxury product, while commoditized hardware strategies employed by a variety of firms targeting niche customer groups will be more commonplace.
Moreover, Amazon's strategy of perpetually cutting prices on its Kindle devices, even to the point of selling them at a loss, signifies the right strategy: Kindle is simply a distribution for Amazon's ecosystem; almost like an ad. The marketing strength of this strategy is not to be underestimated, in my opinion, and ensures the firm will focus on creating a robust ecosystem that can serve as a powerful profit center for Kindle users.
3. A concern that gets voiced far less in discussions pertaining to the tablet wars is that of the coming bandwidth crunch. What is ultimately needed is complete spectrum deregulation, so that any computer can broadcast on whatever frequency it would like, with each being responsible to filter out interference. But whether we continue to live in a world where government rations spectrum or if we graduate to spectrum anarchy, companies that can reduce their reliance on bandwidth will be able to offer a faster experience.
And Amazon, with its ability to split processing on Kindle between its servers at Amazon Web Services that already host so much of the web and the Silk browser on the Kindle devices is at a distinct advantage here relative to its peers. The bandwidth crunch will hit the mobile area first, and given that mobile needs are even more sensitive to speed, I think this issue is especially important.
These three points are, in my opinion, crucial to understanding how value will be created out of the tablet wars. Personally, I look for companies that focus on selling an ecosystem, have an ecosystem designed for a specific customer group they are effectively targeting, leverage commoditized hardware strategies, and can effectively deliver a mobile experience in a world where bandwidth is crunched. Amazon is my favorite here, as I see them well-positioned on the three key dimensions mentioned above. As for Microsoft, I think their initial plans look quite solid: a focus on business customers is their big opportunity, where they can leverage their assets and existing customer base and where industry incumbent Apple has historically struggled.
As for how this impacts the investment opportunity, it doesn't change anything for me personally at this time -- but as the tablet industry is a trend I believe in I certainly think it could in the future, which is why this space is worth watching. Apple is trading like a momentum stock and still needs to spend more time cooling off, preferably falling even more so as to shake out some of the speculative hands that are only adding to the volatility.
Microsoft offers stability, but there are better dividend plays out there, and at a P/E ratio of 10 I don't think the stock is an exceptional value play. Amazon hits the sweet spot of being the safest growth opportunity of the bunch, though its high P/E ratio is certainly a dealbreaker and I won't buy the stock unless there is a big decline in price -- at least 50% before I can entertain the idea. Otherwise, there are simply too many other opportunities that I think are more worth pursuing.