One of the models will be priced at US$199 while the other will be priced US$99, and both models are expected to hit markets by the end of 2012, added the sources.
If such rumor pans out, it has two very important consequences for Amazon.com:
- One, it confirms what I said in my article "Amazon.com Throws Down The Gauntlet". Basically, Google would be responding aggressively to Amazon.com's (NASDAQ:AMZN) parasitic usage of the Android OS. Google would do this both to avoid fragmentation and to keep control over the OS. If Google does this through a loss-leader strategy, then Amazon has bought a war it can't possibly win, given Google's much larger profitability and deeper pockets;
- Two, it gives Amazon.com a taste of its own venom. Amazon.com has become famous by pricing aggressively in every market it tries to penetrate, in hopes of driving established players out of the market or into bankruptcy. This has worked well with Borders, and seems to be working with Barnes & Noble (NYSE:BKS) and Best Buy (NYSE:BBY). However, this time the other players are not weakly capitalized. This time Amazon.com is applying its strategy against behemoths such as Google and Apple (NASDAQ:AAPL). If Google fights back by pricing a product well below cost - as a decent $99 tablet would imply, Amazon.com wouldn't be able to match the pricing, simply because it can't take a $0.5-$1 billion loss selling a device (10 million units at a $50 subsidy would produce a $0.5 billion loss).
As always, the market completely ignored this possibility. I have to say I find it hard to believe myself. I don't think Google is ready to throw away $0.5-$1 billion in such a fight. At least not yet.
This move, if it were to happen, would hit Amazon.com's Kindle Fire and Kindle Fire HD directly - possibly wiping them out entirely. It would also be a defensive move against the expected Apple mini iPad that's expected to be announced during October.
In other news
Even without Google's move, there's reason to believe some of Amazon.com's latest hardware isn't selling too well. Although the new 7" Kindle Fire HD 16Gb retook the first place on Amazon.com's best seller list, the 8.9" Kindle Fire HD is already falling down through the ranks and the 7" Kindle Fire HD 32Gb is similarly down the ranks. Both these devices are around 15-17th in Amazon.com's best seller list, alongside the old Kindle Fire which Amazon.com no longer carries - which shows just how little they must be selling. This can be seen below:
This event is significant. Whereas the strong selling 7" Kindle Fire HD 16Gb is probably priced at breakeven, the 8.9" version and the higher-capacity 32Gb version - those shown above not selling well - are versions which might carry a bit of profit (for instance, 16gb of flash memory doesn't cost $50 …).
In a market completely driven by monetary considerations, no attention is paid to how Amazon.com is doing fundamentally, never mind that it trades at 360 times estimated 2012 earnings and the estimates do little but go down.
Still, today we got a fresh batch of rumors that imply that Google might decide to start a price war with Amazon.com - a price war which Amazon.com can't match due to the implied losses it would make. I have doubts about this rumor being true, but still it reminds us that two can play at Amazon.com's loss leading strategy.
Also, there's good reason to believe that those models in Amazon.com's Kindle line which might carry a little profit - the 8.9" version and the larger capacity 7" version - aren't selling well. This again doesn't bode well for Amazon.com's already tiny profits. My expectation is that Amazon.com will see further cuts to its 2013 estimates.
Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.