Amazon And Apple Agree There's Room For Two At The Top

|
About: Amazon.com, Inc. (AMZN), Includes: AAPL, GOOG, GOOGL, MSFT, SSNLF
by: Max Greve

Summary

Amazon has unveiled a whole series of new devices across its Fire and Echo lines heading into the holidays.

Apple and Amazon have both seen their tablet lines return to solid growth, and are now the two leading growth engines in the tablet market.

Apple iPad appears to be firmly accelerating even without substantial price cuts or content sales, refuting my predictions to the contrary.

Fire 10 will perform well, but Amazon's Fire lineup has clearly not been designed to challenge iPad, contrary to my prediction.

Fire is essentially a line of personal, portable TVs. They will appeal to a different customer base than iPad. With Fire and iPad both growing, pressure will only grow on Android and Microsoft.

While Seeking Alpha does not lack for Amazon (AMZN) bulls - or bears either, it must be said - my bullishness has always rested a little more than most, at least in part, on the progress Amazon has made in selling Fire tablets, and using them as a springboard for the sale of subscriptions to its pivotal Prime program.

Lately, however, even I have begun to wane on the Fire’s ability to make any substantial dent against Apple’s (AAPL) iPad, which has begun to restore growth after several years of falling sales. With Amazon making a renewed push, however, and reports emerging that momentum has returned to Fire sales, I am beginning to reconsider my reconsideration.

A Long Wait

Back in February, I made a prediction that Amazon was on the verge of moving up-market in tablets and making a head-on challenge to Apple’s iPad, something it had shied away from doing the last few years. Then this fall, I predicted that Amazon had a new Echo device coming, and not long after that I predicted a new Fire TV to rival Apple’s TV .

By the time I made the latter two guesses, it had been six months since my Fire HD 10 prediction, and nothing had come of it. When, at first, new Echoes and TVs did not appear either, I more or less swore off writing about hardware designs for a while. I was getting a growing amount of pushback and I didn’t blame readers one bit.

Well, when it rains, it pours. Last month, Amazon finally unveiled its new Fire HD10, almost six months after retiring the old one. About a week later, it held a full-on launch event and unveiled not one, but a whole slew of new Echo designs. Amazon also announced a new Fire TV device with 4K and HDR support, and a price cut from $90 down to $70.

Changing Expectations

When I wrote my original Fire HD 10 article back in February, I was all gung-ho on Amazon’s tablet business, then the only non-China manufacturer showing any substantial growth, and its ability to compete with Apple’s top-level iPads. For the past two years, I have been arguing that iPad is being somewhat mis-targeted, designed for content creation when the overwhelming majority of users use tablets for content consumption.

By the time the Fire HD 10 actually was on its way to customers - announced in September, it didn’t ship until October 11th - my enthusiasm had somewhat cooled in response to intervening developments. First, Apple had actually taken just a tiny step in my direction, unveiling a reduced-price iPad with somewhat less-powerful specs. At $329 it was not nearly a wholesale embrace of the “content profit, not hardware profit” strategy that I favored, and which has served Amazon so well. Apple is still Apple. And I was skeptical it would be enough.

But it was. Apple reported its first growth in tablet sales in years in its last reported quarter, the first after the new iPad was unveiled. Meanwhile, that same strategy suddenly didn’t seem to be serving Amazon so well. It’s tablet sales growth came to a sudden, screeching halt for the intervening six months. Or at least it seemed to. If people were willing to pay four times what Amazon charged for a Fire HD 8 tablet, it didn’t seem like there was any chance for the Fire HD 10 against the full iPad line, against which it actually enjoys a smaller price advantage.

Delayed Gratification

While Apple reports its sales figures openly, Amazon has always been first and foremost a retailer, not a manufacturer, and like other retailers it refuses to disclose what products are selling in what quantities in its store - that goes even for the ones it makes itself. As a result, Amazon’s sales figures for its Fire line are much harder to obtain.

But figures do become available, eventually. To begin with, while I have always considered IDC the standard for tablet market data, Gartner and others were pushing back hard on the idea of a Fire decline, reporting that their own figures showed sales were still rising sharply and the restored popularity of iPad hadn’t dented them. What’s more, over the summer IDC published its own 2Q figures for the tablet market and suddenly it too was seeing a major Fire pickup, even in the face of Apple’s new iPad launch, to the tune of 50% Y/Y growth.

It is now clear that Amazon’s Fire skid, if it ever happened, has come to an end, at least for the moment. Which suddenly brings me back to my original question. Is Amazon now in a position to push up-market in tablets?

The New Fire Is Solid....

Reviews for the Fire HD10 have generally been very positive. CNBC called the new iteration “the best tablet you can buy for $150.” Though the extent of that compliment probably depends on what the writer thinks of $150 tablets, which after all sell for less than half of Apple’s cheapest iPad, and as little as 20% of its top-line models.

Amazon did not take quite the path I had predicted it would last winter. HD 10 is indeed upgraded substantially, with better battery life and a full 1080p screen, the first Fire tablet so endowed since 2013’s Fire HDX. Amazon has definitely boosted the specs a bit. But nowhere near as much as I thought it would. Crucially, processor speed, while more than adequate, remains far below the HDX 8.9 from 2014, the first and still only time Amazon incorporated a true iPad level degree of power into a design.

...But Not As Expected

Instead, Amazon has stuck to its knitting and focused on producing another substantial price cut, paired with moderate growth in specs. At $150, HD 10 is priced considerably below where I thought it would be. Instead of a bold new approach to try to take iPad’s crown, which even I admit would have been a tall climb, Fire HD 10 looks more like the finishing touch of its existing strategy. It slots in almost perfectly with the rest of the lineup, rather than standing apart from it.

The Fire HD8, which is also very highly regarded, has a 720p screen and the Fire 7 has a Standard-Definition screen. All three tablets have processors which are adequate but not contenders for any power awards. This is because Amazon is sticking to its strategy of emphasizing content consumption, where Apple emphasized content creation - a considerably more power-intensive task that requires a top-line, and expensive processor.

Precisely because Fire doesn’t do as much, however, its processor still preserves the all-important user experience. Reviewers say that Fire HD 10 is the first $150 tablet “that’s actually good,” with no noticeable lag in performance. They aren’t fooled as to why that is, however. One notes that Fire HD 10 should be considered “more personal TV than personal computer.” That’s basically a restatement of my “creation vs consumption” paradigm for examining the tablet market, and its completely accurate.

So what Amazon has is three tablets, all priced well below iPad levels, each of which offers a step up in screen resolution for an additional price, from 480p to 720p to 1080p. And they come with whatever level of processor is required to keep the thing running smoothly. By defining its tablets mostly by their screen resolution rather than their processing power, Fire tablets are indeed personal TVs, not iPad alternatives. And Amazon appears to be just fine with that.

Apple And Amazon Share The Spoils

With both Amazon and Apple poised to continue to grow their sales, the painful adjustment in the tablet market seems to be falling exclusively on Alphabet’s (GOOG) (GOOGL) Android and Microsoft (MSFT) Surface. IDC’s numbers show that while Amazon and Apple have recovered, the tablet market overall is still shrinking. Microsoft has already admitted to taking some hits on Surface over the first half of 2017.

Even worse, from Alphabet’s perspective, is that the decline in Android tablets is not happening evenly across all geographies. IDC’s data shows that China Android tablet makers, who do not always integrate Google’s full suite of products into their designs, are holding much stronger than Android in the rest of the world. IDC’s other category, composed almost exclusively of Android with Surface thrown in, was the fastest shrinking segment of the market in Q2. Samsung (OTC:SSNLF) alone held steady, and even it did not report actual growth.

Altogether, the tablet business seems to be a bullish factor for Apple and Amazon, and a bearish one for Alphabet, Microsoft, and Samsung.

Investment Summary

As major tech conglomerates, none of these companies will swim or sink solely on the basis of their tablet performance. All have other product lines which can sustain them, from Apple’s iPhone to Microsoft Azure to Amazon’s retail and AWS. Of all the companies, Amazon probably cares about tablets most, simply because of the tie-in to Prime. I have calculated before that Amazon can generate as much as $500 per customer, per year, for each $50-$80 tablet Amazon sells them.

But iPad is angling to once again become Apple’s second-largest product segment. While tablets are far from the heart of these companies, nor should developments in this space be ignored by investors.

In summary, my prediction of an iPad challenger from Amazon has not been born out, despite Amazon finally launching the long-awaited device. But Amazon appears to have found a way to continue to grow market share without challenging Apple, by taking more from Android and Microsoft. Meanwhile Apple has also stayed out of Amazon’s territory, offering only a small price cut to iPad base-level products and still seeing a strong rebound in sales.

I remain bullish on Amazon, even with its $100 jump the other day. I consider Apple a hold, with a much more reasonable P/E but a high degree of dependence on one product line, iPhone, for the lion’s share of its profit.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.