Home > Tech > Kindle vs. iPad Just Start of Amazon vs. Apple Deathmatch

Kindle vs. iPad Just Start of Amazon vs. Apple Deathmatch

Forget the tablet wars – what will really define these tech stocks going forward is the CONTENT war these devices will spark

The war between Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), on the surface, seems to be a choice of high-end vs. low-end.

Apple has its ridiculously profitable iPad. Amazon has driven e-reader and tablet prices lower, with its new Kindle Fire HD starting at $199 with its older version starting at just $159.

The gadget forums light up like a pinball machine, comparing the functionality of the Apple iPad vs. the Kindle and its Google (NASDAQ:GOOG) Android operating system. And you inevitably get the comparisons between struggling tech giant Research In Motion (NASDAQ:RIMM) and its poorly received PlayBook, the relatively new Surface from Microsoft (NASDAQ:MSFT) or Samsung and its Galaxy tab.

But that debate over gadgets is a bit short-sighted. Because the real future of mobile isn’t going to be hardware — it’s going to be content.

Apple Retreating on High-Margin Hardware

And here’s where Apple and Amazon are really going to roll up their sleeves and fight with earnest, leaving RIM, Samsung and others in the dust.

You see, Apple has redefined the consumer tech space with “insanely great” products that consumers are willing to pay big bucks for. The iPhone, by most estimates, garners a margin north of 50%.

But Apple is starting to loosen its grip on those margins. CNET reported a few months ago that iPad margins are nearly half what they are for iPhones. And you can bet if the Apple rumors about iPad mini coming in a few weeks are true, this device will see even thinner margins than the flagship Apple iPad.

And beyond tablets, you have Apple driving down the margins on older iPhones by giving the technology away at a fraction of the cost of newer models. With the iPhone 5 launch, you can get an iPhone 4 free from a wireless carrier like Verizon (NYSE:VZ), AT&T (NYSE:T) or Sprint (NYSE:S) with a two-year contract.

Apple isn’t going broke by any means, and it’s still making a pretty penny here. But the high-end isn’t what it used to be for Apple, and margins are about to feel some big pain in the next 12 to 18 months.

The Future Is About Scale

Why the retreat on margins? Because Apple knows that if it’s going to remain dominant in tech, it needs to remain dominant in the device category simply to tap into the content sales that come with it.

You see, just as Apple pioneered many of the now-ubiquitous tech gadgets we use, it also pioneered a slick way to ensure those gadgets continue to throw off cash via the App Store. The tech giant skims off 30% of the profits from its App Store sales to ensure a nice flow of cash long after the initial hardware sale.

That model is predicated on reach, however. Without scale, this kind of model would never work.

The scale of Apple’s audience allows the company to tap into a huge amount of customers and thus make the 30 cents for each $1 video game add up. Equally important, it also ensures that developers will keep the App Store ecosystem on top. Back in 2011, I read a great post from a developer who racked up a million bucks in App Store sales in just 20 days after coding image-editing software for Apple devices. And he was all to happy to dish out the 30% for the payday, because there was simply no way for him to ever get that kind of sales and exposure on his own.

But what happens if a rival marketplace is siphoning off both sales and developers? Well, you feel the pain. And since many consumers don’t feel the need (or have the means) to upgrade their tablet every 12 months like clockwork, that means application and media sales are key.

What’s more, the future of mobile isn’t as pedestrian as a $1 puzzle game you buy to entertain your toddler on your Apple iPad or that 99-cent song download from iTunes that you work out to. The future is all media, including movie archives on the cloud, live TV news and recent sitcoms, digital coupons and banking, and even mobile advertising on free content.

You have to have scale and you have to keep it to win the mobile wars. In many respects, these revolutionary devices are simply the first shots that have been fired. What comes next for companies like Amazon, Apple and Google will really be what defines mobile computing going forward — and most important, where the money goes from this revolution.

Apple or Amazon: Who’s the Front-Runner?

It’s hard to pick a winner here in an fast-evolving business between the Apple iPad and Amazon Kindle. But those folks who look only at the Kindle are missing the big picture of how dangerous Amazon is right now to its competitors. Amazon is selling its Kindles at cost simply to get a foothold in the content space, and that’s where it really has potential.

The dominance of Amazon’s e-books is obvious: This year, e-books topped hardcovers in total sales for the first time ever, and the Kindle and its associated Kindle reader are the platform of choice for most Americans with roughly 60% of the market.

Then there’s Amazon Prime, which AMZN and its CEO Jeff Bezos are investing heavily in to take on cable companies as well as streaming video giant Netflix (NASDAQ:NFLX). Amazon is selling its service for the lower price of just $79 a year, and including all kinds of perks to its e-commerce site in tandem with a membership.

And, of course, there is the Amazon Appstore (notice the one word to avoid Apple’s lawyers…). Google has an Android app store, but every Kindle device is programmed to go here. Amazon is shady on its specific Kindle numbers so there’s no way of knowing the true reach, but it’s surely impressive and growing as fast as the AMZN tablet is.

Of course, Apple is hardly going bankrupt here. It remains the leading tablet by a long shot, with a stunning 70% market share, a robust App Store and its iTunes marketplace that has become synonymous with media downloads.

But it’s worth noting that despite Apple’s powerful brand, it’s now No. 2 in the smartphone war behind Android-powered devices, according to ComScore. Some analysts are worried that Apple’s smartphone dominance will slip soon — either in unit sales as it fails to keep up its growth rate, or in the margin department as it sacrifices profits for scale.

One has to wonder whether the iPad will suffer the same fate, or if Apple has been fast enough to get competitive on pricing and maintain its dominance despite lower-cost competitors.

It will be interesting to watch going forward. But all investors need to remember that regardless of whatever Kindle or iPad incarnations we see next, content is going to be key for both of these companies moving forward.

Sources:

Article http://slant.investorplace.com/2012/10/kindle-vs-ipad-just-start-of-amazon-vs-apple-deathmatch/

Image http://www8.pcmag.com/media/images/284838-new-ipad-vs-kindle-fire-which-tablet-is-right-for-you.jpg

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