Apple Joins The eReader Business

Today's much-heralded announcement of the Apple tablet brings Apple into even broader competition with Amazon.

Several weeks ago, I discussed this impending event with a business colleague who has had involvement with other companies entering the electronic book reader business. In a few short years, the niche most recently pioneered by Amazon's Kindle is getting rather crowded.

For example, Barnes & Noble debuted a reader, as has Sony. Now Apple brings its prowess to the category.

A glance at the two nearby price charts for Amazon, Apple & the S&P500 Index for the past 5 years, and then for the companies since Apple's inception, tells an interesting story.

Over the past five years, Amazon's and Apple's equity price moves have been surprisingly coherent. While both suffered somewhat through the last year's market troubles, both delivered performance significantly above that of the S&P. The pattern of the price moves almost leads one to conclude that Amazon now behaves in a quasi-technology issue manner.

Looking at the same three series from the mid-1980s, it's rather shocking to see that, in a much shorter timeframe, Amazon has created more return for its shareholders than has Apple. And, again, looking over the longer term, the recent nearly-identical patterns of the two firms' equities moves is stunning. If I'm not mistaken, Amazon began performing like Apple around the time of the Kindle's introduction.

This morning's Wall Street Journal features articles focusing on Apple's battle with Amazon over pricing of titles and relationships with publishers, as well as, on the technology front, its continuing march into new product areas.

If I were handicapping this race, I'd have to bet on Apple. For several reasons.

First, by controlling the entire business system, including in-house product design, as a software and hardware producer, Apple has more natural advantages over the long term. My colleague and I discussed how likely it will be for Apple to release, in future versions, an iPhone-like tablet, where the phone application becomes a freebie.

Second, Apple cut its teeth on this business model with the iPod, which has consistently outperformed MP3 players. At a stroke, Apple can neutralize Amazon's history with publishers, simply through its contracts for epublication on the tablet.

Third, Apple has a much more visceral brand loyalty than does Amazon. In a product space becoming crowded with entries, the vaunted Apple brand, distribution system, and customer service are all advantages which will bring share to the tablet. By comparison, Amazon is simply a place where you buy books online. And maybe some music, if you don't use an iPod. Perhaps rent or buy videos, as well.

I just don't think Amazon has built strong enough brand identity for what is coming in this product/market space to withstand Apple's assault on the ereader category.

Finally, if Apple only competes on a par with Amazon, it's already won. For Amazon, it's a defensive game of mitigating share loss. Perhaps the tablet will expand the overall market, but with its expected higher price, probably not share that was going to Amazon. For Apple, any sales of tablets and content through its online site are net additions.

The momentum and nature of the competitive situation would seem to favor Apple- again.