Regarding Amazon's Fire Tablet- And Apple

The big news in online business last week was Amazon's unveiling of its Fire tablet. By now, you've doubtless read plenty of reviews of the product, comparisons with Apple's iPad, heard and seen countless pundits pontificate on the new entry.

Here's my take.

First, as I've always contended, and several pundits reinforced, Amazon will always trail Apple in this product space, by virtue of its entirely outsourcing the design and manufacture. For example, from what I've read, the Fire has no camera and lacks some connectivity options.

Second, the real and most important aspect of the Fire is its $200 price point. While it technically exploits a market segment which Apple doesn't care to currently address, it does begin to exert more downward pressure on pricing and margins in the product/market. In fact, the Wall Street Journal's report on the Fire alleged that Amazon is not only pricing to profit on the downloadable content, but that the $200 list price doesn't even cover the Fire's production costs.

Thus, as I told a friend over lunch last Friday, Amazon is embarking down a very dangerous road- using a sprawling, integrated business model including its entire online general store to subsidize the cost of its latest deliverable tablet. Sooner or later, some aspect of Amazon's business will probably begin to experience pricing problems as the transfer pricing and allocation of overheads begin to distort the prices and margins of products which effectively fund the Fire.

Mixed into that mess is Amazon's tying the Fire to an automatic Premium subscription. So various shipping and other discounts on content are included with the tablet, but it's unclear that buyers of the Fire actually want, prefer or will use much of that content. Or spend more money to buy or rent what isn't free with the Fire.

In contrast, Apple's business model seems simpler and cleaner.

As I also explained to my friend last Friday, this development is why Apple won't be in my equity portfolios forever. Eventually, one or more of three forces tend to drive equities from the buy list: investor expectations adjust to the firm's actual performance, resulting in the equity's price no longer rises so smartly; competitive forces attenuate the firm's revenue and profit growth, and/or; regulatory action puts a stop to the firm's previously-unstoppable growth.

I've seen a succession of former portfolio holdings fall victim to one or more of these forces over time: Kohls, Dell, Microsoft, Home Depot and Wal-Mart.

Now Apple and Amazon seem to be heading in that direction. Both have been recent portfolio members. But now their evolving struggle involving tablets and online-delivered content- music, video and books- is likely to limit margins and pricing power for both.

Thus, Amazon's Fire has accelerated the move of the tablets and their content toward commoditization. Good for consumers, not so great for investors in the providers of these services.
Interestingly, in his weekend Wall Street Journal column, Holman Jenkins, Jr. contended that the real reason for the demise of technology firms Microsoft and HP has been that their product lines are devoid of the social media content which Apple, Amazon, Google, and Facebook have so zealously and successfully pursued. Including, for the first three, developing special-application computers, a/k/a tablets and smartphones, which undercut general-purpose computers and emphasize media consumption.

Certainly, that's one view. But personal computers became commoditized some years ago- well before the rise of Facebook, social media and the general accessibility of media content via cheap, ubiquitous wireless connections.

Still, as I contended in today's companion post, competitive forces tend to affect every product/market, even if at different speeds.