Amazon vs. Apple: Then and Now

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Shares of Amazon.com (Nasdaq: AMZN  ) soared to new highs last week, after the e-commerce giant unveiled its next-generation Kindle Fire tablet along with new models of its Kindle e-readers. The updated product lines are important for Amazon in its ongoing battle with Apple (Nasdaq: AAPL  ) , as the two heavyweights compete for dominance in a crowded tablet market. Yet when Amazon launched the original Kindle Fire nearly a year ago, I contested that it was a true iPad challenger. I've now learned that a lot can change in a year's time.

New and improved
With a smaller and cheaper iPad on the horizon, Amazon knew it needed to rise to the occasion. I think it has. The updated product mix is packed with promising features, such as a Dolby Digital Plus audio system, 4G LTE wireless, and built-in Facebook (Nasdaq: FB  ) and Skype apps for the HD versions. That's a far cry from Amazon's original Fire, whose inferior processing abilities and technical shortcomings were no competition for Apple's iPad.    

Last October, I argued that the first Kindle Fire wouldn't beat Apple's iPad on price advantage alone, no matter how many headlines at the time dubbed it the "iPad killer." However, today I think Amazon is closer than ever to hitting this mark. As far as hardware is concerned, Amazon's new devices boast dual antennas for faster Wi-Fi performance, front-facing high-definition cameras, and faster processors.

These are certainly enhancements over the former Kindle Fire, which first sold for $199 last November. The new high-definition devices will range in price between $199 and $599 and will be available in late November of this year. Of course, Amazon was sure to tout its aggressive pricing strategy repetitively throughout the launch.   

Subliminal messages
It's cheaper than Apple's iPad, yes. But there's a catch. Purchase any of the new Kindle Fire products, and you'll have to suffer through full color advertisements displayed on the devices' lockscreens. True, Amazon's "Special Offers" have always adorned the cheaper Kindle e-books, but this could dampen sales, especially of Amazon's higher-end tablets, which could cost as much as $500 apiece. I certainly wouldn't pay a fraction of that price if it meant being constantly bombarded with advertisements. On the other hand, it appears the ads are a way for the e-commerce company to help offset costs related to its aggressive pricing strategy.

Picking up the tab
Last year, Amazon booked a small loss on its original Kindle Fire products, which cost the company an estimated $201 per device to manufacture but were sold for just $199 apiece, according to calculations from iSuppli. With its refreshed lineup of tablets due out later this year, Amazon remains focused on its end goal of offering affordable tablets as a way to drive higher-margin content sales. According to The Wall Street Journal, Amazon CEO Jeff Bezos "suggested Amazon may break even or even lose money on the sale of its devices."

Of course, if you ask Amazon, it's all part of the company's grand plan to make money from its services rather than its devices. According to Bloomberg, digital-media sales made up 37% of Amazon's total revenue last year.

While Bezos' company continues to gain traction on the digital media front, its share of the tablet market remains well below those of rivals in the space. During the second quarter, Apple's iPad grabbed 68% of the global tablet market, whereas Amazon's shipments weighed in at just 5%, according to IDC.

Looking ahead
I don't think Amazon's updated Kindle Fire will knock Apple's iPad out of the lead, but it should steal meaningful market share away from other new entrants such as Microsoft's (Nasdaq: MSFT  ) Surface tablet and Google's Nexus 7. Barnes & Noble's (NYSE: BKS  ) Nook e-reader has also become a victim of the Amazon price-bully. The book retailer's latest version of its Nook product line failed to compete with the Kindle Fire, even with its similar features and price point.

Despite Amazon's affordable prices, Apple's iPad is still the tablet to beat ahead of the holiday shopping season. But if there's one thing Amazon and Apple seem to agree on, it's a disdain for Google services. In fact, Amazon's newest Kindle Fire devices will no longer come with Google as the default search engine, according to AllThingsD. Instead, the tablets will be preset with Microsoft's Web search engine, Bing. And while the new Amazon products will still run on Google's Android software, it's a big win for Microsoft.

The software giant has struggled to gain traction in the mobile market. Support from Amazon could give Microsoft the push it needs to finally get its software and services into other mainstream mobile devices. In addition, Microsoft is rumored to be paying Amazon for the spot as the default search engine. This bodes well for Amazon, as the company fights to recover manufacturing costs. Meanwhile, for iPad users, the default search is set to Apple's Safari browser.

Bigger picture, both Apple and Amazon are focused on long-term success. Both companies are growing their respective digital libraries, and rolling out competitive new mobile devices to consume the content they sell. For now Apple has the lead over Amazon in the tablet market. However, I suspect Amazon's affordably priced family of Kindles will be a hit during the upcoming holiday shopping season. As the year draws to a close, investors may want to consider shares of Amazon. The Motley Fool covers all the need-to-know details of Amazon's investment thesis in its new premium research report. Get your copy of the report today.

Fool contributor Tamara Rutter owns shares of Amazon.com and Apple. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Apple, Amazon.com, Facebook, and Microsoft. Motley Fool newsletter services have recommended buying shares of Amazon.com, Google, Facebook, Apple, and Microsoft, writing puts on Barnes & Noble, creating a synthetic covered call position in Microsoft, and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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