Can Apple Survive a $99 Kindle Fire Tablet?

The hills were alive yesterday with the sounds of $99 Kindle Fire HD tablets.

TechCrunch's report that Amazon.com (NASDAQ: AMZN  ) is producing a high-def tablet that will hit the market later this year at a $99 price point turned heads. An Amazon rep denied the report, but it's not as if it would come as a major surprise if it did actually happen.

The original Kindle e-reader hit the market at $399 six years ago, and now the latest generation is available for as little as $69.

The original non-HD Kindle Fire hit the market at $199 less than two years ago, and it's already at $159 -- with a Cyber Monday sale this past holiday season that temporarily marked down the device to $129.

Technology gets cheaper over time, especially as a company aims for the mainstream market. It wouldn't be a surprise to see a somewhat scaled-down Amazon tablet break below the $100 barrier. There are actually a few 7-inch Android tablets selling for less than $80 on Amazon.com itself right now. Google's (NASDAQ: GOOGL  ) Android is an open source platform, so it's really just a matter of working with suppliers to get the components that are cheap enough to work. If the obscure Zeepad, Coby, and Chromo can pull off sub-$80 gadgetry, why not Amazon with the vibrant ecosystem of digital media to sell after the initial sale?

If anyone could subsidize a $99 tablet, it would have to be Amazon -- but what would this mean for Apple's (NASDAQ: AAPL  ) iconic iPad?

Passing the torch
Android became the top dog in smartphone mobile operating systems a couple of years ago, but it's taken longer for Android to overtake iOS when it comes to tablets.

Apple was strong out of the gate. The $499 price point was aggressive enough that the first wave of similarly sized tablets merely matched the tech giant's price point. By the time the world realized that there was a legitimate market for tablets, the iPad had a seemingly insurmountable lead.

Schools went iPad. Restaurants went iPad. Gadget blog Electronista is reporting this week that the Department of Defense has a pending purchase order for Apple hardware including 220,000 iPads that will kick in at the end of the sequester.

The iPad has become to tablet operating systems what Microsoft's (NASDAQ: MSFT  ) Windows is to the PC market -- Apple's platform is the safe and popular choice. Why risk straying from iOS?

However, Windows never had a rival gobbling up market share the way that Android has been noshing in the "good enough" computing niches of tablets and smartphones.

The threat is real, and Apple needs to pay attention.

Industry trackers see Android overtaking iOS in tablets this year, and a price war will only bloody up the players on the way down.

Apple fights back
Apple's response late last year was to roll out the $329 iPad mini in time for the holiday shopping season. Shaving down the size, specs, and price was supposed to help Apple, but as I pointed out in January it did come at a cost. Apple's average revenue per iPad slipped from $568 a year earlier to $467 in its most recent quarter. The iPad mini was likely a major contributor to seeing Apple's overall gross margins shrink from 44.7% to 38.6% over the past year.

The contraction is intensifying, and Apple can no longer make it up in volume. Analysts see earnings per share declining 17% this quarter despite a nearly 23% pop in revenue.

If Amazon throws down the gauntlet of $99 tablets, can Apple really stick to $329 for its similarly sized iPad mini?

Apple and Amazon come from two different camps. Amazon's willing to sell hardware at cost, hoping to make it back in digital distribution. Apple relies on hardware markups because it's not counting on media sales as profit drivers. Apple didn't roll out the original iTunes Music Store to make money on downloads. By the time it pays the labels more than two-thirds of the revenue and covers its own costs, there isn't really a lot there.

There's no point debating the better model. What matters for investors is what Apple will do if Amazon slashes prices.

Apple's iPad was immune to price cuts early on. When BlackBerry (NASDAQ: BBRY  ) struggled with its original PlayBook -- slashing its price from $499 to $199 -- it didn't eat into iPad sales. If Microsoft's Surface continues to sputter, the iPad won't be vulnerable if it follows the PlayBook, TouchPad, and other defeated tablets into the clearance bin.

Amazon is different. The success that Amazon's Kindle Fire and Google's Nexus have had below $200 forced the iPad mini into the market, and if $329 seemed slightly high before, it will seem outrageously high if Amazon does produce -- and more importantly market -- a $99 tablet.

The marketing part is important. Unlike the unknown entry-level Android tablets already on the market, Amazon doesn't have a problem devoting its valuable front-page real estate to the promotion of Kindle and Kindle Fire rollouts and price cuts.

The good news for Apple is that the shares -- at 10 times earnings -- are already priced for pain.

We also can't dismiss Apple's history as an innovator. If it can raise the bar later this year with features or services that the competition can't match, pricing will be less of a factor and margins may actually begin to improve again.

Amazon's history of price cuts on Kindle products hasn't helped Apple, but it doesn't have to be the end of the world if Apple's building a better planet.

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Read/Post Comments (16) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 22, 2013, at 12:16 AM, JAVKO wrote:

    why don't you instead question AMZN's valuation metrics?

    How can a Co constantly produce inferior results and be valued at > 100 F P/E?

    Now you want to compare a Rolls Royce with a Yugo, that's your crdibility on the line! Afterall, you "analysts" are more than a herd with mentality or IMO hidden agendas more in line than any other group of players in the market.

  • Report this Comment On March 22, 2013, at 12:47 AM, stocksonaut wrote:

    Forget about AAPL, can AMZN survive?

  • Report this Comment On March 22, 2013, at 2:05 AM, kramsigenak wrote:

    Apple survive Rick? You're not a fool your a Clown.

  • Report this Comment On March 22, 2013, at 2:24 AM, toddhartman1a wrote:

    Even if a $99 Kindle is released -- one key issue is the Kindle is a closed system and you can't access Android - only use Kindle's Proprietary System and this is a huge disadvantage to a lot of users.

    I recently purchased a Novo 7 Venus Android tablet for $149 through a site called TabletSprint -- and this tablet rivals the Nexus 7 for a lot less - with most of the same features, including a Quad Core processor and a hi-res 1280x800 IPS screen display -- Plus a microSD card slot, HDMI, and Front and Rear Cameras, all of which the Nexus 7 doesn't feature.

    Perhaps if the Kindle tablets gets better specs like the Venus tablet as well in the future allows more of an open access -- for now, it's really limited in what you can do with a Kindle tablet and what you do have access to.

  • Report this Comment On March 22, 2013, at 4:44 AM, Melci wrote:

    Apple sold more iPad minis in their first three days on the market than Amazon sold Kindle Fires in their first three months.

    Consumers aren't dumb- they know you get what you pay for and the iPad is far more than just hardware. The vast tablet-optimized app library, the enormous hardware, peripheral and services ecosystem around the iPad and envy other Apple device means Amazon is much less threat that it might seem.

    If Amazon sells their tablets at or below cost but also does the same with their ebooks, music and movies then where exactly is Amazon making any money? Compare Amazon's losses and skin-thin margins with Apple's continuing record revenues and profits and you tell me who is merely "surviving" versus who is thriving?

  • Report this Comment On March 22, 2013, at 5:47 AM, H3D wrote:

    Kindle sales have been plunging. Returns are high. Satisfaction is low.

    I guess in needs to be cheap. But they will have to make it even nastier to hit that price.

    Impact on Apple. None whatsoever.

  • Report this Comment On March 22, 2013, at 7:50 AM, yragsapo wrote:

    "The iPad has become to tablet operating systems what Microsoft's (NASDAQ: MSFT ) Windows is to the PC market"

    Poor analogy. iPad is not a tablet operating system; iOS is.

  • Report this Comment On March 22, 2013, at 7:56 AM, never2dull4u wrote:

    Ask yourself this question. Should Apple follow Amazon to negative earnings? In other words, the more you lose in earnings, the higher the stock goes? Nothing else matters including users' experience. Is that what you are preaching?

    This article is pointless....

  • Report this Comment On March 22, 2013, at 8:33 AM, Oril wrote:

    I see you are still pumping that DOD apple BS even though it has now been debunked. You fools are so full of it you have lost all credibility.

    Change your name and find a new line of work.

    You and your articles suck!

  • Report this Comment On March 22, 2013, at 9:06 AM, ronrapllc wrote:

    Can BMW survive Toyoto?

  • Report this Comment On March 22, 2013, at 9:09 AM, ronrapllc wrote:

    By the way I could never understand the concept of having the word "fool" in your name and selling financial services.

  • Report this Comment On March 22, 2013, at 10:35 AM, 2sour wrote:

    Motley Fool authors need to get serious. The whole article is nonsense in so many ways. There are already cheap alternatives on the market and Apple is having no trouble selling ipad mini's. Apple's profit margin may be decreasing slightly, but so what ... even with decreasing profit margin, how many companies come anywhere close to the margin Apple earns? Why aren't you writing about the impact of a $99 tablet on Amazon's profit margin? Why aren't you writing about the fact that this will pull tablet sales from an android competitor, like Samsung?

    Nonsense.

  • Report this Comment On March 22, 2013, at 10:42 AM, Mega wrote:

    Can Amazon survive a $99 Kindle Fire tablet?

  • Report this Comment On March 22, 2013, at 12:16 PM, rlcato wrote:

    Betteridge's Law of Headlines is an adage that states, "Any headline which ends in a question mark can be answered by the word 'no'".

    You have disproved this law. Congrates!

    (It also means this article is pointless.)

  • Report this Comment On March 22, 2013, at 12:38 PM, ScottAtlanta wrote:

    Wow...lotta hatin' from Apple fans.

    Here's another model that fits with Apple's demise.

    At the start of internet craze AOL was what people thought of the internet...they bought the stock, they made a movie about AOL, AOL bought Time Warner....

    Then....everyone realized...oh, the internet is not AOL, it's this other thing that you can access and enjoy from so many other ways and (more importantly) it's cheaper and just as good or better.

    Think Amazon, Google, Android, Samsung...

  • Report this Comment On March 22, 2013, at 4:34 PM, Intidesi wrote:

    it's piece of crap.

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