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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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