Apple’s iPad Mini 3 vs. Amazon’s Fire HDX: Which Company Needs A Bigger Tablet Hit?

The market for smaller tablets is getting crowded these days. Going into the holiday season, many consumers are probably comparing Apple's (AAPL +0.49%) new 7.9-inch iPad Mini 3 to Amazon's (AMZN 1.24%) 7-inch Fire HDX, which was released last year. As investors, let's take a look at how these two tablets fit into Apple and Amazon's long-term business strategies.

The iPad Mini 3 (L) vs. Amazon's 7" Fire HDX (R). Source: Company websites.

Different specs for different markets
First and foremost, Apple and Amazon are clearly targeting different markets with the iPad Mini 3 and 7-inch HDX:

Source: Amazon, Apple, industry websites.

The HDX sports a snappier processor and more RAM than the iPad Mini 3, but also offers an inferior display and lacks a rear camera. The iPad Mini 3 also only weighs an ounce more, but offers an inch more screen estate than the HDX. Comparing the two devices side by side also reveals the obvious difference -- the iPad Mini 3, like all Apple devices, is a premium product, while the HDX is a budget device aimed at first-time tablet buyers.

What Kindle Fire tablets mean for Amazon
The HDX is only one of Amazon's five current generation color tablets, which include the larger HDX 8.9, the cheaper HD 7 and HD 6, and the rugged HD Kids Edition. Amazon's first Kindle Fire, which launched in 2011 for $199, cost $201.70 to manufacture, according to IHS iSuppli. Its successor, the $199 Kindle Fire HD, had a teardown cost of $174. While that was a definite improvement, investors should remember that Amazon isn't out to sell these tablets at a profit.

Source: Amazon.

Instead, Amazon's goal is to convince more users to sign up for $99 per year Prime memberships, which offer free two day delivery, free monthly e-books, and unlimited media streaming of select content. The tactic has paid off -- Prime members surged from 20 million confirmed members in January to 50 million estimated members (RBC Capital) in September. RBC Capital also recently reported that Prime Members spend an average of $538 per year on the site, compared to $320 for non-subscribers. Another recent study, from Consumer Intelligence Research Partners found that 42% of Amazon shoppers subscribe to Prime, while 48% own a Kindle tablet, e-reader, or both.

Investors shouldn't fret about the Kindle Fire's market share (which is difficult to calculate without sales data from Amazon) or device margins, and instead focus on the growing percentage of Amazon users who own a Kindle and subscribe to Prime. That feeds directly into Amazon's plans for dominating living rooms with set-top boxes and streaming dongles, carving out its own forked Android ecosystem with Fire OS, and streamlining home delivery via Amazon Prime and Prime Fresh.

What the iPad Mini 3 means for Apple
Unlike Amazon, Apple cares about making profits on every unit sold. An IHS teardown of the first generation iPad Mini revealed that the $329 16GB Wi-Fi model only cost $188 to build. While teardowns of the second and third Minis are not available, Apple is likely keeping margins consistent with the original device.

That's Apple's core tenet -- to sell expensive looking devices at high margins. Unlike Amazon, Apple doesn't need to forcibly tether people to its ecosystem, although iTunes (together with software and services) still accounted for 11% of its top line last quarter. However, iTunes delivers content in a la carte, not subscription, form, and Apple doesn't have any vested interest in e-commerce beyond its own Apple Stores.

The iPad Mini 3 doesn't matter much to Apple, because the iPhone 6 Plus serves nearly the same purpose in smartphone form. This has led some to believe that the iPhone 6 Plus will cannibalize sales of the Mini 3, and that the long-rumored 12.2-inch iPad Pro could be its intended replacement. Apple also isn't worrying too much about slumping iPad sales -- which have declined for three consecutive quarters -- since its declining weight on the company's top line is being offset by rising sales of iPhones and Macs.

Source: Compiled by author from Apple's Q4 earnings.

Instead, the iPad will keep being refreshed and sold at high margins regardless of sales volume, like the iPod, as long as customers keep buying them.

So who needs a bigger hit tablet?
For Amazon, the Kindle Fire HDX is just another way to get more users to sign up for Prime memberships. For Apple, the iPad Mini 3 is really just a placeholder device which could be rendered obsolete by the iPhone 6 Plus. Therefore, neither Amazon nor Apple expect the HDX and Mini 3 to be "hit tablets", but the roles they fill can teach investors a lot about how these two tech giants operate.