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 Inc. (NASDAQ:AAPL)’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.com, Inc. (NASDAQ:AMZN) 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.com, Inc. (NASDAQ:AMZN) slashes prices.
Apple’s iPad was immune to price cuts early on. When Research In Motion Ltd (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.com, Inc. (NASDAQ:AMZN) 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.com, Inc. (NASDAQ:AMZN)’s history of price cuts on Kindle products hasn’t helped Apple Inc. (NASDAQ:AAPL), but it doesn’t have to be the end of the world if Apple’s building a better planet.
The article Can Apple Survive a $99 Kindle Fire Tablet? originally appeared on Fool.com.
Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and Google. The Motley Fool owns shares of Amazon.com, Apple, Google, and Microsoft.
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