Changing Tablet Market Hurts Amazon the Most

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Be Careful What You Wish For -- You Might Get It!

One of the biggest themes of the tech world these days is the rise of the tablet, and the corresponding death of the PC.  As PC sales stagnate, shares of the PC big three, Intel (NASDAQ: INTC) Microsoft (NASDAQ: MSFT) and  Hewlett-Packard (NYSE: HPQ) have fallen: 

And as tablet sales increase, expectations for Amazon.com (NASDAQ: AMZN) get higher and higher.  And while the PC big three have been falling, Amazon has been rising:

As I write this, Hewlett Packard is tanking, big time, again.  They are the world's largest PC seller, which is beginning to look more and more like being the world's largest typewriter company, or the world's largest wagon company.  Intel just announced the early retirement of their CEO, acknowledging their big problems in cracking the mobile market.  For their part, Microsoft's new entry into the tablet market, the Surface, has gotten a somewhat lukewarm reception.

Both of these trends, the macro shift from PCs to tablets, and the current woes of the PC big three, seem like unalloyed good news for Amazon.  But is that the case?  In fact, for Amazon’s family of Kindle tablets, there are two big causes for worry, one obvious, one not so obvious.   

Amazon has stated their strategy is not to make money on the Kindles, but to make money selling content and goods over the Kindles.  Sounds good.  Except that, so far, this is just talk – so far, there is no profit.  Any “profit” to be made from the Kindles is purely theoretical.  In the meanwhile, Amazon has started a price war on tablets, attempting to get their Kindles into as many hands as possible.

So far, the big three in the tablet space, Amazon, Apple, and Google, have had the field more or less to themselves. But the big three PC companies are not going to simply go away. In theory, a corporation whose market disappears, like the PC business, can wind down its affairs, and go out of business. It can take all of the money in the bank, sell all its patents and other intellectual property, sell all its physical plant, lay off all its workers, distribute all the cash to the shareholders, and close. In practice, this does not happen. Instead, such companies fight to hang on – – they try to fight in the new markets that are taking their business, such as tablets.  And that is exactly what Intel, Hewlett Packard, and Microsoft are doing, and will continue to do, more and more aggressively.  They will crowd into the tablet space, and accelerate the tablet price war.

An Intensified Tablet Price War Hurts Amazon The Most

That is because Amazon is a company without profits, and as such they cannot continue to lose more money indefinitely. Now, I am not suggesting that Jeff Bezos and his managers don't know what they're doing in terms of cash flow, etc. I am sure that they are well aware of the problems they face. However, the fact remains that a profitless company is in a very weak position to conduct a price war for any length of time.

An Increasingly Fragmented Tablet Market Also Hurts Amazon The Most

The second danger to Amazon is less obvious but potentially even more dangerous -- market fragmentation. As more and more players enter the tablet space, we can expect the market to fragment down into smaller and smaller pieces of market share. For example, the leader might go from 30 or 40% market share down to 20 or 30% market share, and the smaller players might go from 20 or 30% market share down to 10 or 15% market share. On the one hand, a smaller market share would actually help the profitability of Amazon if they are losing lots of money per tablet. They would lose less money.

But fragmentation will hurt Amazon the most because their entire strategy is dependent on gaining a large market share – – the idea is to get the tablets into as many hands as possible so that they can use the tablets as selling devices, and the selling is all about scale and volume, razor thin margins on retail, fixed costs of streaming video that must be spread over millions of consumers, etc.  Companies that sell their tablets at a profit (or at least not a loss) don’t have this scale or market share problem.  For example, if Rolls-Royce makes $100,000 per car, they will make money even with only a .0001% market share, and not be in danger of going out of business due to lack of profitability.

Therefore, the death of the PC market is not necessarily a good thing for Amazon.  An increasingly crowded and fragmented tablet market will hurt Amazon the most.

 

 


boriskabinov is short Amazon via long-dated puts. The Motley Fool owns shares of Amazon.com, Intel, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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