It’s the Ecosystem, Stupid

By Peter Pham - September 12, 2012 | Tickers: AMZN, GOOG, INTC, MSFT | 0 Comments

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With Intel (NASDAQ: INTC) cutting its 3^rd quarter revenue guidance by more than 8% and pulling its 4^th quarter guidance off the table while the NASDAQ 100 Index was breaking to 12 year highs, it seems that there are a number of disconnects in the world of technology investing.   Amazon (NASDAQ: AMZN) released its newest set of Kindle readers and Kindle Fire tablets the day before making it very clear that they are looking at the mobile computing revolution quite differently than Google (NASDAQ: GOOG) is.

The new Kindle Fires, including various 8.9” versions, are purpose-built to be platforms to drive sales for Amazon.  Amazon makes no bones about this with the lowest-end devices displaying ads on their lock screens, believing that they and their customers are benefited by a full-service suite of activities.

Apple’s approach is to build devices that make you believe you are changing the world by using their products.  Removing the learning curve from the device and making it beautiful to look at and manipulate, Apple creates an emotional connection between the device and the user, or at least most users.  Through that connection they have built a full-service suite of services that wed you to their world. 

Google has done something similar to Apple with Android but only on phones, where the market was starving for an alternative to the Apple-AT&T alliance and needed the appeal of an open-source, low license fee platform to develop on.  Android has succeeded on phones beyond anyone’s wildest aspirations because the market potential was so big and the barrier to entry was becoming smaller by the day.  Apple has their obscene profit margins now but is beginning to feel the heat of the lower-cost Android-based phones coming in to shave points off the bottom line bit by bit. That trend will definitely accelerate.  

Android has been an unmitigated disaster on tablets because there is nothing to drive the use of the tablet on its own merits.  For most, an Android tablet is just a portable device that’s more convenient to browse the web and play Angry Birds on while you’re waiting for the day to end. 

But the device itself isn’t compelling.  Google is now scrambling to play catch up while Amazon and Apple have their worlds functioning and generating revenue.  It is not like Google is crying, however, as it should be obvious that their search and ad revenue are the true strengths of their ecosystem at this point.  The wild card in this is Microsoft (NASDAQ: MSFT) in that they too have all of the facets of the ecosystem working separately and are on the verge of tying it all up in a big new primary-colored package of tiles. 

Windows 8/RT should have Google worried silly that Microsoft will be able to convince OEM’s to produce a real alternative to the iPad as a functional laptop replacement at the expense of going back to building Android devices they’ve already lost money with.  This will also cut into their potential search and advertising revenue as Bing and Internet Explorer become the default choice for a whole new crop of users. 

Google has managed Android in such a way as to turn themselves into the Microsoft that existed at the beginning of the smartphone/tablet revolution: the keepers of a platform that has neither control over the hardware it is built on or the software that is built on top of it.  Microsoft is trying to turn itself into Apple albeit with a completely different design aesthetic.

And this leads right back to Amazon, which proved that someone could sell a device that could compete with the iPad conceptually, by being a platform that adds value to the tablet itself.   But, Amazon also has a real problem that goes back to the opening sentence of this article; Intel cutting their guidance spells a difficult and ugly holiday season coming up.  There are other compelling data points out there.  So, while Amazon may have finally built a number of Kindle Fires worth more than just their low price tag they are likely facing a season where people will be able to afford their tablet and nothing else.

Does the mobile world in the West have room for four ecosystems?  In China, Baidu is rapidly pulling an Amazon with Yi, so that’s five at a minimum.  Samsung and Sony are attempting to build similar ecosystems now.  This move by Amazon in itself isn’t a gamble.  The gamble is banking on an ever-growing revenue pie to slice up and someone will go hungry through 2013. 

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