Quick Thoughts: iPhone and Fire – Just Weapons in a Bigger War

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The last week has been more than eventful in the world of mobile devices.  First up, today’s fairly lackluster Apple announcement.  With the iPhone 4S, the global community of Apple soothsayers was laid to waste, with the forecasts of a radical new iPhone 5 or low-priced iPhone junior relegated to the iconic trash can.  The 4S is a solid, incremental follow on with a faster processor, a much improved and better integrated camera, and a slick voice activated front end called Siri that is a clear tool to wean iPhone users off of Google.  It is a good phone, but Apple is still not on 4G LTE, the hardware specs are only in line with the top Android models, and the functional innovations are not game changers.  Given a likely 12 month wait for the next update, these models do little to slow down Google and Microsoft, hence the curmudgeonly response from investors.

To this, we say, “So what!”  While Apple’s first mover advantage and scale have given it leadership in smartphone and tablet device hardware so far, the gap has been closing with every subsequent generation and it seems very unlikely that the company’s device specs can stay out front forever against the R&D onslaught of its hydra-headed rivals.  Rather, Apple recognizes that the real power of its platform is as a conduit to a much broader experience across its devices.  While Apple is certainly intent on fighting for device market share, the bigger opportunity is to provide more for the loyal customers that it already has.

To us, the more important rollouts for Apple are iCloud and iOS5, both announced in June.  These products officially move Apple off of its Mac-centric religion to a more up to date Internet-centeric architecture.  iCloud is the glue to tie iPhone users to Apple for a world of new services, offering net based storage for personal files and a mechanism for streaming media to Apple devices today, and a platform for myriad other services tomorrow.  iOS5 opens the buttoned up Apple software to native social networking feeds from Twitter and Facebook, improving Apple device performance as social access gateways.  These are important steps, as Apple inexorably turns toward on-line advertising, transaction fees, and consumer services for future revenue growth.

While the Apple brand mystique, user base, device leadership, and powerful integrated software are formidable assets in the battle for the hearts and minds of internet users, its chief rivals Google, Amazon, Facebook and Microsoft have formidable assets of their own in areas where Apple is weak.  For example, all of these companies have made substantial investments in the skills and assets necessary to deliver content across the internet, while Apple continues to rely on partners like Akamai for this capability.  Similarly, Apple trails some of these competitors in key areas like advertising, social networking, transaction processing, user profiling, and business applications.  Success of iCloud could show Apple closing some of these deficits.

Of course, Apple is not the only company to have made a big announcement recently.  This past Wednesday, Amazon announced its new $199 Fire tablet, along with two sub-$100 Kindle e-readers.  These are well designed products at extremely aggressive price points sold through the Amazon e-commerce juggernaut with a cornucopia of easily accessible media content– it would be easy to underestimate how many will be sold, even if most industry journalists would rather have an iPad.

However, beyond the Fire-iPad Holiday showdown looms a more important issue.  Despite its nominal Android geneology, the Fire is Amazon’s leap to platform status.  We have written about the advantage that the iOS and Android platforms represent for Apple and Google’s aspirations for cloud-based services – increasingly they are being integrated directly into the device user experience.  Amazon has taken a page from this playbook, and tightly integrated its own streaming media and e-commerce services into a comprehensive reworking of Android.  Gone are the familiar widgets and app icons in favor of a simplified page turning metaphor reminiscent of RIM’s struggling Playbook.  Amazon has souped up the browser by off-loading processor intensive tasks to its own high-powered networked data centers, speeding page loads for users and subtly favoring Amazon’s own hosted sites in the process.  From a user perspective the last clue that you are using Android at all is the ability to run Android apps, that is, IF they are available on Amazon’s App Store, since Google’s Android Market is not supported.

In fact, the Fire make-over is so complete that Amazon could likely port its user experience to an alternative operating system without undue discontinuity for its first generation user base.  This is not a farfetched scenario, as rumors have Amazon kicking the tires on HP’s soon to be discarded WebOS as a potential bargain bin pick up.  Eventually, we believe that device platforms will extend to integrate all internet experiences, including over-the-top video entertainment, and giving the platform owners extraordinary opportunities for advertising, transaction and subscription fees.  If Amazon sells millions of units in its first selling season as expected, it would become the second leading tablet in the market and an important weapon as the company spars with Apple, Google, Microsoft and Facebook for hearts and minds of Internet users everywhere.

In the end, we believe that the opportunity for these integrated Internet platform providers is huge.  Advertising alone could be a better than $1T global opportunity.  Add direct e-commerce, electronic payments, and streaming media to the mix and the addressable market could be multiple trillions.  Not to say that any of Amazon Apple, Facebook, Google, and Microsoft will capture more than a small part of that revenue, but we believe they are best positioned to generate value against the changes that will happen along the way.

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