Should Apple fear Amazon?

On Thursday afternoon, Amazon’s Jeff Bezos got up on stage and introduced the world to an awesome set of updates to the Kindle Fire. Amazon doesn’t just want to have the best priced tablet (Kindle Fire is now $159), but it also wants to have the best tablet “at any price”.

To that end, the 8.9” Kindle Fire HD is hitting the market in November. It has great technical specs, and comes with a $299 price point (16 GB, Wi-Fi only) and a $499 price point, which includes 4G (LTE) and 32 GB of memory. That’s between $200 and $230 cheaper than a comparable iPad.

Andy Grove, the former CEO of Intel, is famous for saying, “Only the paranoid survive”. I think it’s fair to say that it’s time for Apple to get paranoid. No, I’m not saying Amazon will kill the company Steve Jobs founded. Far from it. But I do think Amazon is a serious threat, and paranoia would be healthy here.

What Amazon has going for it is an incredible back-end business that it can monetize. Amazon isn’t interested in making money on tablets. Instead they want to make money when people use their tablets. And with Amazon’s incredible online retail size, Kindle Fire customers will buy lots of stuff.

So Apple needs to be fearful of a competitor that essentially doesn’t care about profit from hardware, which is in stark contract to Apple, which makes a ton of money from hardware by including incredibly good software.

Even worse, Amazon isn’t under pressure from Wall Street to make money in the very near term. Yes, the company is profitable. But profit margins are thin. Amazon has time on its side. By contrast, if Apple felt the need to drop prices on the iPad, its stock would get creamed instantly.

I’m also impressed with Amazon’s ability to change the game when it comes to paying for bandwidth. They somehow managed to convince AT&T to support a $49 per year LTE plan. It’s a pretty limited plan at 250 MB per month, but I still think people will eat it up just as a convenient backup plan to Wi-Fi. I’m dying to know how Amazon made this happen. Are they cutting AT&T in on any e-commerce transactions done via LTE, essentially making AT&T a giant Amazon affiliate? Is there something special here that only Amazon can offer carriers? I think being able to offer customers a better data plan is a compelling advantage in the market.

In Apple’s corner, they’ve still got the best darn app ecosystem on the planet. It will be a while before Amazon’s forked Android platform can compete on apps. But don’t count them out. If it sells well, developers will rally behind it and the Kindle Fire will start to get the same quality of tablet-optimized apps the iPad currently enjoys. No question.

Apple also wins with stickiness since iPhone and Mac users are much more likely to continue paying a premium for the iPad over any competing product. Add Apple Retail into the mix, with AppleCare and Geniuses and Specialist and everything else a real, physical location with great customer service offers, and it's an advantage we shouldn’t under estimate.

Another winning element for Apple is distribution. The first Kindle Fire was only available to US customers. Amazon is expanding European distribution somewhat with the Kindle Fire HD, but it still pales in comparison to the global reach of the iPad. Amazon has also had trouble striking the kind of global content deals Apple has managed to secure. Kindle FIre content is limited outside the U.S. whereas Apple has the best digital content availability on the planet.

But again, this is not a long term advantage and we shouldn’t act like it is.

I remember when the iPhone first came out, and I was a sell side analyst attending the RIM analyst event in Orlando. A fellow analyst asked Jim Balsillie, then Co-CEO, if he was worried about the iPhone. Paraphrasing his answer: It’s one phone sold by one carrier in one country. Steve Balmer laughed at the iPhone by asking who would possibly want to buy a phone with a $600 price tag. Ed Colligan of Palm said no PC guys were going to figure smartphones out.

We all know what happened after that ...

So, Apple needs to get paranoid. They’ve done an amazing job of bringing killer products to market at fair prices. Android vendors, Research In Motion, and (so far) Microsoft have failed to present any real threat to Apple’s dominance with tablets. But in one short year, Amazon has become the price leader with a good product in an important market, taken significant US share (if you believe their numbers), and followed up with several much better products. Amazon is moving fast. They’re innovating for real and not just copying Apple.

Obviously this will be a long and hard battle. Apple gets to throw the next punch on September 12th and may just follow it up with a low-priced iPad mini. I can hardly wait.