Turbulent Waters Ahead for Amazon?

A Morgan Stanley analyst has cut his rating on Amazon to equal weight from overweight. The reason? Mounting near-term challenges that mean 2012 will be a year of transition for the stock.

Generally, the company is a long-term supporter of Amazon, Scott Devitt wrote, and it remains a long-term supporter.

However, there are near-term trends the company must address, and soon, he said. Chief among them is Apple’s wild success in changing the digital distribution of music, books and other content.

Also, the Kindle Fire, while popular, has not provided as much competitive pressure to the iPad as Amazon may have expected.

More Than a Near-Term Trend

The challenge Amazon is facing from Apple is more than just a near-term problem, though, Trip Chowdhry, managing director of equity research at Global Equities Research, told MacNewsWorld. “Rather, it is a fundamental assault on Amazon’s business model.”

Amazon has other challenges as well, he said — such as the move by many states to implement laws requiring online retailers to collect sales taxes.

If it wants to survive in the long term, though, it must first figure out how to answer Apple’s challenge, said Chowdhry.

Apple’s iBooks textbook initiative, launched in January, was a shot across Amazon’s bow, he said — Amazon is at its core a bookseller. iBooks and its accompanying textbook-authoring tool have taken off with astounding speed.

The Kindle — all versions, not just the Kindle Fire — is last decade’s story, Chowdhry said. “This decade’s story is iBookstore and the iPad.”

The Kindle Fights Back

The Fire is not being consigned to the tablet reject pile, though — as so many other contenders have been — at least not yet. Amazon shipped 3.9 million Fire tablets in the fourth quarter, according to IHS iSuppli, to claim a 14.3 percent share of the market and make Amazon the world’s second-largest tablet shipper.

Apple shipped 15.4 million iPads and iPad 2s during the fourth quarter of 2011, iSuppli found — a 39 percent increase from the 11.1 million in the third quarter, but not enough to keep Apple’s share of the global media tablet market from slipping to 57 percent.

Still, Apple is its own worst enemy — not Amazon, iSuppli said., noting that it was Apple’s newly introduced iPhone 4S that proved to be the strongest competitor for the iPad during the final three months of 2011.

The Sales Tax Issue

Amazon must also address the push by states to force online retailers to levy a sales tax, Chowdhry noted — and not by refusing to go along or negotiating a stay, as it has done in the past.

“The sales tax that Amazon will pay or pays now erases the main differentiator it had in the market — its lower price. Amazon has to figure out what else it can offer consumers with its business model.”

Amazon is trying, he acknowledged, pointing to reports that the company is thinking about setting up a boutique to sell high-margin projects such as its Kindle and its exclusive line of books.

That tactic isn’t enough to reverse its competitive decline, though, Chowdhry said. “They have to find a different value proposition, and I don’t know what that will be.”

The Long Haul

It would be a mistake to rate Amazon based on short-term trends and blips in the market, said Scott Testa, a marketing professor at Cabrini College.

“It is not a company that is willing to play to every twist and turn, and its CEO is not that way either,” he told MacNewsWorld. “The moves it is making now could take a while to pay off, but they are clearly good plays for the long term. I wouldn’t count Amazon out, by any means, just yet.”

Morgan Stanley and Amazon did not respond to our requests to comment for this story.