Some of the launch energy of the iPad has ricocheted off Apple and hit Amazon.

Turns out that the iPad is another powerful channel for Amazon although in this case it’s just the Kindle reader software running on the Apple hardware. There are still many who say the Kindle is a better, lighter form-factor for books while iPad fans cite the joy of being able to do music, video and applications in addition to reading.

Either way Amazon comes out a winner. Apple is working hard to expand their titles but Amazon is far ahead in terms of selection. Apple gets to win too because all those applications make the iPad an another easy-to-buy product.

Books are still evolving into the online world. Not being able to share, lend, or resell online books come to mind right away. Of course being online brings important advantages like immediacy, portability and the ability to synthesize information from different books easily.

Many cite this as just another transition like the one we went through with online music. Most people really miss their compact discs or vinyl records. But of course in that transition we were able to import all our old content into the new system so there was little loss. Making incremental purchases of content in a purely digital form seemed okay at that point.

But owning a book today won’t get you a break (in most cases) on the digital edition. Some publishers like O’Reilly, have offered much more innovative approaches like the “bookshelf” concept, where you can pay a flat monthly fee for access to a set of books that you can configure and update as your needs and interests change. It’s very well suited to the non-fiction and technical realm in which they operate. There are newer innovations there too like “rough cuts” which allow access to material in pre-published form and “living editions” which get constantly updated to stay current with changes in subject matter.

There is something special about a book. In a year or two such a statement may seem very quaint. Maybe it’s me. My parents were both librarians and about the only physical possession I miss when moving or traveling are my books. I can’t imagine not owning a physical copy of the OED. It’s too much fun to take out a volume to look up a word. Having said that I realize this probably puts me in the same category as the people out there still cherishing their vinyl record collections and tube amplifiers that generate “real, true, rich” sound.

It’s been easy to resist the Kindle as being an impractical device since it’s limited to doing only one thing. The Apple iPad destroys those arguments since it can do many things like video, music, email, games and runs the Kindle reader software just fine.

In conclusion I think the Kindle paved the way for the iPad but now the iPad will accelerate the adoption of digital books in a major way. Before the iPad I would say “I don’t want to read a 1000 page book on World War I history on my laptop so I’ll order the book.” But now the iPad offers enough of a “laid back book-like” experience to change that decision to a click on the “Kindle edition.”

Good for Amazon, Good for Apple. Good for innovative publishers like O’Reilly.

[Disclosure: At the time of this writing the author owns shares of both Apple and Amazon. The R2 Model Portfolio holds a position in Apple.]

So far Internet TV has been slow to get started. Part of the reason is that early efforts like Apple TV just didn’t work very well as a main entertainment system in a home.

Next week the space will get a boost as a new price/performance leader in this space, Vizio, will be shipping a new array of very nice Internet-focused TVs. By focusing on general purpose Internet attachment these devices will serve very well as what they are supposed to be (a TV) but also enable a range of new entertainment and gaming services to be delivered seamlessly and easily over IP networks.

Now instead of having to watch Cable VOD on the TV and Amazon or Netflix VOD on your computer, it will be easy to watch everything on your beautiful, large TV with a sound system and comfortable chairs.

Some have noted that the average consumer is not in a condition to buy these iTV units since they only recently went to HDTV. That may well be the case but it will only slow the take up rate, not stop it. In fact I think that we tend to underestimate how powerful the pull of a new entertainment unit like this is for most consumers. It’s not unusual for a home to have multiple TV sets and we see most incremental purchases including these new features to help “future proof” current purchases.

Vizio is also demonstrating that we are starting down the path of wireless connectivity with the TV. Most “media centers” have been put together in part to deal with the mess of connecting cables that swirl and tangle behind the multiple units that comprise the system. A number of companies have been focused on very high speed wireless methods so that the only connections needed will be power cables.

The remote provides an early example of what we expect to see in the space. This one covers the basics but in the future they will be more elaborate and functional.

With bluetooth it will be easy to add better keyboards as well as specialized devices for gaming and device networking applications.

In summary we think 2010 is the start of Internet in the living room from the iTV to the iPad it’s going to be busy. It’s also one step closer to 3D as well which may be another driver that kicks in starting in 2011.

This link can be used to view these at Amazon.com and to pre-order if you want to be the first on your block to step into what will be more entertainment without all the proprietary borders and limits.

This seems like something Dell should be leading the charge in no?

Update: And don’t forget that Google is taking YouTube to new levels with a redesign and more watchable features like live concerts. The rise of Internet TV will be very good for Google.

[Disclosures: None]

I say this mostly because of the Apple “iSlate” which is supposed to be announced later this month and ship in March. (Even if this isn’t true it might still have the same market freezing effect.)

At this point most of the other platforms have disclosed what they have to offer in the near term. The Google Nexus One is out. A bunch of new eReaders are all out. The Windows version of the tablet computer is out. There is a laundry list of new technology gadgets rolling out CES as we write that will include many new netbook and laptop option from basically every vendor.

But now it feels like we will enter the eye of the hurricane of mobile Internet for the next month or two as all eyes turn to Apple and the “iSlate” or whatever it will be called.

There is an obvious gap in the market that Apple may be able to exploit. The iPhone and similar devices are too small to be good choices for doing lots of reading on. As nice as an eReader might be it’s hard to justify a separate device for it. It certainly feels like a feature that should be built into a device that does more than just support reading.

Obviously many of us simply use our laptops for reading most online content but the form factor is not ideal for casual consumption in the living room, kitchen or the hammock. As reading online expands to represent a few hours a day it’s easier to justify a separate device for it. A tablet style device is perfect for many of these use cases but not if one has to navigate a typical OS environment to use it.

It would seem silly to buy an eReader in Q1. The same might be said regarding a new smart phone although buying a Droid, Nexus One or iPhone isn’t going to cause any acute pain or suffering.

Personally I think Apple might have a hit on their hands if they do the iSlate right. The most critical aspect will be how supported it is by players like Amazon. If Apple and Amazon can work together here it will be huge for both.

However if Apple comes out with a fantastic device but isolated from Amazon and most content then it’s not going to be very compelling.

I’m freezing my technology budget until April/May and then will make some new purchases for myself and the company.

The first quarter is always seasonally weak so it will be hard to tell what magnitude this may have in terms of near-term business trends. But if Apple successfully stalls the market in Q1 it could create some disappointments in Q1 and some opportunistic portfolio adjustments. We can only watch and be ready.

What are you going to do?

[Disclosure: Apple Computer is in the Research 2.0 model portfolio.]

We love Amazon as a company.  However last year the abrupt move from $40 to $80 caught us off guard.

We’ve watched it closely and continue to like it but… lately there have been some major outages.  Not just the ones that got headlines but quite a few more.

Speculation is out there about what might be going on but facts are few.  If Amazon is having infrastructure problems we have no doubt that they will figure them out and come back as strong as ever.  However until we know more we think it’s best to avoid the shares.  In fact we just took out a small short position.

Amazon is all about their infrastructure and while web services have not been impacted as far as we know they are certainly losing business from the public and the non-public outages. 

In addition we might be in a bit of a lull as we enter the summer season. Kindle is very interesting but it’s early for it to move the needle much.  Also other firms, like Google, are entering the fray with potent alternatives to Amazon EC2 and S3. 

Valuation is an issue here as well with the stock trading at levels that leave it vulnerable to selling in a rough market looking for excuses.  Any more outages or other issues could send the shared down sharply. 

We remain long term buyers on Amazon as a company but are keeping a neutral/negative postion for now.

– Kris Tuttle

Tags: Amazon, Shorts, Longs

From time to time we do adjust our partners porfolio positions based on reasons outside of our current research agenda.  And sometimes we even disclose these moves as they are illustrative of our thinking:

1. We remain holders of GOOG and AAPL although we are down to small positions.  We especially think AAPL is likely to go down as reality settles in but don’t feel comfortable selling out our last 1/4 position.  

2. Purely as a short-term trade we shorted NFLX based on flimsy takeover hype. We recently covered half due to the fortunate turn of events from Blockbuster and analyst downgrades. We may close it out any time since we have no special edge on NFLX.

3. We sold out of our long on Amazon a while back (before the recent increase from $45 to $70) because we were unimpressed with their fundamentals.  Despite a better-than-expected Q1 we don’t see any fundamental changes in their investment merits.  Now the stock is almost 2x where it was just a short while ago.  We absolutely love Amazon as consumers and technology experts given what they are doing with EC2, S3, AWS and so forth.  But as investors we felt we had to take a short position at these levels. 

4. Consistent with our piece in the May Technology Monthly we initiated a set of long positions on Microsoft which we feel has better fundamentals than the investment community is giving it credit for.

– Kris Tuttle

Tags: Microsoft, Google, Apple, Netflix, Amazon

Bezos has created some buzz and head scratching with his infrastructure initiatives lately. Last year we explored and wrote about A9 and Mechanical Turk which have not really taken the world by storm. So it is with some trepidation that investors greet initiatives like EC2 and S3. However it’s hard to believe that Bezos is just being unfocused or distracted into a sideline business as the CEO of a major company.

We’ve been provoked by the idea that Amazon can go much further and offer a very complete array of outsourced services that might represent the kind of turn-key virtualized company often conceived and seldom realized.

Despite the efforts of eBay, Yahoo and Google it’s still not very easy to instantiate a robust online business of any sort, digital or physical.

To get an inkling and have a little fun we decided to build Our Bookstore using Amazon’s new store tool. The point of it is to get thinking about what Amazon could do if they really deliver on the vision of being able to offer a complete solution for a business. Although this simple example uses existing Amazon products it could be extended and generalized easily enough to support custom products or even just designs which are then sourced from global suppliers (think Alibaba), delivered to Amazon and ultimately shipped to end customers.

There’s an open question about the shape of the big wave of innovation and investment around virtualization and open source. One possibility is that it will take the form of typical business process outsourcing but with much more disruptive price points and cycle times. If this is true and Amazon can execute, it would provide a real opportunity for them.

Right now it’s mostly rhetoric so we’re going to push on EC2, S3 and their other services with some force and see what we find. Combined with some margin analysis it will give us a foundation for measuring their progress and determining whether or not it will make a difference for the company and investors.