Not so fast, says Horace Dediu, an analyst at Asymco: Amazon’s margins are too thin to allow it to compete on the tablet’s core technology. It’s an interesting counterpoint to the arguments that most observers have made in the wake of the Kindle Fire’s launch.

The Kindle Fire, announced earlier this week and shipping November 15, costs just under $200. For that, you get a dual-core processor, a 7-inch LCD screen, a modified Android operating system, and some enticing cloud-based features that let you access your books, music, movies and more via an internet connection. There’s even a promising-sounding browser, called Silk, which uses Amazon’s cloud infrastructure to speed up browsing by pre-fetching and cacheing pages you are likely to click on.

Compare that to the specs offered by numerous other tablets, and the Fire looks like a serious competitive threat. It may not push the envelope technologically, but its price is so low that it could be a truly disruptive innovation on the cheaper side of the market. In fact, it’s already prompted Best Buy to slice prices on the BlackBerry PlayBook by $200. Other 7-inch tablets, such as the HTC Flyer and the Samsung Galaxy Tab 7.0, are already going for about $300, so a $100 price cut is not out of reach.

And Amazon has a not-so-secret weapon: It can afford to sell the Kindle Fire for less that it costs to manufacture it, because it will more than make up the difference with sales of media — and even goods. The Fire becomes not just a media device, but a way for Amazon to have a direct pipeline to its customers, pushing them offers for everything Amazon sells, including clothing, electronics, housewares and more.

Add that all up, and the Kindle Fire looks like a serious threat to Apple’s iPad.

Dediu’s argument splashes some cold economic theory on that optimistic assessment. It’s a complicated argument, in which Dediu compares the Kindle Fire to other hardware products subsidized by ongoing service fees, such as game consoles, set-top boxes and cellphones.

In most of these cases, the subsidy means that a company’s profits come from its ability to maximize service sales, not hardware sales. The incentive to invest in updating the hardware technology is accordingly minimized: Game console cycles stretch across many years, for instance.

Dediu’s argument boils down to a simple point, however: Amazon’s margins on the digital goods it will sell through the Kindle are razor-thin. That means it will take a large volume of sales to subsidize the Kindle’s sales cost, encouraging Amazon to wait a long time between updates to the underlying hardware. They’ll need to amortize that cost over several years to make the accounting balance out, rather than pushing customers to buy a new tablet every year or two.

As a result, the Kindle Fire is unlikely to advance rapidly in terms of its technology. Amazon is going to milk as many years as it can out of each generation of the tablet.

That’s not a big deal for Amazon if tablet technology has essentially plateaued, because Amazon is very well-positioned to compete on the basis of its services and additional goods. But if tablet technologies continue to advance, the Kindle Fire could look increasingly like a technological backwater.

Dediu’s conclusion: the Kindle Fire is no threat to the iPad.

In the first part of the 2000s, IBM and HP went in two vastly different directions: HP acquired Compaq to bolster a horizontally-integrated PC business, while IBM sold its PC division to Lenovo and focused on creating a vertical stack of enterprise products.

In the early 2010s, HP’s decision to attempt to dominate PCs has come back to haunt it. Even though HP is the number one PC seller, the low-margin business doesn’t pay, so the company is exiting both the desktop and mobile consumer computer business.

Now HP needs to act fast to remain competitive in the enterprise.

Rule of three

Earlier I described how the consumer computing business is consolidating based on the “rule of three” economic theory and that three big players would dominate the industry: Apple, Google and Microsoft. To play in this market requires a full vertical stack, offering customers everything they need from hardware to applications. Competitive companies will need the ability to extract efficiencies between and from each layer: mobile operating systems, mobile devices, desktop operating systems, personal computers, web browsers, productivity applications, content distribution and cloud services.

Given the vertical integration required to play in the consumer computing business, it is no surprise that HP decided to exit. In order to compete, HP would need to build out cloud services, a desktop operating system, and more. Microsoft, with its domination of the desktop PC and productivity applications businesses, has already spent years and billions of dollars filling its gaps, and will continue to spend billions until it wins the number three spot. HP, and in particular its raucous shareholders, have neither the financial gumption nor a base of technology for an attempt to be the number three in the consumer market.

So it is a wise move for HP to exit the consumer computing business and focus on its enterprise business. However, HP is jumping out of the frying pan and into the fire, as IBM, Oracle and Microsoft have been aggressively building integrated enterprise stacks over the past decade. The rule of three is applying itself to the enterprise space as well, and HP is getting left behind.

Owning the stack

The importance of owning every piece of the stack is increasingly critical. When Oracle decided to end support for the Itanium processor, HP had no database of its own to fall back on and resorted to suing Oracle to support its platform. Both IBM and Oracle are optimizing their databases and middleware to run super efficiently on their respective operating systems, processors and storage. IBM started the verticalized enterprise trend in the early 2000s by widening the memory bus to its PowerPC machines in order to extract more performance out of its DB2 database, forcing Oracle to acquire Sun in order to match database performance.

IBM and Oracle verticalizing enterprise software and hardware is much like the consumer verticalization. Apple’s ability to create efficiencies by building its own iPhones and iPads is a big part of what forced Google to acquire Motorola Mobility. HP board member Marc Andreesen may be right that software is king in his new cloud investments like Facebook and Zynga, but in the hardscrabble world of enterprise and consumer computing, IBM and Apple have verticalized software and hardware and clobbered HP in both the enterprise and consumer markets.

So how will HP build a complete enterprise stack? HP’s acquisition of Autonomy is a great start and fills the gap in enterprise search to compete with IBM’s OmniSearch, Oracle’s Secure Enterprise Search and Microsoft’s FAST. However, HP still has huge gaps compared to its competitors, including collaboration software, business applications, analytics, middleware, and database.

HP’s gaps are perfectly filled by SAP. And SAP’s gaps in services, enterprise search, operating system, processor, storage and management are all filled by HP. A merger of SAP (valued at $60 billion) and HP (valued at $49 billion) would create a $109 billion behemoth capable of competing with IBM ($188 billion), Oracle ($125 billion) and Microsoft ($201 billion). Large mergers like this can be a disaster, but HP’s CEO Léo Apatheker used to be the CEO of SAP and worked there for twenty years, so there is one person who actually knows both organizations.

HP needs to move fast. HP should dump its printer business along with its other low margin hardware businesses, merge with SAP to get a full stack, and then go on a shopping spree to shore up the weaker parts of the combined HP-SAP stack such as EAServer, StreamWork and HP-UX.

We are about to see a scrum amongst all of the larger enterprise players to acquire companies at every layer, such as TIBCO, Teradata, Jive, Salesforce, Red Hat, and likely even my own company, analytics vendor Webtrends. Microsoft may even take another try at Intuit now that it is no longer a monopolist.

Otherwise both HP and SAP risk losing the third place in the rule of three to Microsoft. It should be noted that despite its detractors, Microsoft has actually had amazing execution over the past decade and is the only contender to hold its own in both the consumer and enterprise computing stacks.

HP and SAP need to stave off Microsoft as the small- and medium-sized business enterprise player, or they will both wind up being carved up and bought by IBM and Oracle.

Top photo by Lee Torens/Shutterstock.

Peter Yared is the VP/GM of Social at Webtrends. He has founded four e-commerce and marketing infrastructure companies that were acquired by Sun, VMware, TigerLogic and Webtrends. You can follow him at @peteryared.

Now it appears that Congress may weigh in: The WSJ quotes Rep. Fortney “Pete” Stark, a California Democrat, calling for changes in Medicare reimbursement to eliminate any incentive to overuse the drugs, which stimulate production of the red blood cells that carry oxygen.

More on “generic” biologics — Here are two takes on the move to allow copycat versions of biotech drugs that I neglected to mention in yesterday’s post on the subject. Writing at Forbes.com, Scott Gottlieb — former FDA deputy commissioner for medical and scientific affairs, now a pundit at the neoconservative American Enterprise Institute — makes the counterintuitive argument that copycat biotech drugs will speed the development of new drugs, even if they’re just simply improved versions of older ones.

Meanwhile, pharma/biotech consultant David E. Williams dismisses the biogenerics push as “a bad bill that deserves to die” on his Health Business Blog, but suggests that Congress could adopt a more straightforward solution: Simply mandate price cuts on biotech drugs once their patents expire. It’s such a wacky but weirdly intriguing idea that I can’t even tell if it makes sense, but I certainly doubt that Congress could muster the political will for such a naked exercise of government power — it simply violates too many current assumptions about the usefulness and necessity of markets.

Stem cell divisions — The president of California’s $3 billion stem-cell research program resigned abruptly on Tuesday, citing both health concerns (a recent diagnosis of prostate cancer) and tensions between patient advocates and biomedical academics over plans to spend up to $300 million on new research facilities. Zach Hall’s departure will now come earlier than expected — he’ll depart at the end of April instead of the end of June — but plans to name a successor are already underway. Despite his title, Hall wasn’t the head honcho of the California institute; that honor is reserved for Robert Klein II, chairman of the inaptly named Independent Citizens Oversight Committee, who is also rumored to have clashed with Hall more than once. David Jensen of the estimable California Stem Cell Report has all the details.

Dollars for doctors (and everyone else) — Why does U.S. healthcare cost so much? The economics blog Marginal Revolution hosted a fascinating debate on the subject earlier this week, prompted by Tyler Cowen’s capsule review of a new book by Maggie Mahar titled Money Driven Medicine. The argument is too complex to do it much justice here; the best summary I can make without writing an essay myself is that the entrepreneurial instincts of doctors and medical-technology suppliers (including drug companies), combined with weak resistance from desperate patients, leads to market failure, including drastic overuse — and misuse — of medical services. Don’t miss Mahar’s contribution to the Marginal Revolution debate in comments. Two other takes on the book are here and here.

In a similar vein, this post from the group blog Health Care Renewal aims to explain why so many academic researchers seek out funding from pharmaceutical and biotech companies these days. Turns out it’s not just the greed of companies eager to co-opt paragons of the ivory tower; instead, blogger Roy Poses suggests that university incentives similar to the ones that motivate car salesmen are at fault. Definitely worth a read if the question has ever crossed your mind.

Research odds and ends from the week that was:
• Scientists discovered a gene that appears to be key to “self-renewal” in both embryonic and adult stem cells.

• Surgeons are exploring ways of conducting minimally invasive procedures using “natural openings” in the body such as the mouth, the rectum or the vagina.

• Take that, white supremacists: Physical anthropologists now believe that European skin only lightened up 6,000 to 12,000 years ago, suggesting that “our European ancestors were brown-skinned for tens of thousands of years” prior to that. The link is subscription-only, so here’s a brief snippet of the Science news article:

Researchers have disagreed for decades about an issue that is only skin-deep: How quickly did the first modern humans who swept into Europe acquire pale skin? Now a new report on the evolution of a gene for skin color suggests that Europeans lightened up quite recently, perhaps only 6000 to 12,000 years ago. This contradicts a long-standing hypothesis that modern humans in Europe grew paler about 40,000 years ago, as soon as they migrated into northern latitudes. Under darker skies, pale skin absorbs more sunlight than dark skin, allowing ultraviolet rays to produce more vitamin D for bone growth and calcium absorption. “The [evolution of] light skin occurred long after the arrival of modern humans in Europe,” molecular anthropologist Heather Norton of the University of Arizona, Tucson, said in her talk.

Now it appears that Congress may weigh in: The WSJ quotes Rep. Fortney “Pete” Stark, a California Democrat, calling for changes in Medicare reimbursement to eliminate any incentive to overuse the drugs, which stimulate production of the red blood cells that carry oxygen.

More on “generic” biologics — Here are two takes on the move to allow copycat versions of biotech drugs that I neglected to mention in yesterday’s post on the subject. Writing at Forbes.com, Scott Gottlieb — former FDA deputy commissioner for medical and scientific affairs, now a pundit at the neoconservative American Enterprise Institute — makes the counterintuitive argument that copycat biotech drugs will speed the development of new drugs, even if they’re just simply improved versions of older ones.

Meanwhile, pharma/biotech consultant David E. Williams dismisses the biogenerics push as “a bad bill that deserves to die” on his Health Business Blog, but suggests that Congress could adopt a more straightforward solution: Simply mandate price cuts on biotech drugs once their patents expire. It’s such a wacky but weirdly intriguing idea that I can’t even tell if it makes sense, but I certainly doubt that Congress could muster the political will for such a naked exercise of government power — it simply violates too many current assumptions about the usefulness and necessity of markets.

Stem cell divisions — The president of California’s $3 billion stem-cell research program resigned abruptly on Tuesday, citing both health concerns (a recent diagnosis of prostate cancer) and tensions between patient advocates and biomedical academics over plans to spend up to $300 million on new research facilities. Zach Hall’s departure will now come earlier than expected — he’ll depart at the end of April instead of the end of June — but plans to name a successor are already underway. Despite his title, Hall wasn’t the head honcho of the California institute; that honor is reserved for Robert Klein II, chairman of the inaptly named Independent Citizens Oversight Committee, who is also rumored to have clashed with Hall more than once. David Jensen of the estimable California Stem Cell Report has all the details.

Dollars for doctors (and everyone else) — Why does U.S. healthcare cost so much? The economics blog Marginal Revolution hosted a fascinating debate on the subject earlier this week, prompted by Tyler Cowen’s capsule review of a new book by Maggie Mahar titled Money Driven Medicine. The argument is too complex to do it much justice here; the best summary I can make without writing an essay myself is that the entrepreneurial instincts of doctors and medical-technology suppliers (including drug companies), combined with weak resistance from desperate patients, leads to market failure, including drastic overuse — and misuse — of medical services. Don’t miss Mahar’s contribution to the Marginal Revolution debate in comments. Two other takes on the book are here and here.

In a similar vein, this post from the group blog Health Care Renewal aims to explain why so many academic researchers seek out funding from pharmaceutical and biotech companies these days. Turns out it’s not just the greed of companies eager to co-opt paragons of the ivory tower; instead, blogger Roy Poses suggests that university incentives similar to the ones that motivate car salesmen are at fault. Definitely worth a read if the question has ever crossed your mind.

Research odds and ends from the week that was:
• Scientists discovered a gene that appears to be key to “self-renewal” in both embryonic and adult stem cells.

• Surgeons are exploring ways of conducting minimally invasive procedures using “natural openings” in the body such as the mouth, the rectum or the vagina.

• Take that, white supremacists: Physical anthropologists now believe that European skin only lightened up 6,000 to 12,000 years ago, suggesting that “our European ancestors were brown-skinned for tens of thousands of years” prior to that. The link is subscription-only, so here’s a brief snippet of the Science news article:

Researchers have disagreed for decades about an issue that is only skin-deep: How quickly did the first modern humans who swept into Europe acquire pale skin? Now a new report on the evolution of a gene for skin color suggests that Europeans lightened up quite recently, perhaps only 6000 to 12,000 years ago. This contradicts a long-standing hypothesis that modern humans in Europe grew paler about 40,000 years ago, as soon as they migrated into northern latitudes. Under darker skies, pale skin absorbs more sunlight than dark skin, allowing ultraviolet rays to produce more vitamin D for bone growth and calcium absorption. “The [evolution of] light skin occurred long after the arrival of modern humans in Europe,” molecular anthropologist Heather Norton of the University of Arizona, Tucson, said in her talk.