Why Amazon's cheap tablet is a threat to Apple and Microsoft

Amazon (AMZN) made investors happy with its surprise profitable quarterly earnings announcement on Thursday. It's a break from the common red ink that has flowed.

One of the ongoing challenges to the company's financial performance has been its electronic devices. Sold at near, or even below, cost, they have been a bid to gain market share. Amazon's payoff is not in becoming a king of the consumer electronics heap. Instead, it wants to gain data from what people do and pull even more consumers into its purchasing ecosystem. The newest example has been Amazon's $50 Fire tablet.

In terms of functions, it's not a real competitor to Apple's (AAPL) iPad, Microsoft's (MSFT) Surface devices, Samsung's Galaxy line, or other full-featured tablets. But it doesn't have to offer the same functions to become a threat in the long run.

For a number of years, there's been a trend to ever cheaper hardware. New PCs can be had for a few hundred dollars. Laptops, about the same. Until the recent move by carriers to drop subsidies, even top end smartphones have typically run consumers $199 up front (although the rest of the price is paid off via the obligations of two-year contracts).

As the authors of The Knockoff Economy: How Imitation Sparks Innovation have written, research suggests that knock-off versions of luxury goods can eventually drive additional sales of the more expensive real item. People see the fake items as trial versions.

But when it comes to electronics, the question is not one of counterfeit. Instead, it is more like a range of differently priced products that provide some of the same benefits. Some people will buy a luxury car, but most go for more moderately-priced items because they either can't afford or can't justify spending the difference in price.

Apple products may be very popular, but there is an illusory quality in the numbers. Google's (GOOG) Android operating system has more than 80 percent market share in the world, and the big reason is the broad availability of less expensive handsets available. Apple has strength in certain countries, like the U.S., and among more affluent buyers. But Apple can't raise its prices without consumers howling. In what other product categories do consumers assume that prices will never rise?

As products on the whole become cheaper, they eat away at the rationale of why more expensive items must remain at their existing prices, or why most people should spend the extra money. Microsoft's new Surface Book may be getting good reviews, but it's very pricey. Apple's iPad unit shipments have continued to decline over time. It has tried to shore up the line's revenue with the new more expensive iPad Pro. Perhaps that will work, but one might wonder whether the reason for the decline is a the triumph of the good-enough, versus a pricier top-end model.

And if good enough is just that, can Microsoft, or others, ultimately succeed with premium-priced mobile products?