Why Amazon Is Special and Apple Is Not
theatlantic.com
theatlantic.com
The point is that Apple's devices are not easily disrupted by low end competitors because building software platforms and ecosystems is incredibly hard and once established they are very resilient to disruption.
If low end disruption was such a dire threat, the Zune would have rolled the iPod and Amorok would have supplanted iTunes. The majority of Android handset makers wouldn't be on the ropes financially and Microsoft's Phone and tablet software would be rapidly accumulating credible market share. And yet....
The author is trying to explain why what has been manifestly and irrefutably happening in front of our eyes for the last 10 years plus, and at this point is a matter of historical record, is impossible.
comparing the net income of Apple to Amazon.. in 2012 the difference was astounding at 98,000 vs 41,733,000!
http://finance.yahoo.com/q/is?s=AMZN http://finance.yahoo.com/q/is?s=AAPL+Income+Statement&an...
So that's 98 million vs. 41 billion USD.
There's not wishful thinking in any of this. Amazon and Apple are not startups, they are both mature businesses in their prime. They still have a lot of risks and opportunities ahead of them for sure, but Amazon started business I think 17 years ago. Arguably Apple's reconstruction into the company it is today started at around the same time with the NeXT acquisition and the return of Steve Jobs. That's a significant track record on which to evaluate them.
1. Apple has an amazing business.
2. Despite 1 it is not sustainable to have both mass volume and high margin.
I am trying to come up with counter examples of point 2. Coca Cola, McDonald's and Microsoft come to mind, but they share a common characteristic in that these companies control a small but high margin part of their respective value chains. The end products that consumers actually buy (Coke, burgers and PCs) are mass volume and low margin.
And yet, last I checked, a lot of companies made serious money in retail, but very few companies managed to earn substantial profits in smartphones, tablets and notebooks.
I seems to be harder to compete with Apple than most investors think it is. (I say that as a developer who hopes that an open platform will win the smartphone wars.)
Now, if you could say that incumbents attacking Amazon's base stole serious revenue from Amazon that would be something. But what does it mean to say WalMart makes serious money in retail, ergo it is easy to compete against Amazon?
I guess I don't see it that way, but reflecting I guess my view is distorted.
If you define it as general retail (who manages to capture the consumer dollar), then Walmart and its physical stores can be considered a competitor.
If you take the article's concept: "build a massive online database and offline infrastructure to transport boxes from warehouses to hundreds of millions of doorsteps.", then clearly stores aren't competing with Amazon.
In many places, suburbs and cities alike, people don't want stuff delivered to their doorstep. The existence of Amazon Lockers is proof enough of this - sotres now offer online shopping with local pickup (Best Buy, Staples, and IIRC Wal-Mart). This competes with Amazon.
Wal-Mart is also attempting to reposition itself as an Amazon alternative (i.e., pure online shopping) and has the capital and existing supply chain infrastructure to do so (they are one of very few).
On top of that Amazon continues to struggle with specialty goods. Amazon is very, very effective at selling mass-market products, but their attempts to move upmarket have been extremely mixed. Lower-volume, premium goods are not their forte, and brick and mortar stores (as well as niche online shops) still have a firm grip on that.
Not to mention we know that the public is extremely price-sensitive. Amazon continues to price-compete with Wal-Mart, despite its substantially lower volume, leading to even thinner margins. They do this out of necessity, because at this point for many people the conveniences of online do not trump a quick trip to Wal-Mart if the product is cheaper.
I don't think it's at all prudent to discount pure brick and mortar businesses as competitors to Amazon. Amazon very much exists in the same sphere as all retailers, online and off.
In general it is true that Amazon has a high threat of substitutes. I think what @silverstorm, and this article, are trying to say is that rivalry for Amazon is pretty low, given how expansive their business is.
[1] http://en.wikipedia.org/wiki/Porter_five_forces_analysis
Certainly Walmart believes they are competing with Amazon. (I would have bought my patio furniture there, too, if they hadn't sold out. Instead I bought it on Target.com.)
Consider a site like NewEgg. At ~250M annual revenue they're an appreciable fraction of Amazon's size with a lot of catalog overlap. Certainly for commodotized consumer electronics they are direct competitors.
I think the difference the author is trying to articulate is that NewEgg's overlap with Amazon (for example) is considerably less impactful on Amazon than, say, Samsung's overlap with Apple. Phones and tablets are a huge proportion of Apple's profit generation - an area where they cannot afford to be dethroned. With Amazon and consumer electronics, having NewEgg overtake more of their sales in that area would hurt, but Amazon has such a vast catalog that the company, investors, and stockholders know they'll soldier on in a variety of other markets.
That's Amazon's power. Apple's no one-trick pony but they are a pony with a countably limited number of tricks. Amazon is a platform for selling anything and everything. They've abstracted out their distribution network to adapt to selling the Next Big Thing before it's even been conceived. Competitors can take a swipe at a chunk of their market but at the end of the day they're in so many markets that it's a truly monumental task to dethrone Amazon in any meaningful way.
This was all said in the article I think but I'm just trying to rephrase it.
But yes, as Microsoft demonstrates competition in this sector doesn't always go by the book. Because it really isn't such a free market with non-captive consumers.
People have been beating Apple on price for years, yet Apple are still here and still reaping their profits. These are not commodity products - I doubt that too many people would choose a Samsung tablet over an Apple one based solely on the fact that they were £100 cheaper. If I want an iPhone or an iPad, I'm only going to be buying it from Apple
Amazon, on the other hand, offer pretty much nothing that couldn't be copied or beaten by a big retailer (someone like WalMart, or Tesco in the UK) if they really put their mind to it.
- Apple's core business is something 'everyone can do'. If so then why aren't there more people chasing down their position as 'most profitable tech company'?
- 'Practically nobody wants to' do what Amazon do?
I get the premise: Amazon are playing a long game but will be entrenched, whereas Apple's products tend to have a far shorter lifespan, therefore Amazon isn't being chased as furiously as Apple. However, it still seems a bit... wrong?
Keep in mind that Apple has been doing this (building touch screen devices) for about 6 years, while Amazon has been doing this (e-retail) for more than twice that time. Apple already has serious competitors, while Amazon maintains a near monopoly. I think this is the essence of what the article was getting at.
I can't think of any other company that competes with Amazon at anywhere near the scale they are operating at.
Competitors are not yet successful at giving Apple's profitability a run for its money, but you'd have to be willfully blind to think they weren't trying.
LG, Samsung, Nokia, RIM, HTC, Huawei, Acer, Asus, Motorola, Sony...
I myself think the view a bit too simplistic and as a counterpoint I would say that Apple's continuous influential presence within the market despite the hostility imposed by the numerous competitors is a testament to Apple's ability to navigate treacherous waters.
Apple can cross borders much more easily, which it does.
Most of their profit comes from phones and tablets, and in both of these markets their global marketshare has decreased, or at best held steady, in most quarters over the last few years.
It’s not necessarily true that competitors are converting owners of Apple devices en masse, it’s much more likely that competitors are able to convert more non-smartphone or tablet users than Apple can.
I foresee Apple being just a company that doesn’t grow much in the future but still makes tons of money.
With the iPod, iPhone and iPad, Apple have been going from Early Mover to Early Mover, which has allowed them to keep their high margins. Unless they can keep finding even more new markets to move into, they are going to find it harder and harder to maintain high margins. They will then almost certainly have to lower their prices to remain competitive, or lose huge amounts of market share.
tl:dr digital content delivery made Apple king.
OSX has Unix compatibility, better audio and video production etc.
Neither is "simply better".
I was a Mac user through that time. Windows 95 came around with preemptive multi-tasking. The Mac was still more polished, but Windows 95 was a better operating system. This period also saw Intel processors far outpace the PowerPC. When OS X came out in 2001, it was so slow as to be nearly unusable. 10.1 helped, but comparing it to a Windows XP machine was simply disheartening.
Looking back on this period, I find it hard to believe that I (mostly) stuck with the Mac platform through it. OS X is wonderful today. However, I think it's important to realize that during the dark days for Apple, they were really selling inferior machines and an inferior operating system. From 1995-2001, Apple was selling a cooperatively multitasked operating system against a more technologically sound Windows 95/98. Intel processors were very significantly better as OS X came around and Apple was having trouble getting good PowerPC processors out of IBM and Motorola. Apple introduced a 700MHz iMac in 2002 against around 2GHz PCs. Apple did try to spin it and we all know that MHz isn't everything, but there was quite a gap - a gap that would simply become larger until the Intel switch.
So, it's easy to say that "Windows machines competed on price," but I think looking at the history, Windows machines were substantially better for a decade. Mac OS was still better polished and a more pleasant interface (in my opinion), but the classic Mac OS was ancient by the technology of the day, OS X was dreadfully slow when introduced, and Intel processors wiped the floor with PowerPCs. The Windows machines weren't just "competing on price", but were better.
While people may prefer Android or Windows phones, the iPhone's processor is as fast or faster than what is being offered in the competition. You may want a different mix of features than iOS offers, but I don't think a reasonable person would say that it's technologically inferior to its competitors. In many ways, Apple is still the state of the art. The A6 processor runs circles around the Galaxy S III (http://www.anandtech.com/show/6330/the-iphone-5-review/10), iOS is well liked, the build quality of Apple's devices is arguably the best in the industry, etc. Apple does have competitors and it would be foolish to discount them. However, Apple's current situation is absolutely nothing like 1995-2006. In that period, a dispassionate person would look at Apple's products and find them woefully inadequate. Today, dispassionate people don't find Apple's products lacking.
At the time I thought that the lack of quality of the Mac was an offshoot from the lack of market share, but having read a number of books lately on that era, I think it was more a lack of Steve Jobs that was the problem.
It will be interesting to see what happens now, because again they don't have Jobs, but the current team are in my opinion far more on top of things than the management team in the 90's. OSX is also on a much firmer footing than the old Mac OS, particularly because of the Unix roots.
iOS I'm not sure about. I think they have made a number of compromises and sacrifices in order to make the phone run quicker and be more "simple", but I think it is falling behind Android. I also think that their reliance on marketing Retina DPI along with having s fixed resolution is getting them into trouble.
Then, as now, Windows primarily thrived because corporate buyers bought more of what they already had. The success of Windows between 1996-2005 was almost entirely due to monopolistic abuse and buyer inertia.
Windows machines thrived for many reasons, including being faster, cheaper, having the best office programs, by far the best games, as well as all the advantages they had in enterprise.
I don't think any competent observer could say that late 90's Macs were good value machines.
If a product is - or at least is perceived - to be 100% better than the others, paying just an extra 30% is a win in the mind of consumers
Amazon, on the other hand, is in retail. Very little magic or innovation happens in this old business, though Amazon is doing its best to squeeze some from a stone. Their music business was successfully disrupted by the iPod and they're scrambling like hell to prevent disruption in other digital media. It is not a place of wonder, and Amazon will never make anything but a token profit due to the nature of retail and Bezos' desire to constantly reinvest in the future.
This isn't really true. Check out Emek Basker's famous paper "The Causes and Consequences of Wal-Mart's Growth" (econ.missouri.edu/working-papers/2006/wp0611_basker.pdf (and its citations)) and the work of other economists who estimate that WalMart, on its own may be responsible for an appreciable portion of U.S. productivity growth in the 90s and 2000s.
One major problem India suffers from right now is entrenched incumbents who prevent modern retail practices from reaching most of the country. A lot of people there would love for American-style retail practices to spread.
I applaud Amazon's efforts to prevent disruption with the Kindle and to move into the cloud. AWS is fairly innovative.
Again, check out the paper, the papers citing it, and the papers cited in its bibliography—based on that research, the distinction is fuzzy at best.
What about Amazon Web Services? Amazon was and still is a leader on the cloud computing front.
> Bezos' desire to constantly reinvest in the future
This is a huge advantage at least from an investor perspective.
> The chances I leave [Apple] are minimal because I have all my music and photos and such on the phone. The inertia or friction of moving is fairly high.
This is also starting to become true with the kindle for consumers.
Another advantage of Amazon however is its many business customers - i.e. those who use and rely on AWS. I would imagine the friction of moving away from AWS are even higher for a business than for an end-user to transfer their songs and videos...
I disagree. In my experience, buying books on Kindle has been almost a reassurance that it could be read on any other platform, either through a web browser or iPhone/Android app. Amazon has made it easy to switch platforms and still be hooked on their services, whereas Apple essentially locks you in to their ecosystem with only allowing their content (iBooks and movie rentals, but not music in some sense) to be enjoyed on Apple devices.
Services like Spotify and Rdio make it easier to switch platforms -- if I want my music library on another platform, all I need to do is download an app. That kind of flexibility and availability is more powerful and consumer-friendly in the long run, in my opinion.
Here's an interesting read from Paul Miller of The Verge: http://www.theverge.com/2012/1/4/2669066/ecosystem-the-winne...
Anecdata: I'm an Apple customer who purchases Kindle books specifically because they're cross-platform. I like that they're at least future-resistant.
( On another hand I totally admire Jeff Bezos and the company he built )
As for "offer something better other than price", most people point to customer service, and in my experience Costco's customer service completely blows away Amazon.
They might compete of some selected products, but it's a long way to the "we have it all" of Amazon.
Amazon's catalog is so much bigger than Costco's along two axes; more kinds of products, and more varieties of a given kind of product. The latter axis can be good for Amazon, since people have different utility functions, brand loyalties, etc. But one thing I like about Costco is that their catalog seems to be curated; whatever brand/model of a given thing they happen to carry, it's usually pretty decent. Amazon, by comparison, carries good and crap versions of pretty much everything, but you can use the customer reviews to separate the wheat from the chaff). By removing the paradox of choice, Costco not only reaps the usual benefit on the buyer's psychology, but is also able to negotiate better wholesale prices on the items they buy due to higher volume. Maybe that's a way for them to compete?
If you have so much money you can pay dividends, it means you have grossly high margins and not investing in growth enough; which means someone will come and not only destroy your margins but your business also.
If we're talking tech not mining.
Hints? Potential? Have you guys not seen the kool-aid their employees are watching internally: https://www.youtube.com/watch?v=-AkLOvjl5jo
By the way: a Good P/E is probably correlated with cash in bank, a higher buyout /sale price and likelihood of getting some cash back via dividends or share repurchases.