12 ms·

Amazon, Apple, and the beauty of low margins

187 points by tortilla 14y ago

LnxPrgr3 14y ago
Interesting thoughts, but I'm confused: how exactly is Apple going wrong here? Despite their sky-high margins, they're finding enough customers to rake in record-breaking earnings. New products are often hard to find in stock: even iMac demand still outstrips supply. Samsung actually ran commercials mocking supposedly stereotypical Apple customer loyalty. How is Apple hurting exactly? What are the symptoms of their failure to go after the low end market? From here, it looks like their big ailment is not making money as much faster than everyone else as some people would like.
- cageface 14y ago
  The only market in which Apple enjoys a healthy phone market share now is the U.S. and I strongly suspect that is largely a product of the carrier subsidy model. If people had to pay the full price of a phone upfront I'm sure a lot of iPhone buyers would opt for cheaper alternatives. Any company that's growing should post "record-breaking" earnings every quarter. Luckily for Apple the U.S. market is also by far the most lucrative, at least for now.
  - Bockit 14y ago
    Australia is a market where Apple holds a healthy phone market share and has both subsidised and unsubsidised iPhones available. Anecdotally, people who can afford get it outright and those that can't take the 2 year carrier contract.
    - cageface 14y ago
      Even there Android has overtaken iOS from next to nothing in just two years: http://www.theage.com.au/digital-life/mobiles/android-overtakes-apple-in-australia-20121212-2b8q2.html http://www.theage.com.au/digital-life/mobiles/android-overta... Remove the subsidies and I think you'd see an even greater tilt to Android.
  - jdboyd 14y ago
    I think that Apple could reduce iPhone pricing to close to iPod Touch pricing if they wanted to. My suspicion is that the high price of unlocked iPhones is a concession to carriers.
  - rimantas 14y ago
    And "triple digits" growth in China. And premium resselers going from 200 to 400 in China. And 2.5x increase of iPhone points of sales.
    - cageface 14y ago
      And, as of last month, in 6th place behind Huwei: http://www.dailytech.com/Apple+Falls+to+6th+Place+in+Chinas+Mobile+Market/article29358.htm http://www.dailytech.com/Apple+Falls+to+6th+Place+in+Chinas+... But really it's the Apple apologists that keep saying nothing is wrong that are doing the most harm. If you care about Apple then you should be doing what you can to help put a boot up their backside.
      - YooLi 14y ago
        You purposefully chose a link from Dec. 5th, way before earnings and when everyone was speculating on AAPL numbers. Choose any of the articles about AAPL and China after 1/23, like say this one, and things aren't as bad as you keep trying to make them: http://online.wsj.com/article/SB10001424127887323539804578261070252650036.html http://online.wsj.com/article/SB1000142412788732353980457826... Your posts were erroneous, so people corrected you. That doesn't make them apologists.
  - ephesus 14y ago
    The iPhone has a huge portion of the Japanese market. Just glancing around the train right now I see about 75% iPhones.
  - taligent 14y ago
    Luckily for us actual facts exist instead of baseless opinions. http://techcrunch.com/2013/01/22/kantar-iphones-top-seller-in-u-s-japan-android-winning-everywhere-else-windows-phone-growing-most-in-europe/ http://techcrunch.com/2013/01/22/kantar-iphones-top-seller-i... I wouldn't call the US their only healthy market.
    - cageface 14y ago
      Ok two markets, U.S. and Japan. From the same article: In markets where Android is leading, it is consolidating its lead, accounting for over half of all smartphone sales in the 12 weeks ending December 23. Doesn't sound like something Apple fans should be cheering about to me. Personally I'm not anti-Apple. I'd just like to see them get back to making interesting new stuff instead of polishing what they already have and suing everybody.
      - ZeroGravitas 14y ago
        I've seen the exact opposite iOS vs Android numbers for Japan though I have no theory on why there is the discrepancy. And it's worth noting that the fancy phones a lot of people have in Japan don't count as "smartphones" so only 25% of people have "smartphones" vs 40-50-60% of the market in other nations, in other words there's more scope for these numbers to change (in either direction), assuming the Japanese move to "smartphones" en masse. http://news.cnet.com/8301-1035_3-57497144-94/android-apple-tops-among-smartphone-users-in-japan/ http://news.cnet.com/8301-1035_3-57497144-94/android-apple-t...
  - mattmanser 14y ago
    I'm sorry, but almost everything you wrote is wrong. Take Europe. The ratio of Android:iPhone may be higher in Europe than in the US, but it's still a MASSIVE share. And people are still extremely defensive if they've got anything but an iPhone here in the UK. The European models also have carrier subsidy on ALL monthly contract phones, not just iPhones. Generally only poor people have pay-as-you-go. It's not as if there aren't regular articles on here about the ratios of iPhones to Androids in all markets. It's slightly confusing that you could believe any of what you wrote. BTW, you're also wrong about any company that's growing should post "record-breaking" earnings. Earning are profits. Growing companies often post losses. It's not turnover.
    - ZeroGravitas 14y ago
      It's worth noting that carrier subsidy system in the USA seem to be much sillier than you get elsewhere. It's a fair hypothesis that this is part of the reason Apple does better there. (Though of course, historically they were always much bigger in the US on desktop as well)
- thefreeman 14y ago
  Can you source your record-breaking earnings statement? From what I've seen they seem to be kind of stagnant. `The firm matched last year’s net profit figure at $13.1 billion.` [1] [1]http://www.washingtonpost.com/business/technology/apple-faces-pressures-ahead-of-earnings/2013/01/23/29cf3680-6566-11e2-9e1b-07db1d2ccd5b_story.html http://www.washingtonpost.com/business/technology/apple-face...
  - gareim 14y ago
    If this is correct, then it is technically record breaking: "Apple just announced its Q1 2013 earnings, and the company posted a record $13.1b profit on a record $54.5b in revenue. That's just over last year's record of $13.06b profit on $46.33b in revenue at this time last year, and well over the $8.2b profit on $36 billion in revenue in the last quarter." http://www.theverge.com/2013/1/23/3908330/apple-q1-2013-earnings http://www.theverge.com/2013/1/23/3908330/apple-q1-2013-earn... $13.1 > $13.06 but just a bit.
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  - nemothekid 14y ago
    Last year they were record breaking. `Apple reported record-breaking net profits for the three months to 31 December 2011 of $13.06bn (£8.36bn), up 118% from the same period in 2010.` - http://www.bbc.co.uk/news/business-16712089 http://www.bbc.co.uk/news/business-16712089
  - tdg 14y ago
    Last year had an extra week. So per-week profit is higher (which is what should matter).
    - gfodor 14y ago
      This can't be overstated and I am loathe to admit it but I have a feeling that a large part of the panic today was the fact that it was widely reported that Apple's earnings were "flat" year over year. They weren't, they were up by about 7%, which isn't stellar but is a far cry from flat.
- damian2000 14y ago
  I don't think they're going wrong - its just a different model to Amazon's. If you pare back the reason why Apple is a profit leader in the markets it sells to, you might come up with design, quality and brand. In the end the competitors can eventually catch up on design and quality. But brand is something that's build over a long time, and takes a long time to change.
- jusben1369 14y ago
  They're hurting because their super high profits and margins have attracted an amazing array of competition and left them plenty of room to get a toe in the water. The fear is they're going to go from being the absolute leader in this space in terms of volumes, margins and profits to a smaller bit player. There is a sense that history is repeating itself.
  - bilbo0s 14y ago
    "...They're hurting because..." Wow. Just to be clear, we are talking about Apple right?
    - Kylekramer 14y ago
      Pay attention to context: the poster is responding to the grandparent's question of "How is Apple hurting exactly". Any response besides a straight denial would take the form "they're hurting because..."
  - LnxPrgr3 14y ago
    Maybe things have changed in the last several months, but: "94.2% of iPhone users plan to buy an iPhone for their next phone, improving upon last year's rate of 93%." "Android phones were measured at a re-buy rate of 60%, up from 47% last year." (Source: http://tech.fortune.cnn.com/2012/07/17/piper-jaffray-80-million-iphone-5s-sales-are-already-in-the-bag/ http://tech.fortune.cnn.com/2012/07/17/piper-jaffray-80-mill...) "Delving deeper into the retention and user metrics, iPhone and iPad users are 52% more loyal to their apps than Android users. A healthy 35% of Apple iOS users launched an app more than 10 times after downloading, compared to 23% of Android users." (Source: http://www.localytics.com/blog/2012/app-user-loyalty-increasing-ios-beats-android/ http://www.localytics.com/blog/2012/app-user-loyalty-increas...) "Google paid App devs approximately $320 million through end of January. At that time Apple reported it had paid out $4 billion." (Source: https://twitter.com/asymco/status/199127829550612481 https://twitter.com/asymco/status/199127829550612481) I'm finding conflicting numbers on mobile browser share, but none of them are making the iPhone look particularly weak either. ---- I see two scenarios that could theoretically actually hurt Apple (not just in a slowed growth kind of way, but by actually causing their revenue to fall): iPhone users ditch the platform for something else they like better, or another platform becomes more lucrative to develop for, causing developers to abandon the iOS App Store and leading users to abandon the iPhone over the lack of new and updated apps. From the bits of data I can dig up, that doesn't look like a terribly immediate threat: iPhone users are still ridiculously loyal to the platform and still far more willing to spend money on apps. Some of this is old data and things change quickly, so life could be worse for Apple than I realize. That said, the closest things I could find to reasons to worry: Android users do seem to be becoming increasingly happy with their phones, or at least the platform, and they're downloading apps at a rate approaching what Apple's App Store sees, even if it hasn't led to the same developer revenues iOS produces yet. Apple's dominance profit-wise is far from guaranteed, and Android is a legitimate threat that could eventually bring down the empire. I'm having a hard time believing Apple's hurting at the moment though in any way besides a drop in share price. Revenue is healthy and growing. iPhone sales are healthy and growing. Profit is healthy if a bit stagnant. (Ironically enough, it's a decline in margins hurting Apple right now, not sales.) iPhone users seem to like their phones enough to buy upgrades, and to buy and use apps on them, and Apple is still winning new converts. If this is what hurting is, Apple sure makes hurting look attractive.
- shuzchen 14y ago
  From the article, the argument isn't that Apple is hurting, but it's market position is weak against newcomers because there are many vectors to compete on. While it holds a very strong position now, it's very conceivable that some brand can come up and compete on all aspects of design, quality and price. Amazon then, can be considered to have a more stable position because newcomers cannot beat them on price, but merely match them.
hkmurakami 14y ago
> Attacking the market with a low margin strategy has other benefits, though, ones often overlooked or undervalued. For one thing, it strongly deters others from entering your market... Not having to sweat a constant onslaught of new competitors is really underrated. You can allocate your best employees to explore new lines of business, you can count on a consistent flow of cash from your more mature product or service lines... Isn't this contradictory? Having a low margin business by definition should mean that you have a smaller cash flow available to fund your R&D? Also, somewhat unrelated, but I think one needs to draw a distinction between a low margin consumer staple style business (like cosmetics, food, or Amazon) and a low margin discretionary style business (luxury goods or consumer tech).
- atdrummond 14y ago
  "Isn't this contradictory? Having a low margin business by definition should mean that you have a smaller cash flow available to fund your R&D?" Not always. It depends on how consumers react to the price of your products. A drop in profit per unit (by lowering one's price) might yield a large enough increase in units sold such that the total profit is higher. This is especially important for retailers who can't price discriminate easily.
- jusben1369 14y ago
  No, it's all relative. Let's say two developers each build and maintain a site and service. One to sell their own service and one to resell other people's products. If someone is selling $10,000 of their own service per month at 80% margins they have $8000 profit to reinvest in their business. If someone is reselling $100,000 of someone else's products and getting an 8% cut they have $8000 profit to reinvest in their business. Forget their topline, they both have an $8000 per month "profit" business. If they feel insecure about their place in the market they'll spend a large portion of that $8K defending their existing revenue. If they feel very secure about that $8K they'll invest it to do more things that grow the business.
- hef19898 14y ago
  Margin don't relate 1:1 to cash flow. You can have small margin and pretty big free cash-flow (Amazon seems to have that, a German example would be Aldi, a low cost retailer that used to be famous for his "pay suppliers 3 months after I sold the product" approach). High margins and a low or even negative free cash-flow are possible, too. And my opinion is that more companies collapse due to cash flow issues than too high costs (given they don't sell below production costs).
ActVen 14y ago
"Your margin is my opportunity" -Jeff Bezos
ethyreal 14y ago
"A lot of folks, especially Apple supporters, like to characterize Amazon as irrational, even crazy, for its willingness to live with low margins. It must be frustrating to compete with a company like that." This assumes that Apple is actually competing with amazon. Does BMW compete with say Ford.... maybe but really they are after different markets. Apple has said numerous times they are not interested in going after the low end market.
- cageface 14y ago
  The iPad mini is quite obviously a response to cheaper, smaller Android tablets, the best selling of which is the Kindle. Apple is clearly interested in the customers on the fence between a Kindle and a more expensive but higher quality device.
  - demallien 14y ago
    I'm not so sure that it is that obvious that the iPad mini was in response to competition. My personal theory is more that they recognised that there was an unfulfilled need for an iPad that was smaller / lighter than the original. For example, many people find an iPad too heavy for long periods of reading, but an iPhone is too small. As this is one of the biggest use cases for tablets, it is not surprising that Apple wanted to make a product that is optimised for that use case. Another way to look at it - if competition was the motivation for the iPad mini, it would have cost $50 less.
    - ygra 14y ago
      Why bother selling it for less if people buy it for more, too? Apple's customers don't really compare prices and features between different options. They won't even consider an Android tablet and why would they? They probably own three generations of iPhones and two generations of iPads already. They'll happily pay Apple's price.
      - greedo 14y ago
        So many unsubstantiated assertions in your reply... I'm an "Apple customer" and I'm price sensitive, I've also considered many Android based tablets as well as WebOS based tablets. Now we all know that anectadata is of limited value, but compare to no data...
fleitz 14y ago
BMW could launch a bargain basement 0 series, or Wal-mart could start selling quality products. Fundamentally there isn't much point for either because it's not the right customer base. This is what branding is about, if Apple acquires a whole bunch of customers that don't care about quality and then complain that their devices don't have half-baked features it doesn't do the brand any good. These customers will destroy the brand. I don't want to have to walk into an Apple store and wonder which is the low margin device that will fall apart / fail to perform, if I wanted to ask those questions I'd go to Best Buy. The low margin Apple market is craigslist, if you want a 3 year old Apple device that's where you can get it. The most confusing thing about AMZN and APPL are their respective PEs. They are priced as if each are going to adopt the other's business model.
- ScottBurson 14y ago
  > The most confusing thing about AMZN and APPL are their respective PEs. I've wondered about this too, but the post seems to shed some light on it. Amazon arguably has essentially no competition, while Apple, for all that it's doing well at the moment, has plenty. (I understand the point is debatable. I'm just saying, this appears to be how the market is thinking.)
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  - doctorpangloss 14y ago
    I think the market is thinking more about selling high and buying low, and many AAPL owners are very, very high right now. :)
- cageface 14y ago
  The difference here is that, thanks to volume, Wal-Mart has the kind of market-making muscle that BMW could only dream of. This isn't as important in the world of cars or TVs but the network effects of software means there's a lot more at stake in the contest for market share.
bobbles 14y ago
Yeah I'm sure Apple is just SOOO frustrated at Amazons low margins. It's not like Apple is generating record profits or anything now is it?
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rayiner 14y ago
Didn't Amazon post a loss last quarter?
- pooriaazimi 14y ago
  @schraeds: You've been hellbanned for... 299 days! schraeds 34 minutes ago | link [dead] Apple made as much profit this quarter ($5B), as Amazon has earned, ever.
- schraeds 14y ago
  Apple made as much profit this quarter ($5B), as Amazon has earned, ever.
- jrockway 14y ago
  Didn't they make a lot of money and then spend it on new fulfillment centers? Nothing wrong with investing capital into your business. If you just accumulate cash and sit on it, your company won't grow.
kyllo 14y ago
So what does Amazon do when it has finished using loss-leader pricing to drive its competitors out of business in every retail market where it wants to play? Clearly market share at any cost is the name of the game for Amazon. It is a well-oiled, market-share-taking machine. But when it has swallowed up so much of the retail market that it becomes a monopoly? Then what?
- scarmig 14y ago
  1) Win a monopoly market share. 2) Profit. As far as business plans go, it's pretty obvious and pretty solid. It'll be implemented as a dual monopoly-monopsomy setup: consumers go to it to buy most goods, get screwed. Suppliers sell to it, get screwed. There's a reason Wall Street likes AMZN.
  - xenophanes 14y ago
    Have you ever read about the economics of monopoly prices? E.g. in Human Action by Ludwig von Mises? It's not actually that simple and doesn't always work well.
    - scarmig 14y ago
      I'm not too familiar with the Austrian take on monopolies. Care to enlighten? Mainstream economics does argue that monopolies enable excess profit, and I've never seen reason to question that part of it. But I'm genuinely curious and open to other models, even Austrian ones.
      - xenophanes 14y ago
        In short, not all demand curves have a monopoly price point at which you would make more money by restricting supply (e.g. it's possible to have a demand curve where demand would fall off a cliff if price went up slightly, even if supply went to near-zero. in this case, you cannot make monopoly profits). And even if there is a monopoly price which could provide monopoly profits, it can be hard to figure out what it is and you can lose money (or even go out of business) trying to find it. Therefore, not all monopolies can lead to monopoly profits. Quoting minimally: http://mises.org/humanaction/chap16sec6.asp http://mises.org/humanaction/chap16sec6.asp > The special conditions and circumstances required for the emergence of monopoly prices and their catallactic features are: > 1. There must prevail a monopoly of supply. > 2. Either the monopolist is not in a position to discriminate among the buyers or he voluntarily abstains from such discrimination.[12] > 3. The reaction of the buying public to the rise in prices beyond the potential competitive price, the fall in demand, is not such as to render the proceeds resulting from total sales at any price exceeding the competitive price smaller than total proceeds resulting from total sales at the competitive price. > 4. It is a fundamental mistake to assume that there is a third category of prices which are neither monopoly prices nor competitive prices. > 5. [some stuff about cartels] > 6. The concept of competition does not include the requirement that there should be a multitude of competing units. [i think you will have to read further to understand this one] > 7. If it is possible for the seller to increase his net proceeds by restricting sales and increasing the price of the units sold, there are usually several monopoly prices that satisfy this condition. > 8. The monopolist does not know beforehand in what way the consumers will react to a rise in prices. He must resort to trial and error in his endeavors to find out whether the monopolized good can be sold to his advantage at any price exceeding the competitive price and, if this is so, which of various possible monopoly prices is the optimum monopoly price or one of the optimum monopoly prices. This is in practice much more difficult than the economist assumes when, in drawing demand curves, he ascribes perfect foresight to the monopolist. We must therefore list as a special condition required for the appearance of monopoly prices the monopolist's ability to discover such prices. > 9. A special case is provided by the incomplete monopoly. > 10. Duopoly and oligopoly are not special varieties of monopoly prices, but merely a variety of the methods applied for the establishment of a monopoly price. > 11. The monopolized good by whose partial withholding from the market the monopoly prices are made to prevail can be either a good of the lowest order or a good of a higher order, a factor of production. > 12. [discussion relating to governments intentionally encouraging monopoly] And it goes on. The biggest takeaway is that monopolies sometimes but not always enable higher profits by restricting supply. It's important not to assume all monopoly will enable significantly more profits than competitive market prices. Some analysis is required in any given case. And the issue of whether and why monopoly prices are bad, and what if anything should be done about them, is considerably more complicated than "the government should prevent all monopolies" (typically with no mention of whether they are charging monopoly prices, or even could profitably do so tomorrow).
kbar13 14y ago
what's that crazy data-block-json? SEO stuff?
- rcsorensen 14y ago
  Looks like it comes from squarespace? http://static.squarespace.com/universal/scripts-v6/01242013221044728/yui-seed.js http://static.squarespace.com/universal/scripts-v6/012420132... is the thing that references it. Lines like a.all(".sqs-block.map-block[data-block-json]").each(function(e) { d.Squarespace.Rendering.renderMap(e.one(".sqs-block-content"), d.JSON.parse(e.getAttribute("data-block-json"))) }); inside the "var Squarespace = {load: function()" namespace.
  - kbar13 14y ago
    interesting. thanks!
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anactofgod 14y ago
It would make sense for Apple to lower its prices to capture and lock in a bigger market share, but only if they were able to meet the resulting demand. But, if they are constrained by supply chain and manufacturing capacity, then maintaining the highest prices the market will bear makes the most sense.
- jusben1369 14y ago
  The author's arguing that's a good short term view and a poor long term one (unless they are constraining the entire SC which does happen for very short periods of time in high tech around chips or screens etc) Those high prices (really margins/profits) will attract competitors.
jusben1369 14y ago
I enjoyed this article. I was a little confused though by the final conclusion. Amazon shouldn't do a nice, high end tablet as that's not its competitive strength while also being Apple's strength. So don't play on their turf - I get that. But then Apple should do a lower margin mass market iPad for example? The author appears to argue that Apple has done this with iPod's - I guess it would be great if he fleshed that out further because the general consensus is Apple doesn't care for/get the lower margin/high volume play. If they did they might have maintained an early PC lead.
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- hayksaakian 14y ago
  They prefer high margin high volume :-) How did they take over mp3 players? They made a high cost product everyone wet their lips with, and year later made cheaper versions everyone who was enviously waiting for could afford. They make an excellent play on consumer psychology.
atechie 14y ago
It should be titled " Amazon, Apple and the beauty of high volumes"
OGinparadise 14y ago
I don't understand Amazon investors. They own a piece of of a $100+ billion company that makes virtually no profit (relatively speaking) for a decade plus. To make money they'd have to increase prices drastically but that's Amazon's selling point (along with customer service,) their competition isn't going away any time soon.
- chime 14y ago
  > their competition isn't going away any time soon. That's where the investors disagree with you. Amazon is trying to do to big box stores what big box stores did to mom and pop stores. I buy everything from $2 batteries to $5000 electronics on Amazon. Only reason I go to local stores is groceries or emergency goods (meds, last-minute-gifts). Nobody knows what will happen to Office Depot or Kohls in 20 years but unless Amazon royally screws something up, I am certain they will remain significant for decades to come.
  - OGinparadise 14y ago
    So you think Amazon will drive everyone serious enough out of business and then be able to raise prices? Personally, I doubt it. They will not surrender that easily I love Amazon by the way, and do a lot of my shopping there. But, IMO, its hard for investors at these levels to see a decent return.
    - rednukleus 14y ago
      This is a misconception. Amazon aren't making any profits because they are pumping all of their margins into new facilities and other infrastructure investments. If they stopped expanding and just squeezed profit out of their existing business, then they would be very profitable. After Walmart destroyed the mom and pop store they didn't incrase prices, and Amazon probably won't either. Particularly since Amazon are an online retailer, and it is very easy for customers to shop around.
      - OGinparadise 14y ago
hef19898 14y ago
This sums up the major differences between companies like Apple and Amazon in really good way. I for myself thought about this a couple of days back. It was more like brain training in Supply Chain Management (the execution of the mentioned low and high margin strategies if you want). Now, Low vs. High margins looks more than just obvious. What I came up with, and please feel free to give feed-back, as one big difference between Amazon and Apple is the product range. Amazon has orders of magnitude more products and commodities than Apple. What makes it eassier (not easy, mind you, just easier) for Apple to manage their supply chain. You can see this in their release schedule, everthing is planned according to that. Hard to do with thousands of product lines. In this area, Apple is really doing great in the planning part of supply chain management, from my outside perspective they are a benchmark here for everybody else. Plus, one could argue their supply chain strategy matches perfectl their business strategy. Amazon on the other excels at the logistics part of supply chain management. As mentioned in the article, they have to in order to get their low margins and high customer satisfaction. Currently, I'd say Amazon is doing to logistics what Toyota did up to the lets say 80s and Wal-Mart did up to the early 2000s (no coincidence that Amazon hired Wal-Mart people back then). What both companies have in comon is really good view of Point-of-Sales data. Big difference here to most other companies around. How does all that match with high and low margins? In the place of Apple excellence in supply chain planning is used in combination with a narrow product range to allow for high margins and high inventory turn rates (again, a narrow product range is helping a lot here). Supplier management is critical point here, too. In the place of Amazon logistic excellence is used to run an very efficient ditribution network. This efficiency allows them things like next-day delivery and their low margins. Think Toyota Production System and Lean and all the businesses that tried to copy that since the late ninties. So, as long as both companies can keep their respective levels of operational performance up I don't think they are in trouble. Back on the OP, the low margin-attack was what the whole Android industry did on Apple, Samsung in particular. But Samsung is different story all together.
mjfern 14y ago
Low margins, per se, isn't a strategy. Amazon is pursuing a cost advantage [1], and it's choosing to keep its prices very low, hence the low margins. With a cost advantage and low prices, Amazon gives away a lot of value to customers (instead of capturing a lot of value for itself in the form of profits). Its primary objective is to gain market share (i.e., both new customers and a greater portion of existing customers' everyday shopping). With an increase in market share, Amazon can further reduce its costs through economies of scale (i.e., spreading its fixed costs, such as infrastructure and R&D, over a greater number of customers served and products sold). Amazon's cost advantage and low prices explains why most other online retailers have been unable to gain significant market share and why Amazon is posing an increasing threat to companies like Wal-mart, Target, and Costco. - [1] I'd argue that Amazon is actually pursuing a dual advantage, both a cost and value advantage (at least for customers that favor convenience over impulse buying). The value advantage stems from the ability to shop at home, its product reviews, its excellent customer service, extensive selection, etc.
- fspeech 14y ago
  No Amazon does not have a cost advantage over Costco. It is operational cost is FAR higher than Costco: 18% vs 10%. It is easy to see why. Costco thrives on high volume/low count of SKU and customers pay for delivery themselves. Costco's gross margin is 12% vs 23% for Amazon. Amazon's cost advantage over WalMart is only marginal. About 1 pt lower on the SG&A and 2.5 pts lower on gross margin. But Walmart is a lot more profitable. The advantage of Amazon vs WalMart is really in the long tail. It can keep more SKUs than even the largest WalMart Supercenter could hope for and still turn its inventory over much faster. And for items you can wait for you get them delivered to the door. My own family's shopping behavior is consistent with the data: we buy from Costco if it carries them, esp recurrent consumables; my wife occasionally goes to Target if she needs something soon; for things that we can take time to shop and do some research on I buy from Amazon, sometimes for price but mostly for convenience of not having to go to the store.
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tyang 14y ago
Amazon has a defensible moat for physical products. Apple has Samsung.
monochromatic 14y ago
Amazon could have had a margin of zero and still made money. What?
- snowwindwaves 14y ago
  the article says because they get the customer's money right away, but don't pay the supplier for months, they have a big pile of cash. I suppose they could make money with that money before they have to pay their bills.
  - DanBC 14y ago
    This is such a well known problem that the UK had to implement laws. If you can get people to pay you quickly (in advance is best, on delivery is ok, 30 days after delivery is standard) and you can delay paying your suppliers (90 days after delivery is best, 60 days is ok, 30 days is standard) you can improve cash flow and there are a bunch of benefits to it. I don't think it's legal in the UK anymore. It's very easy for a big company to squeeze little companies into accepting really lousy terms.
Andy_Troutman 14y ago
Andy Jassy's keynote from this year's AWS conference (amazon's web service business) talks about running AWS as a high-volume, low margin business and why that's so different from high-margin businesses. The whole keynote is interesting, but here is the part that's pertinent to this discussion: http://www.youtube.com/watch?v=8FJ5DBLSFe4&t=30m35s http://www.youtube.com/watch?v=8FJ5DBLSFe4&t=30m35s

187 points by tortilla 14y ago

Interesting thoughts, but I'm confused: how exactly is Apple going wrong here? Despite their sky-high margins, they're finding enough customers to rake in record-breaking earnings. New products are often hard to find in stock: even iMac demand still outstrips supply. Samsung actually ran commercials mocking supposedly stereotypical Apple customer loyalty. How is Apple hurting exactly? What are the symptoms of their failure to go after the low end market? From here, it looks like their big ailment is not making money as much faster than everyone else as some people would like.

cageface 14y ago
The only market in which Apple enjoys a healthy phone market share now is the U.S. and I strongly suspect that is largely a product of the carrier subsidy model. If people had to pay the full price of a phone upfront I'm sure a lot of iPhone buyers would opt for cheaper alternatives. Any company that's growing should post "record-breaking" earnings every quarter. Luckily for Apple the U.S. market is also by far the most lucrative, at least for now.
- Bockit 14y ago
  Australia is a market where Apple holds a healthy phone market share and has both subsidised and unsubsidised iPhones available. Anecdotally, people who can afford get it outright and those that can't take the 2 year carrier contract.
  - cageface 14y ago
    Even there Android has overtaken iOS from next to nothing in just two years: http://www.theage.com.au/digital-life/mobiles/android-overtakes-apple-in-australia-20121212-2b8q2.html http://www.theage.com.au/digital-life/mobiles/android-overta... Remove the subsidies and I think you'd see an even greater tilt to Android.
- jdboyd 14y ago
  I think that Apple could reduce iPhone pricing to close to iPod Touch pricing if they wanted to. My suspicion is that the high price of unlocked iPhones is a concession to carriers.
- rimantas 14y ago
  And "triple digits" growth in China. And premium resselers going from 200 to 400 in China. And 2.5x increase of iPhone points of sales.
  - cageface 14y ago
    And, as of last month, in 6th place behind Huwei: http://www.dailytech.com/Apple+Falls+to+6th+Place+in+Chinas+Mobile+Market/article29358.htm http://www.dailytech.com/Apple+Falls+to+6th+Place+in+Chinas+... But really it's the Apple apologists that keep saying nothing is wrong that are doing the most harm. If you care about Apple then you should be doing what you can to help put a boot up their backside.
    - YooLi 14y ago
      You purposefully chose a link from Dec. 5th, way before earnings and when everyone was speculating on AAPL numbers. Choose any of the articles about AAPL and China after 1/23, like say this one, and things aren't as bad as you keep trying to make them: http://online.wsj.com/article/SB10001424127887323539804578261070252650036.html http://online.wsj.com/article/SB1000142412788732353980457826... Your posts were erroneous, so people corrected you. That doesn't make them apologists.
- ephesus 14y ago
  The iPhone has a huge portion of the Japanese market. Just glancing around the train right now I see about 75% iPhones.
- taligent 14y ago
  Luckily for us actual facts exist instead of baseless opinions. http://techcrunch.com/2013/01/22/kantar-iphones-top-seller-in-u-s-japan-android-winning-everywhere-else-windows-phone-growing-most-in-europe/ http://techcrunch.com/2013/01/22/kantar-iphones-top-seller-i... I wouldn't call the US their only healthy market.
  - cageface 14y ago
    Ok two markets, U.S. and Japan. From the same article: In markets where Android is leading, it is consolidating its lead, accounting for over half of all smartphone sales in the 12 weeks ending December 23. Doesn't sound like something Apple fans should be cheering about to me. Personally I'm not anti-Apple. I'd just like to see them get back to making interesting new stuff instead of polishing what they already have and suing everybody.
    - ZeroGravitas 14y ago
      I've seen the exact opposite iOS vs Android numbers for Japan though I have no theory on why there is the discrepancy. And it's worth noting that the fancy phones a lot of people have in Japan don't count as "smartphones" so only 25% of people have "smartphones" vs 40-50-60% of the market in other nations, in other words there's more scope for these numbers to change (in either direction), assuming the Japanese move to "smartphones" en masse. http://news.cnet.com/8301-1035_3-57497144-94/android-apple-tops-among-smartphone-users-in-japan/ http://news.cnet.com/8301-1035_3-57497144-94/android-apple-t...
- mattmanser 14y ago
  I'm sorry, but almost everything you wrote is wrong. Take Europe. The ratio of Android:iPhone may be higher in Europe than in the US, but it's still a MASSIVE share. And people are still extremely defensive if they've got anything but an iPhone here in the UK. The European models also have carrier subsidy on ALL monthly contract phones, not just iPhones. Generally only poor people have pay-as-you-go. It's not as if there aren't regular articles on here about the ratios of iPhones to Androids in all markets. It's slightly confusing that you could believe any of what you wrote. BTW, you're also wrong about any company that's growing should post "record-breaking" earnings. Earning are profits. Growing companies often post losses. It's not turnover.
  - ZeroGravitas 14y ago
    It's worth noting that carrier subsidy system in the USA seem to be much sillier than you get elsewhere. It's a fair hypothesis that this is part of the reason Apple does better there. (Though of course, historically they were always much bigger in the US on desktop as well)
thefreeman 14y ago
Can you source your record-breaking earnings statement? From what I've seen they seem to be kind of stagnant. `The firm matched last year’s net profit figure at $13.1 billion.` [1] [1]http://www.washingtonpost.com/business/technology/apple-faces-pressures-ahead-of-earnings/2013/01/23/29cf3680-6566-11e2-9e1b-07db1d2ccd5b_story.html http://www.washingtonpost.com/business/technology/apple-face...
- gareim 14y ago
  If this is correct, then it is technically record breaking: "Apple just announced its Q1 2013 earnings, and the company posted a record $13.1b profit on a record $54.5b in revenue. That's just over last year's record of $13.06b profit on $46.33b in revenue at this time last year, and well over the $8.2b profit on $36 billion in revenue in the last quarter." http://www.theverge.com/2013/1/23/3908330/apple-q1-2013-earnings http://www.theverge.com/2013/1/23/3908330/apple-q1-2013-earn... $13.1 > $13.06 but just a bit.
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- nemothekid 14y ago
  Last year they were record breaking. `Apple reported record-breaking net profits for the three months to 31 December 2011 of $13.06bn (£8.36bn), up 118% from the same period in 2010.` - http://www.bbc.co.uk/news/business-16712089 http://www.bbc.co.uk/news/business-16712089
- tdg 14y ago
  Last year had an extra week. So per-week profit is higher (which is what should matter).
  - gfodor 14y ago
    This can't be overstated and I am loathe to admit it but I have a feeling that a large part of the panic today was the fact that it was widely reported that Apple's earnings were "flat" year over year. They weren't, they were up by about 7%, which isn't stellar but is a far cry from flat.
damian2000 14y ago
I don't think they're going wrong - its just a different model to Amazon's. If you pare back the reason why Apple is a profit leader in the markets it sells to, you might come up with design, quality and brand. In the end the competitors can eventually catch up on design and quality. But brand is something that's build over a long time, and takes a long time to change.
jusben1369 14y ago
They're hurting because their super high profits and margins have attracted an amazing array of competition and left them plenty of room to get a toe in the water. The fear is they're going to go from being the absolute leader in this space in terms of volumes, margins and profits to a smaller bit player. There is a sense that history is repeating itself.
- bilbo0s 14y ago
  "...They're hurting because..." Wow. Just to be clear, we are talking about Apple right?
  - Kylekramer 14y ago
    Pay attention to context: the poster is responding to the grandparent's question of "How is Apple hurting exactly". Any response besides a straight denial would take the form "they're hurting because..."
- LnxPrgr3 14y ago
  Maybe things have changed in the last several months, but: "94.2% of iPhone users plan to buy an iPhone for their next phone, improving upon last year's rate of 93%." "Android phones were measured at a re-buy rate of 60%, up from 47% last year." (Source: http://tech.fortune.cnn.com/2012/07/17/piper-jaffray-80-million-iphone-5s-sales-are-already-in-the-bag/ http://tech.fortune.cnn.com/2012/07/17/piper-jaffray-80-mill...) "Delving deeper into the retention and user metrics, iPhone and iPad users are 52% more loyal to their apps than Android users. A healthy 35% of Apple iOS users launched an app more than 10 times after downloading, compared to 23% of Android users." (Source: http://www.localytics.com/blog/2012/app-user-loyalty-increasing-ios-beats-android/ http://www.localytics.com/blog/2012/app-user-loyalty-increas...) "Google paid App devs approximately $320 million through end of January. At that time Apple reported it had paid out $4 billion." (Source: https://twitter.com/asymco/status/199127829550612481 https://twitter.com/asymco/status/199127829550612481) I'm finding conflicting numbers on mobile browser share, but none of them are making the iPhone look particularly weak either. ---- I see two scenarios that could theoretically actually hurt Apple (not just in a slowed growth kind of way, but by actually causing their revenue to fall): iPhone users ditch the platform for something else they like better, or another platform becomes more lucrative to develop for, causing developers to abandon the iOS App Store and leading users to abandon the iPhone over the lack of new and updated apps. From the bits of data I can dig up, that doesn't look like a terribly immediate threat: iPhone users are still ridiculously loyal to the platform and still far more willing to spend money on apps. Some of this is old data and things change quickly, so life could be worse for Apple than I realize. That said, the closest things I could find to reasons to worry: Android users do seem to be becoming increasingly happy with their phones, or at least the platform, and they're downloading apps at a rate approaching what Apple's App Store sees, even if it hasn't led to the same developer revenues iOS produces yet. Apple's dominance profit-wise is far from guaranteed, and Android is a legitimate threat that could eventually bring down the empire. I'm having a hard time believing Apple's hurting at the moment though in any way besides a drop in share price. Revenue is healthy and growing. iPhone sales are healthy and growing. Profit is healthy if a bit stagnant. (Ironically enough, it's a decline in margins hurting Apple right now, not sales.) iPhone users seem to like their phones enough to buy upgrades, and to buy and use apps on them, and Apple is still winning new converts. If this is what hurting is, Apple sure makes hurting look attractive.
shuzchen 14y ago
From the article, the argument isn't that Apple is hurting, but it's market position is weak against newcomers because there are many vectors to compete on. While it holds a very strong position now, it's very conceivable that some brand can come up and compete on all aspects of design, quality and price. Amazon then, can be considered to have a more stable position because newcomers cannot beat them on price, but merely match them.

hkmurakami 14y ago

> Attacking the market with a low margin strategy has other benefits, though, ones often overlooked or undervalued. For one thing, it strongly deters others from entering your market... Not having to sweat a constant onslaught of new competitors is really underrated. You can allocate your best employees to explore new lines of business, you can count on a consistent flow of cash from your more mature product or service lines... Isn't this contradictory? Having a low margin business by definition should mean that you have a smaller cash flow available to fund your R&D? Also, somewhat unrelated, but I think one needs to draw a distinction between a low margin consumer staple style business (like cosmetics, food, or Amazon) and a low margin discretionary style business (luxury goods or consumer tech).

atdrummond 14y ago
"Isn't this contradictory? Having a low margin business by definition should mean that you have a smaller cash flow available to fund your R&D?" Not always. It depends on how consumers react to the price of your products. A drop in profit per unit (by lowering one's price) might yield a large enough increase in units sold such that the total profit is higher. This is especially important for retailers who can't price discriminate easily.
jusben1369 14y ago
No, it's all relative. Let's say two developers each build and maintain a site and service. One to sell their own service and one to resell other people's products. If someone is selling $10,000 of their own service per month at 80% margins they have $8000 profit to reinvest in their business. If someone is reselling $100,000 of someone else's products and getting an 8% cut they have $8000 profit to reinvest in their business. Forget their topline, they both have an $8000 per month "profit" business. If they feel insecure about their place in the market they'll spend a large portion of that $8K defending their existing revenue. If they feel very secure about that $8K they'll invest it to do more things that grow the business.
hef19898 14y ago
Margin don't relate 1:1 to cash flow. You can have small margin and pretty big free cash-flow (Amazon seems to have that, a German example would be Aldi, a low cost retailer that used to be famous for his "pay suppliers 3 months after I sold the product" approach). High margins and a low or even negative free cash-flow are possible, too. And my opinion is that more companies collapse due to cash flow issues than too high costs (given they don't sell below production costs).

ActVen 14y ago

"Your margin is my opportunity" -Jeff Bezos

ethyreal 14y ago

"A lot of folks, especially Apple supporters, like to characterize Amazon as irrational, even crazy, for its willingness to live with low margins. It must be frustrating to compete with a company like that." This assumes that Apple is actually competing with amazon. Does BMW compete with say Ford.... maybe but really they are after different markets. Apple has said numerous times they are not interested in going after the low end market.

cageface 14y ago
The iPad mini is quite obviously a response to cheaper, smaller Android tablets, the best selling of which is the Kindle. Apple is clearly interested in the customers on the fence between a Kindle and a more expensive but higher quality device.
- demallien 14y ago
  I'm not so sure that it is that obvious that the iPad mini was in response to competition. My personal theory is more that they recognised that there was an unfulfilled need for an iPad that was smaller / lighter than the original. For example, many people find an iPad too heavy for long periods of reading, but an iPhone is too small. As this is one of the biggest use cases for tablets, it is not surprising that Apple wanted to make a product that is optimised for that use case. Another way to look at it - if competition was the motivation for the iPad mini, it would have cost $50 less.
  - ygra 14y ago
    Why bother selling it for less if people buy it for more, too? Apple's customers don't really compare prices and features between different options. They won't even consider an Android tablet and why would they? They probably own three generations of iPhones and two generations of iPads already. They'll happily pay Apple's price.
    - greedo 14y ago
      So many unsubstantiated assertions in your reply... I'm an "Apple customer" and I'm price sensitive, I've also considered many Android based tablets as well as WebOS based tablets. Now we all know that anectadata is of limited value, but compare to no data...

fleitz 14y ago

BMW could launch a bargain basement 0 series, or Wal-mart could start selling quality products. Fundamentally there isn't much point for either because it's not the right customer base. This is what branding is about, if Apple acquires a whole bunch of customers that don't care about quality and then complain that their devices don't have half-baked features it doesn't do the brand any good. These customers will destroy the brand. I don't want to have to walk into an Apple store and wonder which is the low margin device that will fall apart / fail to perform, if I wanted to ask those questions I'd go to Best Buy. The low margin Apple market is craigslist, if you want a 3 year old Apple device that's where you can get it. The most confusing thing about AMZN and APPL are their respective PEs. They are priced as if each are going to adopt the other's business model.

ScottBurson 14y ago
> The most confusing thing about AMZN and APPL are their respective PEs. I've wondered about this too, but the post seems to shed some light on it. Amazon arguably has essentially no competition, while Apple, for all that it's doing well at the moment, has plenty. (I understand the point is debatable. I'm just saying, this appears to be how the market is thinking.)
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- doctorpangloss 14y ago
  I think the market is thinking more about selling high and buying low, and many AAPL owners are very, very high right now. :)
cageface 14y ago
The difference here is that, thanks to volume, Wal-Mart has the kind of market-making muscle that BMW could only dream of. This isn't as important in the world of cars or TVs but the network effects of software means there's a lot more at stake in the contest for market share.

bobbles 14y ago

Yeah I'm sure Apple is just SOOO frustrated at Amazons low margins. It's not like Apple is generating record profits or anything now is it?

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rayiner 14y ago

Didn't Amazon post a loss last quarter?

pooriaazimi 14y ago
@schraeds: You've been hellbanned for... 299 days! schraeds 34 minutes ago | link [dead] Apple made as much profit this quarter ($5B), as Amazon has earned, ever.
schraeds 14y ago
Apple made as much profit this quarter ($5B), as Amazon has earned, ever.
jrockway 14y ago
Didn't they make a lot of money and then spend it on new fulfillment centers? Nothing wrong with investing capital into your business. If you just accumulate cash and sit on it, your company won't grow.

kyllo 14y ago

So what does Amazon do when it has finished using loss-leader pricing to drive its competitors out of business in every retail market where it wants to play? Clearly market share at any cost is the name of the game for Amazon. It is a well-oiled, market-share-taking machine. But when it has swallowed up so much of the retail market that it becomes a monopoly? Then what?

scarmig 14y ago
1) Win a monopoly market share. 2) Profit. As far as business plans go, it's pretty obvious and pretty solid. It'll be implemented as a dual monopoly-monopsomy setup: consumers go to it to buy most goods, get screwed. Suppliers sell to it, get screwed. There's a reason Wall Street likes AMZN.
- xenophanes 14y ago
  Have you ever read about the economics of monopoly prices? E.g. in Human Action by Ludwig von Mises? It's not actually that simple and doesn't always work well.
  - scarmig 14y ago
    I'm not too familiar with the Austrian take on monopolies. Care to enlighten? Mainstream economics does argue that monopolies enable excess profit, and I've never seen reason to question that part of it. But I'm genuinely curious and open to other models, even Austrian ones.
    - xenophanes 14y ago
      In short, not all demand curves have a monopoly price point at which you would make more money by restricting supply (e.g. it's possible to have a demand curve where demand would fall off a cliff if price went up slightly, even if supply went to near-zero. in this case, you cannot make monopoly profits). And even if there is a monopoly price which could provide monopoly profits, it can be hard to figure out what it is and you can lose money (or even go out of business) trying to find it. Therefore, not all monopolies can lead to monopoly profits. Quoting minimally: http://mises.org/humanaction/chap16sec6.asp http://mises.org/humanaction/chap16sec6.asp > The special conditions and circumstances required for the emergence of monopoly prices and their catallactic features are: > 1. There must prevail a monopoly of supply. > 2. Either the monopolist is not in a position to discriminate among the buyers or he voluntarily abstains from such discrimination.[12] > 3. The reaction of the buying public to the rise in prices beyond the potential competitive price, the fall in demand, is not such as to render the proceeds resulting from total sales at any price exceeding the competitive price smaller than total proceeds resulting from total sales at the competitive price. > 4. It is a fundamental mistake to assume that there is a third category of prices which are neither monopoly prices nor competitive prices. > 5. [some stuff about cartels] > 6. The concept of competition does not include the requirement that there should be a multitude of competing units. [i think you will have to read further to understand this one] > 7. If it is possible for the seller to increase his net proceeds by restricting sales and increasing the price of the units sold, there are usually several monopoly prices that satisfy this condition. > 8. The monopolist does not know beforehand in what way the consumers will react to a rise in prices. He must resort to trial and error in his endeavors to find out whether the monopolized good can be sold to his advantage at any price exceeding the competitive price and, if this is so, which of various possible monopoly prices is the optimum monopoly price or one of the optimum monopoly prices. This is in practice much more difficult than the economist assumes when, in drawing demand curves, he ascribes perfect foresight to the monopolist. We must therefore list as a special condition required for the appearance of monopoly prices the monopolist's ability to discover such prices. > 9. A special case is provided by the incomplete monopoly. > 10. Duopoly and oligopoly are not special varieties of monopoly prices, but merely a variety of the methods applied for the establishment of a monopoly price. > 11. The monopolized good by whose partial withholding from the market the monopoly prices are made to prevail can be either a good of the lowest order or a good of a higher order, a factor of production. > 12. [discussion relating to governments intentionally encouraging monopoly] And it goes on. The biggest takeaway is that monopolies sometimes but not always enable higher profits by restricting supply. It's important not to assume all monopoly will enable significantly more profits than competitive market prices. Some analysis is required in any given case. And the issue of whether and why monopoly prices are bad, and what if anything should be done about them, is considerably more complicated than "the government should prevent all monopolies" (typically with no mention of whether they are charging monopoly prices, or even could profitably do so tomorrow).

kbar13 14y ago

what's that crazy data-block-json? SEO stuff?

rcsorensen 14y ago
Looks like it comes from squarespace? http://static.squarespace.com/universal/scripts-v6/01242013221044728/yui-seed.js http://static.squarespace.com/universal/scripts-v6/012420132... is the thing that references it. Lines like a.all(".sqs-block.map-block[data-block-json]").each(function(e) { d.Squarespace.Rendering.renderMap(e.one(".sqs-block-content"), d.JSON.parse(e.getAttribute("data-block-json"))) }); inside the "var Squarespace = {load: function()" namespace.
- kbar13 14y ago
  interesting. thanks!

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anactofgod 14y ago

It would make sense for Apple to lower its prices to capture and lock in a bigger market share, but only if they were able to meet the resulting demand. But, if they are constrained by supply chain and manufacturing capacity, then maintaining the highest prices the market will bear makes the most sense.

jusben1369 14y ago
The author's arguing that's a good short term view and a poor long term one (unless they are constraining the entire SC which does happen for very short periods of time in high tech around chips or screens etc) Those high prices (really margins/profits) will attract competitors.

jusben1369 14y ago

I enjoyed this article. I was a little confused though by the final conclusion. Amazon shouldn't do a nice, high end tablet as that's not its competitive strength while also being Apple's strength. So don't play on their turf - I get that. But then Apple should do a lower margin mass market iPad for example? The author appears to argue that Apple has done this with iPod's - I guess it would be great if he fleshed that out further because the general consensus is Apple doesn't care for/get the lower margin/high volume play. If they did they might have maintained an early PC lead.

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hayksaakian 14y ago
They prefer high margin high volume :-) How did they take over mp3 players? They made a high cost product everyone wet their lips with, and year later made cheaper versions everyone who was enviously waiting for could afford. They make an excellent play on consumer psychology.

atechie 14y ago

It should be titled " Amazon, Apple and the beauty of high volumes"

OGinparadise 14y ago

I don't understand Amazon investors. They own a piece of of a $100+ billion company that makes virtually no profit (relatively speaking) for a decade plus. To make money they'd have to increase prices drastically but that's Amazon's selling point (along with customer service,) their competition isn't going away any time soon.

chime 14y ago
> their competition isn't going away any time soon. That's where the investors disagree with you. Amazon is trying to do to big box stores what big box stores did to mom and pop stores. I buy everything from $2 batteries to $5000 electronics on Amazon. Only reason I go to local stores is groceries or emergency goods (meds, last-minute-gifts). Nobody knows what will happen to Office Depot or Kohls in 20 years but unless Amazon royally screws something up, I am certain they will remain significant for decades to come.
- OGinparadise 14y ago
  So you think Amazon will drive everyone serious enough out of business and then be able to raise prices? Personally, I doubt it. They will not surrender that easily I love Amazon by the way, and do a lot of my shopping there. But, IMO, its hard for investors at these levels to see a decent return.
  - rednukleus 14y ago
    This is a misconception. Amazon aren't making any profits because they are pumping all of their margins into new facilities and other infrastructure investments. If they stopped expanding and just squeezed profit out of their existing business, then they would be very profitable. After Walmart destroyed the mom and pop store they didn't incrase prices, and Amazon probably won't either. Particularly since Amazon are an online retailer, and it is very easy for customers to shop around.
    - OGinparadise 14y ago

hef19898 14y ago

This sums up the major differences between companies like Apple and Amazon in really good way. I for myself thought about this a couple of days back. It was more like brain training in Supply Chain Management (the execution of the mentioned low and high margin strategies if you want). Now, Low vs. High margins looks more than just obvious. What I came up with, and please feel free to give feed-back, as one big difference between Amazon and Apple is the product range. Amazon has orders of magnitude more products and commodities than Apple. What makes it eassier (not easy, mind you, just easier) for Apple to manage their supply chain. You can see this in their release schedule, everthing is planned according to that. Hard to do with thousands of product lines. In this area, Apple is really doing great in the planning part of supply chain management, from my outside perspective they are a benchmark here for everybody else. Plus, one could argue their supply chain strategy matches perfectl their business strategy. Amazon on the other excels at the logistics part of supply chain management. As mentioned in the article, they have to in order to get their low margins and high customer satisfaction. Currently, I'd say Amazon is doing to logistics what Toyota did up to the lets say 80s and Wal-Mart did up to the early 2000s (no coincidence that Amazon hired Wal-Mart people back then). What both companies have in comon is really good view of Point-of-Sales data. Big difference here to most other companies around. How does all that match with high and low margins? In the place of Apple excellence in supply chain planning is used in combination with a narrow product range to allow for high margins and high inventory turn rates (again, a narrow product range is helping a lot here). Supplier management is critical point here, too. In the place of Amazon logistic excellence is used to run an very efficient ditribution network. This efficiency allows them things like next-day delivery and their low margins. Think Toyota Production System and Lean and all the businesses that tried to copy that since the late ninties. So, as long as both companies can keep their respective levels of operational performance up I don't think they are in trouble. Back on the OP, the low margin-attack was what the whole Android industry did on Apple, Samsung in particular. But Samsung is different story all together.

mjfern 14y ago

Low margins, per se, isn't a strategy. Amazon is pursuing a cost advantage [1], and it's choosing to keep its prices very low, hence the low margins. With a cost advantage and low prices, Amazon gives away a lot of value to customers (instead of capturing a lot of value for itself in the form of profits). Its primary objective is to gain market share (i.e., both new customers and a greater portion of existing customers' everyday shopping). With an increase in market share, Amazon can further reduce its costs through economies of scale (i.e., spreading its fixed costs, such as infrastructure and R&D, over a greater number of customers served and products sold). Amazon's cost advantage and low prices explains why most other online retailers have been unable to gain significant market share and why Amazon is posing an increasing threat to companies like Wal-mart, Target, and Costco. - [1] I'd argue that Amazon is actually pursuing a dual advantage, both a cost and value advantage (at least for customers that favor convenience over impulse buying). The value advantage stems from the ability to shop at home, its product reviews, its excellent customer service, extensive selection, etc.

fspeech 14y ago
No Amazon does not have a cost advantage over Costco. It is operational cost is FAR higher than Costco: 18% vs 10%. It is easy to see why. Costco thrives on high volume/low count of SKU and customers pay for delivery themselves. Costco's gross margin is 12% vs 23% for Amazon. Amazon's cost advantage over WalMart is only marginal. About 1 pt lower on the SG&A and 2.5 pts lower on gross margin. But Walmart is a lot more profitable. The advantage of Amazon vs WalMart is really in the long tail. It can keep more SKUs than even the largest WalMart Supercenter could hope for and still turn its inventory over much faster. And for items you can wait for you get them delivered to the door. My own family's shopping behavior is consistent with the data: we buy from Costco if it carries them, esp recurrent consumables; my wife occasionally goes to Target if she needs something soon; for things that we can take time to shop and do some research on I buy from Amazon, sometimes for price but mostly for convenience of not having to go to the store.
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- 14y ago

tyang 14y ago

Amazon has a defensible moat for physical products. Apple has Samsung.

monochromatic 14y ago

Amazon could have had a margin of zero and still made money. What?

snowwindwaves 14y ago
the article says because they get the customer's money right away, but don't pay the supplier for months, they have a big pile of cash. I suppose they could make money with that money before they have to pay their bills.
- DanBC 14y ago
  This is such a well known problem that the UK had to implement laws. If you can get people to pay you quickly (in advance is best, on delivery is ok, 30 days after delivery is standard) and you can delay paying your suppliers (90 days after delivery is best, 60 days is ok, 30 days is standard) you can improve cash flow and there are a bunch of benefits to it. I don't think it's legal in the UK anymore. It's very easy for a big company to squeeze little companies into accepting really lousy terms.

Andy_Troutman 14y ago

Andy Jassy's keynote from this year's AWS conference (amazon's web service business) talks about running AWS as a high-volume, low margin business and why that's so different from high-margin businesses. The whole keynote is interesting, but here is the part that's pertinent to this discussion: http://www.youtube.com/watch?v=8FJ5DBLSFe4&t=30m35s http://www.youtube.com/watch?v=8FJ5DBLSFe4&t=30m35s