This Goes Beyond Tablets: Apple, Amazon & Google Are Betting On Economic Philosophies

from the different-bets dept

Amazon's recently-announced tablets are interesting for a variety of reasons, including that Jeff Bezos made it quite clear that he's taking a very different approach to the market than the one Apple has taken. Lots of attention was (quite reasonably) paid to Bezos' key line:
"We want to make money when people use our devices, not when they buy our devices."
It's a great line in so many ways, because it highlights the different philosophies of Amazon and Apple. John Gruber's summary of those differences is a really worthwhile read (you should read the whole thing). His take on that particular line is dead-on:
Bezos's we want to make money only when you use it framing works two ways. First, it explains the Kindle Fires' noticeably lower retail prices in a way that doesn't make them seem cheaper, only less expensive. It frames Apple's prices -- and profit margins -- as greedy. Second, it works as a sort of guarantee -- if you don't actually use it, we won't even make any money on it.
Later Gruber made a second point that got me thinking (and rethinking...)
Apple's goal is to sell as many iPads as it can. Amazon's goal is to sell as many Kindle Fires as it can to a specific audience: active Amazon.com customers.
I've talked in the past about how Apple's digital goods sales have really been about being the "low margin" leader (if not the loss leader) to drive more sales of the hardware. The digital goods -- content and apps -- make the hardware much more valuable and help drive up the amount people are willing to pay. And that tends to fit with the basic economics I believe in: focus on using the "abundant" (digital) to make the "scarce" more valuable, for which people will pay a premium, especially since that "scarce" can't be "pirated." Apple has, in many ways, put that particular economic concept at the center of how it does business, even if I'm uncomfortable with the closed nature of its overall setup around that.

Amazon, however, has flipped the equation. Their "low margin leader" is the hardware, and they basically appear to want to make their money up on the digital goods purchases. Just as Apple doesn't lose money on selling digital goods (it just makes a very little amount), it appears that Amazon will be making only a little bit on the hardware, but hopes to make the big money on selling the abundant: digital goods via the Kindle store.

I will admit that I struggle with this a bit. I find it hard to bet against Bezos, because on an awful lot of things I think he makes the right bet. Plus, frankly, I'm a lot more comfortable with Amazon as a platform than with Apple. Finally, from a consumer standpoint, I think Apple's hardware seems really overpriced, but Amazon's new prices are really compelling. But economically speaking, there's a voice in the back of my head that says that Apple has this right and Amazon has this wrong. Apple is betting on using the abundant to increase the value of the scarce and then selling that. Amazon is betting on using the scarce to increase the ability to sell the abundant. Perhaps it works because of Amazon's closed Kindle platform and its dominance in the market allows it to make this counter-economical bet. Artificial limitations allow for such things, and Amazon's got the power to control a large segment of the ebook market, which really helps the company out.

In the long run, though, if a competitive market is truly created, it seems more likely that there will be more pricing pressure on Amazon's bet than on Apple's. But, in the short term, Amazon's flip-flopped market certainly could make a lot of sense.

Of course, if you really want to make this fun, just add Google to the equation. It, like Amazon, seems to be focusing on cheap, barely profitable hardware, a la the Nexus 7. It's also put a big effort (recently) into selling digital goods via the Android "Play" store. But Google's business has always been about ads, so it actually adds a third factor to how it views the world, and which part of the business subsidizes which other parts of the business.

In the end, you're left with three big bets on tablets, with very different underlying business models*:
  • Apple: High margin hardware (scarce); make just a little on digital goods (abundant).
  • Amazon: Low margin hardware (scarce); make the real margins on digital goods sales (abundant)
  • Google: Low margin hardware (scarce); make some margins on digital goods (abundant), but cross subsidize both with the ad business.
* Yes, there's also Microsoft Surface tablets. For the life of me, I can't figure out where they place in this particular chart. Which may say something all by itself.

Which strategy works in the end may say a lot about how you view the world economically.


Reader Comments (rss)

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    Atkray (profile), Sep 13th, 2012 @ 11:47am

    I think Amazon has the right plan for Amazon.

    If you take Apple and Amazon and make this comparison only looking at tablets and content then perhaps Apple has the better strategy. The problem is of course that you can't do that.

    Even if Amazon ends up lowering the prices on the digital content they still have people on their site seeing their other products etc... Amazon can afford to set the whole tablet and content package as a loss leader to get customers in the store and then sell them candy, shoes, and frying pans.


    Amazon doesn't just want to sell you tablets and content,they want to sell you everything you buy.

     

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      ChurchHatesTucker (profile), Sep 13th, 2012 @ 1:04pm

      Re:

      Well, if media costs go to zero who's in the Catbird seat?

       

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        Anonymous Coward, Sep 13th, 2012 @ 9:30pm

        Re: Re:

        Still Amazon. They offer a comparable hardware product at less than half the price, and it gets you simple and direct access to their huge content system.

        Remember, media will never go to zero. That's just a Techdirt masturbatory fantasy.

         

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      The Mighty Buzzard (profile), Sep 13th, 2012 @ 1:18pm

      Re:

      They're also selling a somewhat useful distribution service. So long as they're offering a user experience as good or better for digital goods than illicit distribution methods, they offer value.

      Personally, I hate how they include covers in book searches and make each listing take up five times the space it should. Means I get to see 1/5 the number of titles I otherwise would per page. Bad for me because it takes longer. Bad for them because they get less product listings to my eyes at once. Show the covers once I've clicked on a book, until then they're just wasting space and time.

       

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        Jeffrey Nonken (profile), Sep 13th, 2012 @ 1:37pm

        Re: Re:

        Bad for them because they get less product listings to my eyes at once. Show the covers once I've clicked on a book, until then they're just wasting space and time.

        True, but there's another aspect to this: sellers found out long ago that including a picture of the item -- even if it's not the actual item, and even if they come right out and admit it (such as a representative photo on an eBay sale) -- helps drive up sales. In the long run they may figure that alienating the odd customer may be worth it, because overall their sales go up.

         

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      Jeffrey Nonken (profile), Sep 13th, 2012 @ 1:27pm

      Re:

      The digital goods, being abundant and cheap, can be sold for very little while still making a profit.

      The DRM is an attempt to add artificial scarcity, which I think most of us recognize as a losing proposition in the long run.

      On the other hand, they also add value to the digital goods by offering a convenient service through which to purchase them. Any time you're connected to the Intertubes you have instant access to their entire catalogue, and they even offer a virtually free 3G service to keep you connected 24/7 no matter where you are. The 3G service is a way to keep temptation right there in your face.

      If they don't try too hard to make the abundant scarce to drive up margins, but rather focus more on the service and convenience aspects to drive sales volumes, this could work very well.

      I'm looking at this as more like "free to play" than like "cheap printers, expensive ink".

       

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      Mike M, Sep 13th, 2012 @ 1:47pm

      Re: Apple/Amazon

      Well thought out.

      The real battle will be between Amazon (come shop at our giant megastore) vs Google (come shop at all the stores that advertise with us.

      My gut feeling is that Apple customers will start to favor the lower price, high shopping/research utility that Amazon and Google devices offer.

       

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    Ninja (profile), Sep 13th, 2012 @ 11:51am

    I see a fierce battle forming and It's good. I do expect thermonuclear battles around the broken patent system that will slow the innovation...

    http://arstechnica.com/security/2012/09/apple-wins-german-ban-against-motorola-can- pay-e25m-to-enforce-it/

     

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    Tor (profile), Sep 13th, 2012 @ 12:47pm

    Typo?

    "make they money"?

     

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    Anonymous Coward, Sep 13th, 2012 @ 1:03pm

    Here's news for them.

    I want no locked down reader. Don't want ads; can't stand them and it is the quickest way to see a product never used or purchased is to attempt to expose me to them. The end result of such an ad is I remember who advertised and refuse to buy that item. If they got to pay to brag about their product, something is wrong with it.

    If its too expensive I'm not going to buy it anyway unless there is proof it is worth it's price.

     

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    Jes Lookin, Sep 13th, 2012 @ 1:08pm

    And for MicroSquash...

    High margin hardware (scarce); make high margins on digital goods sales (scarce) - because we rule the corporatocrasy and government (maybe not). Lawsuits will ensue !!!

     

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    TimK (profile), Sep 13th, 2012 @ 1:09pm

    I see a similarity though, in the fact that both Apple (apps/music) and Amazon (books) have a somewhat captive market to sell to. I don't think the two are that different at all.

    Amazon entices its captive book audience to buy its inexpensive tablet in order to consume more books - and even as it may not profit on books, it hopes to profit on shoes, razors, and cameras.

    Apple entices its captive app/music market to buy an expensive tablet to consume more apps and music - and even as it may not profit on apps and music much, they profit on the hardware.

    So in the end, both companies are attempting to profit from their captive markets.... Apple on the Hardware, Amazon on consumer products.

     

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    Aliasundercover, Sep 13th, 2012 @ 1:11pm

    Printer Ink

    "We want to make money when people use our devices, not when they buy our devices."

    Same old printer ink scam. You can buy the device but it doesn't serve you. It serves Amazon or Hewlett Packard as a vending machine. Nice plan for them, bad plan for you.

     

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    Anonymous Coward, Sep 13th, 2012 @ 1:12pm

    Two observations

    1. Since Apple's prices of digital goods are the same as (or higher) than Amazon's, it's hard for me to see Apple as making "just a little" on those. That was pretty much confirmed by the whole e-book price fixing fiasco;

    2. I think the scarcity in Amazon's strategy isn't the low margin hardware, it's the quality of the Amazon buying experience. Why pay Amazon for abundant goods available elsewhere for free? Because it's so darn easy, the customer service is fantastic and the price isn't so high as to make me feel taken advantage of.

     

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    Phillip (profile), Sep 13th, 2012 @ 1:20pm

    mostly true except on all their video conent

    what jeff said mostly applies but yet there is still no way to watch Amazon video on none Kindle Fire's.

    You can get music, books, audiobooks on pretty much any device. However, if you want to watch digital video on a handheld device it currently only exists on the Fire and has for the last year. If this is truly how they feel they need to release apps for other handheld devices.

    It can't just be licensing holding them back I can watch amazon on several other devices (Sony TV, Sony Bluray Player, Xbox 360) but no iDevices or Androids that aren't put out by amazon.

     

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    Anonymous Coward, Sep 13th, 2012 @ 1:21pm

    This seems to be a reversal of the standard advice that TechDirt has repeated: make little money on the abundant items in order to increase demand for the scarce items. In this case, Apple has it right where they're charging more for the scarce items and hoping the abundant low-cost items increase demand. Conversely, Amazon seems to be relying on the abundant items for profit, which are not only abundant but also more easily piratable.

    On the other hand, Apple's business model relies on the consumer accepting a larger cost at the beginning, when they can't really see the cheaper costs later on, while Amazon is getting the customer's foot in the door with cheaper hardware. Both have their trade-offs and I honestly wouldn't consider either of them bad.

     

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    BeaverJuicer (profile), Sep 13th, 2012 @ 1:30pm

    I see this differently.

    To me, Amazon is taking a unique and innovative approach, focused on connecting with the customers, and offering an innovative model to try and make it easier for people to buy legitimate product.

     

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    Thomas, Sep 13th, 2012 @ 1:35pm

    Amazon Prime

    I think you're ignoring a big aspect of Amazon's plan.

    They want everyone to sign up for Amazon Prime. That means enticing people to use even more of their services (remember free 2 day shipping on everything). Amazon Prime also has a ton of video on demand available to subscribers.

    So, I think the Kindle's plan is more complicated than you posited and you can't summarize in one sentence.

     

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      Mike Masnick (profile), Sep 13th, 2012 @ 2:19pm

      Re: Amazon Prime

      I think you're ignoring a big aspect of Amazon's plan.

      They want everyone to sign up for Amazon Prime.


      A very good point...

       

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      Jason, Sep 13th, 2012 @ 2:51pm

      Re: Amazon Prime

      Not just that, but they're extremely well positioned for bundling - reader, digital content, books, other physical media, and cloud services.

       

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      Anonymous Coward, Sep 14th, 2012 @ 10:20am

      Re: Amazon Prime

      Not only this, but if they get a critical mass of Kindle users, then they themselves become the product that Amazon sells to authors (and eventually musicians? perhaps even indie filmmakers?) because Amazon then becomes the ebook/mp3/emovie self-publishing center of the internet.

      In essence making them the clearing house between content creators and content consumers. The new gatekeeper.

       

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    printing724 (profile), Sep 13th, 2012 @ 1:45pm

    AMZN still has to prove the model works...

    It's about more than e-books, apps, and tablets.

    Amazon has shown they can generate a lot of business with little profit but they have to convert that volume into profit before it becomes sustainable. Past 5 quarters:

    AAPL: $177b sales, $62.2b profit, p/e 16
    EBAY: $16b sales, $3.2 profit, p/e 17
    GOOG: $52b sales, $16.1b profit, p/e 21

    AMZN: $64b sales, $0.8b profit, p/e 318

    Obviously the market has a great deal of confidence in their ability to eventually generate sizeable profit, but I am not as sure...

     

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      Chosen Reject (profile), Sep 13th, 2012 @ 2:41pm

      Re: AMZN still has to prove the model works...

      I'm sure you just forgot a 'b', but the idea that ebay made $16b in sales, and only had $3.2 in profit made me chuckle.

       

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      streetlight (profile), Sep 13th, 2012 @ 10:28pm

      Re: AMZN still has to prove the model works...

      One of the reasons Amazon's p/e is so high is because the profit is low while huge amounts of income is going into its infrastructure development. Amazon is building very large numbers of these huge robot-ized warehouses so customers can get their hard goods purchases delivered on the same day as ordered. Order by 10 AM delivery by 5 PM. I'm not sure how far apart these warehouses will be from each other (150 miles) but it's going to take a lot of them to meet their business plan. Wait until nearly all the warehouses are built and stocked and watch that p/e ratio approach the ~16 value.

       

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    bob, Sep 13th, 2012 @ 1:49pm

    Abundant? Scarce? You're so confused.

    You would like to believe that digital content is abundant but that's only true if you ignore the development costs which is the luxury of pirates everywhere.

    You would like to believe hardware is scarce, but that's pretty much disproven by the endless container ships filled with stuff. Heck, most of the stuff made by Apple is just digital content. They ship digital files to China and back comes hardware. The manufacturing costs are a small fraction of the price because the robots and fab lines just stamp out the devices.

    So go on believe that Apple will be buoyed by all of the so-called abundance on the Internet. They're not betting on the cat videos on YouTube selling more devices. That's why they embrace DRM and locked down platforms whenever they can. They know that they have to have the best books, movies and songs on their platform because content sells boxes. The only way to have the best content is to make sure the artists get a fair share.

    The real challenge is controlling piracy. What you really should be noticing is that neither platform is embracing the anarchy that built the Internet. They're locking down their platforms and ensuring that people pay their fair share of the development costs. That's how Amazon can drive down the price of books, music and movies.

     

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      Jason, Sep 13th, 2012 @ 2:56pm

      Re: Abundant? Scarce? You're so confused.

      "What you really should be noticing is that neither platform is embracing the anarchy that built the Internet."

      Amazon is. They're just betting that they can compete.

      Taking the low-margin hardware position inherently embraces piracy because nothing keeps users from jailbreaking hardware for their own piratey ends.

      Amazon is simply betting that they can offer a value above what can be pirated.

       

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      Chosen Reject (profile), Sep 13th, 2012 @ 2:59pm

      Re: Abundant? Scarce? You're so confused.

      Acutally, digital content is abundant. If no more movies or books were made, and Amazon, Apple, Google and Netflix were only able to offer "professional" content that had already made back it's cost and some profit (in real world accounting, not hollywood accounting), there would still be enough that most people would never get through it all in a lifetime. So let's ignore your ignorance of selling copies vs creating new works, and just cut down your entire stupid argument by saying that the number of existing, already-profitable digital content is abundant, let alone the cost to make additional copies of those already abundant goods is negligible, thus making them abundant.

      Amazon currently has 6,000 movies and 1,500 TV shows (grouped by season) available on Prime Instant Video. Let's assume that no more titles are added and that all currently available titles have already made a profit. Given that, you could watch one movie per week for 80 years and only get through about 2/3 of them, and not a single one will bother your poor cat video sensitivity (OK, maybe some will). And you haven't even started on the TV shows, which again, are grouped by season, so one TV show on their list is the entire second season of Bonanza (as an example).

      No Bob, no matter which way you look at it, digital content is abundant.

       

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      Anonymous Coward, Sep 13th, 2012 @ 4:53pm

      You're so confused. Yes, bob, you really are.

      "You would like to believe that digital content is abundant but that's only true if you ignore the development costs which is the luxury of pirates everywhere."

      bob, as has been pointed out before, digital content is readily produced. Now, if you mean "high quality digital content", that is purely subjective as to what you and others consider "high quality". I think the Transformers films are as low quality as you can get, you would put that in the "high quality digital content" field.

      What you mean is that studio/label digital content is abundant, or better said not. But the truth is that it is.

      Also, it's infinitely and readily reproduced. At near zero cost. And by that I mean anything and everything already created can be reproduced at next to nothing.

      Development cost are irrelevant. To everyone but you. And that includes non-pirates. I don't care what you spent to make something, it matters not to me or to a majority of others.

      "You would like to believe hardware is scarce, but that's pretty much disproven by the endless container ships filled with stuff."

      Again, you're so wrong it hurts my head just reading your words. Hardware is not infinitely produced, the materials required to produce hardware are not infinite, thus those materials and by default the hardware created by them is scarce.

      Quick example, this past year there was major flooding in Thailand. What is built/manufactured in Thailand. Hard drives. By almost every "name brand" manufacturer. Due to the shortage of manufactured hard drives, prices rose to levels that hadn't been seen in nearly two years. Why? Because there was a scarcity on the hardware.

      This might be difficult for you to grasp, I know. But those "endless ships" aren't actually endless either. There's a finite number of ships transporting physical products around the world at any given time. And those cargo containers, while there are many, are finite. And can only hold so much of a given product. Thus they are anything but infinite.

      "Heck, most of the stuff made by Apple is just digital content."

      Yes, bob. Only in your distorted world view is that true. We'll ignore the fact that MOST of the stuff made by Apple are consumer electronics. Ranging from all-in-one desktops to laptops to personal media players to smartphones to tablets. They make absolutely none of that. /s

      Oh, just fyi, Apple DOES NOT produce any digital content. At all. Unless you count plans for their hardware, in which case even that isn't that much.

      "They ship digital files to China and back comes hardware."

      So much stupid in that sentence I won't even bother to respond to it.

      "The manufacturing costs are a small fraction of the price because the robots and fab lines just stamp out the devices."

      Manufacturing cost are low for Apple products because they buy components in bulk and have it made in countries where the labor costs are much less than they would be in America. Also, it's not just robots and fab lines stamping out the devices. Sheesh. I honestly didn't think people were that stupid, then I "met" you. I guess we'll ignore the workers at Foxcon (I believe that's the name) and the ones at Samsung and the ones at LG and all the other places that produce the individual components used in Apple products, as well as the ones who assemble it by hand. There are no videos or photos of them doing that. /s

      "So go on believe that Apple will be buoyed by all of the so-called abundance on the Internet."

      That is the sentence where I think the article and the points made in it just flew over your head.

      "They're not betting on the cat videos on YouTube selling more devices."

      Have you used an Apple device? Ever? I'm no fan of the company or their products, but they NEVER have bet on cat videos on YouTube selling more devices. They BET very early on on iTunes and digital content (obtained from the studios and labels) selling said devices. Or better said, they'd get the ability to sell said content through their iTunes store and through it sell the hardware through which to enjoy said content. At a premium price.

      "That's why they embrace DRM and locked down platforms whenever they can."

      Apple is the company that basically told the labels, "No, we're not going to sell your products with DRM. If you don't like it, find someone else to peddle your wares." Know what happened? The labels caved and Apple has been selling content without DRM for quite some time now.

      As for their locked down platform, well... that's their prerogative. And it makes sense. Even to a non-Apple fan like myself. They control the production of the hardware, they control the distribution of the content, and they damn well control the system put on to their devices. Meaning they control everything from point A to point Z, ensuring optimum usability and ease for the people who use their products.

      "They know that they have to have the best books, movies and songs on their platform because content sells boxes."

      This sentence has little evidence to support it. Because just looking at the other options there are show how false it is. Amazon has the same content. Even Google Play has the same content. Plus the plethora of other platforms/choices to get the EXACT same content. There is no difference on the books, movies and songs minus price between the various platforms.

      The only thing that even comes close to being true in that sentence is "content sells more boxes". For sure with Apple hardware, but notice they don't make it hard to acquire/purchase said content. It's all right there at the click of a button on your device/hardware of choice. Enter your login information, credit card info, and click to buy. Easy peasy.

      "The only way to have the best content is to make sure the artists get a fair share."

      No, the only way to have the best content is to prove the viability of a method of distribution to those who control said content, usually the various gatekeepers. Once proven then you can acquire it and distribute it on their behalf (because time has shown over and over that they are incapable of doing so in a way that succeeds and gains any traction).

      As for make sure the artists get a fair share... I'll be sure to remember that bit for the next article that points out an artist getting anything but. I look forward to seeing your response when the labels/studios are ripping them off.

      Slightly off topic. What are your thoughts on Return of the Jedi never having made a profit? According to Hollywood accounting. I bet the artists got a real fair share because of that. What's that? The guy who played Darth Vader still hasn't received diddly? The hell you say?!

      "The real challenge is controlling piracy."

      The real challenge is for the legacy industries to change with the times. You want to beat/control piracy, it's easy. Offer content in an easy to acquire manner, at reasonable prices and with no restrictions (such as DRM, or windowed releases, and no geographic restrictions). End of story. Piracy problem MOSTLY solved overnight with just such a move.

      "What you really should be noticing is that neither platform is embracing the anarchy that built the Internet."

      This has nothing to do with any of the platforms methods of distribution or their hardware. Nothing at all.

      "They're locking down their platforms and ensuring that people pay their fair share of the development costs."

      Again, nothing at all related to the article or the facts. They're not locking down their platforms. They just want to sell hardware that points you to their stores. A smart and beyond common sense business move. Has nothing at all to do with "pay their fair share of the development costs".

      "That's how Amazon can drive down the price of books, music and movies."

      No, they can do so because as far as books are concerned, they own the market. Meaning they have that much bigger an audience to reach and can afford to lower prices, because they'll still reap the benefits.

      Seriously bob, just shut the f*ck up. Your comments are so moronic and non-accurate that they make the Apple "reality distortion field" seem like pure truth. Which is saying a lot.

      Here's something you need to do. Stop using Big Hardware and Big Internet and go down to your local library and peruse Big Newspapers and Big Publishers offerings and start brushing up on some Big Facts. That or go get a vasectomy. Because we seriously don't need you out there breeding even more stupidity into the gene pool. One or the other. Hell, do both. But please get a f*cking clue.

       

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      Ninja (profile), Sep 14th, 2012 @ 4:15am

      Re: Abundant? Scarce? You're so confused.

      The level of ignorance of your comment is remarkable, bobby! I think you hit new lows!

      You would like to believe hardware is scarce, but that's pretty much disproven by the endless container ships filled with stuff.

      Wow! I see trucks loaded with new cars everyday so cars should cost just pennies above the material cost since they are so abundant, right?

      Heck, most of the stuff made by Apple is just digital content. They ship digital files to China and back comes hardware. The manufacturing costs are a small fraction of the price because the robots and fab lines just stamp out the devices.

      Bobby, ever thought that you can't come up with the next iPhone from your garage? I mean, you can if you have enough technical skills (which you obvious don't because you lack even the most basic kindergarten skills) but usually you'll need to use VERY scarce material to come up with a project: manpower (or brainpower). Also, even ignoring the fact that you need raw materials to make a phone (and they are LIMITED, SCARCE) you'd need ENERGY to power up the production line. And last time I checked it was neither free nor abundant.

      The only way to have the best content is to make sure the artists get a fair share.

      I beg to differ. You have your head deeply stuck into Apple's arses if you don't know quality free content. And Youtube has quite a lot of it. Last time I watched the whole show of a comedy group I like in Youtube. I later went to their live show. They made money out of free content? OH MY GOD! Your brain must have melted. Or at least what is there in your head that I'm calling a brain.

      The real challenge is controlling piracy. What you really should be noticing is that neither platform is embracing the anarchy that built the Internet.

      You can't control it so it's not really a challenge. They built their business on scarce goods and services. The content is there because that's where people are used to buy. You are confusing the services/goods with the digital content. Apple built its status with its gadgets and the service. Amazon built its status with good customer service, fast and reliable deliveries.

      They're locking down their platforms and ensuring that people pay their fair share of the development costs. That's how Amazon can drive down the price of books, music and movies.

      They are locking down their platforms because as any big company they want to form a monopoly, bring the user in and render him unable to switch whenever he wants to keep control. The e-book pricing is lower because they realized it sells more and brings more money in, not because they locked it up.

       

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    OldMugwump (profile), Sep 13th, 2012 @ 1:52pm

    Google is different

    I think you're misinterpreting what Google is doing.

    They selling the (scarce) hardware at low margins (Nexus...) _and_ the (abundant) software/media at low margins. This is in order to entice the customer to use their ecosystem, so they can show you ads (high margin).

    In the end, Google is still all about the ads - they see the Apple and Amazon strategy as sucking away ad-viewing customers - so they try to get them back. They don't need to make much profit in the process of getting the eyeballs, so long as they succeed in getting them.

    It's a good deal for consumers who don't mind ads.

     

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      Mike Masnick (profile), Sep 13th, 2012 @ 2:21pm

      Re: Google is different

      I think you're misinterpreting what Google is doing.

      They selling the (scarce) hardware at low margins (Nexus...) _and_ the (abundant) software/media at low margins. This is in order to entice the customer to use their ecosystem, so they can show you ads (high margin).


      No, that's exactly what I was saying... I'm sorry if I worded it awkwardly, but that's what I was saying.

       

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    Mike42 (profile), Sep 13th, 2012 @ 2:12pm

    I must be missing something...

    This equation assumes that Apple media is radically cheaper than Amazon or Google. Seeing as this is NOT the case (as stated in a previous post) this really doesn't seem like a good simplification of the market.

    To me, Apple is using it's sizable group of well-financed fans to promote the higher hardware prices. They know that almost the entire group will go out and buy their latest hardware, so they put out a new version as frequently as possible. They really don't have a reason to discount media, either. They just do.

    Amazon also has a large fan base, but they are the bargain-hunters of the internet. You can't gouge them and keep them as customers. Therefore, Amazon keeps both hardware and media margins at a minimum.

    To Google, every tablet out there is an opportunity to mine data. Therefore, they are able to sell hardware and media at cost (or even a loss) and still come out ahead.

    You will almost certainly see the hardware from Amazon and Google following Moore's law as hardware becomes faster and cheaper, while Apple will have frequent incremental advances.

     

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    Not an Electronic Rodent (profile), Sep 13th, 2012 @ 2:29pm

    I wonder...

    •Amazon: Low margin hardware (scarce); make the real margins on digital goods sales (abundant)
    Is that really true? Is what Amazon ultimately make their margin on not providing the service of digital goods?

    I can't help thinking they are one of those business that often get talked about here where people will still buy stuff off them even if it can be had for free.

     

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    Mark, Sep 13th, 2012 @ 2:33pm

    You forgot to include the value of "service"

    So, while the goods amazon sells are abundant, the service they provide to search for, preview, acquire, etc. is valuable and scarce on the internet today. Not all, but many people are willing to pay for things they can otherwise get for free if it is more convenient. Interestingly, I posit that the wealthier people are, the more valuable their time is (the one truly scarce resource). Companies targeting time-conscious customers bundle abundant goods with services that reduce the time their customers need to spend to find what they want, confirm that it is what they want, identify dependencies (for gadgets think cables and accessories). Now, this does nothing for the people in the world who would like to financially benefit from the work they put into creating goods that are copyable and therefore tend to be abundant...

     

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      Anonymous Coward, Sep 13th, 2012 @ 4:47pm

      Re: You forgot to include the value of "service"

      For me this is critical.
      Amazon occasionally screws up (infrequent - usually UPS incompetence in my experience).
      I find their customer service to be relatively easy to use, responsive, quick, and effective. It seems to be really customer satisfaction focused.

      One of the reasons Amazon is my first choice for gadgets/tech stuff (Newegg is second). I have even chosen to use Amazon to buy something from Buy.com when they supported that (have not bought anything from them since)

      Garth

       

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    Alan, Sep 13th, 2012 @ 2:40pm

    Where do they fit?

    Yes, there's also Microsoft Surface tablets. For the life of me, I can't figure out where they place in this particular chart.


    Simple, High margin on hardware (scarce), high margins on digital goods (abundant), and high margin on protection rackets (abundant - sigh)

     

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    SleepyJohn, Sep 13th, 2012 @ 2:48pm

    Amazon is a highly efficient, web-based supermarket

    I think Amazon knows exactly what it is doing. It is a web-based supermarket that is open all hours, stocks virtually everything you need, has excellent customer service, low prices, highly organised delivery to your door, easy parking and now a cheap gadget enabling you to access it all with considerable convenience from anywhere. How could it not be successful, and deserve to be?

    As long as it maintains keen prices it will trump free because of convenience, safety, reliability and customer service. And I think it has more irons in the fire than Apple, whose repressive, closed system could look increasingly unattractive when other hardware becomes as good as its own. Which is nearly now.

     

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      Chosen Reject (profile), Sep 13th, 2012 @ 3:03pm

      Re: Amazon is a highly efficient, web-based supermarket

      Nearly now? Apple just had their biggest event of the year for their flagship device and the overwhelming majority of viewers sat up collectively to say "meh". Some said something different though. They said, "Oh look, Apple finally caught up".

       

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    Hephaestus (profile), Sep 13th, 2012 @ 4:59pm

    "I will admit that I struggle with this a bit."

    There is no reason to struggle with this. You have often spoken about people being willing to pay for convenience. When all is said an done and the copyright industry implodes. Amazon will be the digital library you pay a monthly fee for so you do not have to search.

    Amazon is selling convenience and a brand, nothing more.

     

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    Lawrence D'Oliveiro, Sep 13th, 2012 @ 7:13pm

    Abundance vs Scarcity vs ...

    Apple’s problem is their scarce goods are becoming less and less competitive. The latest Iphone 5 release is most kindly described as “solid” rather than, say, “innovative” or “desirable”. With all the regular controversies over which Apple features are copied from Android or vice versa, I think the most damning thing you can say about Apple’s latest releases is that they simply aren’t worth copying any more.

    So the idea of making a tidy profit off high-margin smartphone or tablet hardware seems to have a limited lifespan at best. And Amazon and Google are hastening us just that little bit more quickly to the end of that lifespan, with Apple still hanging well back and trying to pretend it isn’t happening.

    Of the three, the only one it seems with a product that will still be worth money when the dust settles is Google, the lean, mean advertising machine. It looks like, no matter how technologically-advanced the future is, no matter what kinds of products people want to buy, no matter which ones are expensive and which ones are cheap, there will always be a market for those who know how to help those with a product to promote reach their target eyeballs.

     

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    Suzanne Lainson (profile), Sep 13th, 2012 @ 7:22pm

    I'm not sure about scarcities in either content or hardware

    I don't think Apple or Amazon will hang on to the market via either content or hardware. History doesn't support it. There's always another company to come along and undercut you. There aren't really long-lasting scarcities with either. Hardware is harder than digital content to copy, but it does get copied.

    But what Amazon does have as a barrier to entry is a huge warehouse/delivery system that would be hard to quickly duplicate. Amazon is Amazon because of that, not because of its tablet.

     

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    Anonymous Coward, Sep 13th, 2012 @ 7:27pm

    Actually Mike, for once you did a pretty darn good job at looking in depth at this situation, this fork in the road, but I think you let your bias mislead you a bit.

    Amazon is following what could be called the traditional razor handle strategy. They aren't going to make much of anything to razor handles, but they will sell a lot of razor blades.

    Now, your natural instinct here is to say that what they are trying to sell for profit (apps and books and whatnot) are all digital and therefore abundant and not the profitable end of things. I understand it, I don't agree. But let's look at Apple first before I explain why.


    Apple's strategy is to get lots of people to offer snazzy razor blades for their handle, and then charge a nearly exorbitant amount for handles. It's an attempt to make the product so desirable, that the price is literally no object. It's pretty much always Apple's way of doing things, staking out the higher end of the market for themselves and pretty much labeling anyone who doesn't want to pay the premium for their product as someone who is unhip, who doesn't get it. The Apple fanbois have been paying through the nose for the last decade to "get it" and be cool.

    Now, here's why I think that Amazon's strategy will work out for them in the long run: Low barrier to entry, plus the abundant nature of the apps and content. It seems weird to think of it that way, because you feel that the digital goods are pretty much infinite. You are right, but you are looking at it wrong.

    Short term, Apple has the jump on the market by being first and being the best. But at this point, a tablet is pretty much a tablet, everyone can produce them, there is no magic to the products. Everyone can get the screens, make cases, and slap android on them and be off to the races. Amazon is accepting this situation, and working with it to their advantage. Basically, they are trying to be the tablet everyone has because it's too cheap not to have one.

    In the long run, Amazon may only make a couple of pennies on each app or each book or whatever it sells, but with a low price point (low barrier to entry) they are very likely to in the long run dominate the marketplace. Further, with their place in the book world and their significant existing customer base, they are well positioned to be the tablet / e-reader solution of choice, at least in the US.

    Yes, it's likely to be a low margin business. But in a low margin business, volume makes up for everything, and everyone wants to work with the volume leader. That means that in the long run, app makers, book writers, and everyone else will want to be dealing with Amazon, and potentially dealing with Amazon first.

    Apple looks good right now because they got the jump. But already, you can look an d see where others will eat their lunch (and dinner too) because they are ending up positioned at the wrong end of the marketplace.

    Nothing is as simple as abundant / scarce.

    As a side note, where I am at, there is already a new trend developing. People are ditching their smart phones, and moving towards 7 inch tablets for gaming and general use, and using smallest micro cell phones for communication. The tablet market is quickly opening up, and phone companies here are offering multiple sim card options to allow you to have a sim in your phone, and a sim in your mobile device (tablet or similar). Amazon is very well positioned for this market in the future as well.

     

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      Anonymous Coward, Sep 13th, 2012 @ 7:34pm

      Re:

      Sorry, let me add this:

      What Amazon is also doing is creating price pressure against Apple's business model. Basically, if the Amazon device is even 80% of an Ipad, it will make at least some people consider if the difference is worth the price difference. If their product is 90% or 95%, it gets even harder for Apple to keep justifying the high price.

      So Apple would find themselves in an ugly spot, and worse because of the way their structured their business, any attempt to raise prices on Apps or to otherwise change the business model may alienate their current users, who over paid the price of admission and now want the all you can eat app bar.

      Apple really is at risk on this one. Amazon is really looking like they are going to expose the various "pads" as being over priced, and could really put a dent in Apple's long term business plan.

       

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      streetlight (profile), Sep 13th, 2012 @ 10:51pm

      Re: 7" tablet + dumb phone

      I think anonymous hit the nail on the head. I have a dumb phone which does an excellent job making phone calls. I don't have a smart phone, but in considering my options, the best situation may be to keep my dumb phone and get a 7" tablet for doing the kinds of things that can be done on a smart phone in addition to making calls. The Nexus 7, from what I read, can do all those other things - send text and photo messages, read and send emails, surf the web, etc. The advantage of this scenario is that the "smart" things are being done on a large screen. Oh, there are disadvantages, too. The need to carry two devices, maybe not the best camera, and whether the tablet only does WiFi so the need to find hot spots. This would also be a much less costly option if one depends on WiFi for the tablet because the voice plans for dumb phones run ~$40. Might be worth a try.

       

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    streetlight (profile), Sep 13th, 2012 @ 11:34pm

    One other comment

    One thing I didn't see but might have been implicit in the discussion is the difference in the cost of the purchased goods sold by Apple compared to Amazon. Apple's purchased goods, except for its branded hardware, is all intellectual property - songs, movies, digital books, and software applications. Amazon sells these things also but it also sells hard goods - printed books, cameras, laptops, George Foreman Grills, all of which must be physically delivered. The cost of many of Apple's IP items is determined by the author's and through negotiations with music, movie and e-book companies. These prices can be pretty flexible. Amazon, on the other hand, can't do a lot to set the lowest price for the hard goods it sells. The manufacturer has to consider the cost of shipping goods to Amazon's warehouse and the cost of manufacturing their product (materials, labor). Shipping digital IP is pretty cheap compared to shipping physical objects and digital IP has no material or manufacturing labor involved. Both kinds of products have development costs, of course. Also, Digital IP requires data centers but Amazon has or will have a huge number of warehouses to heat and operate. I'm guessing Amazon's hard goods delivery infrastructure is much more costly to operate than Apple's data centers. So, I'm not sure the comparison of Apple's expensive scarcity (iPads) and cheap surfeit of products (IP) vs. Amazon's cheap surfeit (Kindles) and expensive goods (IP and hard goods) is appropriate. There is some overlap in products sold by the two companies, but Amazon has hard goods to sell which is a totally different business from Apple's. (I haven't forgotten that Apple runs physical stores, but these are for selling their branded hardware, not their surfeit product (IP).)

     

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      Suzanne Lainson (profile), Sep 14th, 2012 @ 12:10am

      Re: One other comment

      I'm guessing Amazon's hard goods delivery infrastructure is much more costly to operate than Apple's data centers.

      That's why Apple is ultimately more at risk. It's an easier business to copy.

       

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    Anonymous Coward, Sep 14th, 2012 @ 12:19am

    Hmm.. I thought Amazon was trying to drive sales of their physical goods. By getting more people to buy the kindle fire they are getting more people to plug into the Amazon world where they would be exposed to the Amazon marketplace and more inclined to purchase things from there. Let's say I'm a consumer who wants to buy a tablet and is drawn to the Kindle Fire for its attractive price point. I then go into the Amazon marketplace to look at ebooks, music, movies, etc. and while there I might stumble on the physical goods section of the marketplace. Or perhaps while I'm browsing the web Amazon recommends certain products to me. Whatever, the case I become plugged into shopping with an Amazon mentality and it can quickly become my go to store, especially when it is so easily accessible via my tablet.

     

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      Suzanne Lainson (profile), Sep 14th, 2012 @ 12:36am

      Re:

      Hmm.. I thought Amazon was trying to drive sales of their physical goods.

      Yes, that's what I have figured too. Amazon Prime encourages people to start buying everything via Amazon. Fast delivery, no need to go to a store, etc.

      ________________

      About Amazon Prime

      Amazon Prime is an annual membership program that offers customers unlimited Free Two-Day Shipping on millions of items, instant streaming of thousands of movies and TV shows and access to borrow a Kindle book every month, including New York Times Bestsellers, with no due dates -- all for just $79 a year. Eligible customers who purchase a Kindle Fire will be given a free month of Amazon Prime.
      About the free month of Amazon Prime with Kindle Fire: Eligibility

      Customers who have not used Prime instant videos over the past year will automatically be given a free month of Amazon Prime when they first activate their Kindle Fire. Eligible customers receiving free shipping benefits as an Amazon Mom, Amazon Student or as an invited guest of another Prime member will receive a month of Prime digital benefits, which includes Prime instant videos and Kindle Owners' Lending Library. If you're already a paid or free trial member of Prime when you register your device, you'll be able to seamlessly use your benefits without interruption or changes to your membership.

       

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    TriZz (profile), Sep 14th, 2012 @ 9:26am

    Apple is winning.

    Apple is the most valuable company in the world. It's hard to argue in favor of anyone else's approach.

     

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      Suzanne Lainson (profile), Sep 14th, 2012 @ 10:12am

      Re: Apple is winning.

      Apple is the most valuable company in the world. It's hard to argue in favor of anyone else's approach.

      For the moment.

      No company has ever remained the most valuable in the world indefinitely. The reason Apple is currently the most valuable is that the previously most valuable companies are no longer so. The same will happen with Apple, sooner or later.

       

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      Anonymous Coward, Sep 14th, 2012 @ 10:17am

      Re: Apple is winning.

      'Cause the way things are now is the way they always will be. The digital marketplace will look exactly the same in five years. /s

       

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    Anonymous Coward, Sep 14th, 2012 @ 10:20am

    "We want to make money when people use our devices, not when they buy our devices."

    Notice that Bezos did not say "We want to make money when people use our devices to consume digital media" which is what the article seems to assume.

     

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    Gerald Robinson (profile), Sep 14th, 2012 @ 12:03pm

    Amazon's strategu versus Apple/Google

    I am going to say up front that none of these companies reports anything meaningful on sales. Apparently Amazon lost ~$30/unit on the ~22M original Fire but made ~$2k/year in media sales. (BTW the new Kindle has adds but you can optout for $15.) But that's a MCD¹ not a full up tablet. Apple makes a full up tablet and price gouges on it depending on their Kool factor. iTunes trails Amazon, B&N, Google and when, if ever, it hits MS on media selection except for music. Their pricing is not competitive with Amazon that's why they had to resort to illegal price fixing.

    So here is the question that should have been addressed "Is there money to be made from a high priced tablet (laptop wannabe) or just on MCD and media?" IMHO the whole BYOD is silly. Why should I pay someone to type at word per minute on a screen while sitting on the commuter train? After all the stuff still needs to be brought into the intranet, edited (using a keyboard), and cleaned up. Did I really gain anything from those 90 minutes of commute time?
    Maybe I'd be better off if the guy played Angry Birds or World or Warcraft and got into the office in a better mood and ready to do productive work.

    ¹ Media Consumption Device

     

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    Laroquod (profile), Sep 28th, 2012 @ 7:32am

    This is just the whole printer / ink cartridge market approach warmed over. I believe Gilette invented it with their razors and blades. I can't believe people are talking about it "make money when you use it" like it's new and brilliant.

     

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    Anthony, Dec 10th, 2012 @ 4:51pm

    What about Google's approach

    Everyone is comparing Apple and Amazon, but what about Google? They sell a low-cost device to consumers (Nexus 7) with the hopes of making a profit by selling Google Play apps and ads. How does this business model compare to what Apple and Amazon are doing?

     

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