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 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.

Filed Under: abundant, business models, economics, scarce, subsidies, tablets
Companies: amazon, apple, google

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  1. identicon
    Anonymous Coward, 13 Sep 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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