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 @ 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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