Why Amazon Is Special and Apple Is Not

http://www.theatlantic.com/business/archive/2013/02/why-amazon-is-special-and-apple-is-not-in-1-paragraph/272791/

by TomAnthony • 13 years ago

58 76 13 years ago

theatlantic.com

jamroom• 13 years ago

When has Apple ever "competed on price"? As far as I can tell, low cost competition has not been a problem for Apple.

rednukleus7• 13 years ago

In the 90's, Windows machines competed with Macs on price, and nearly made Apple extinct.

With the iPod, iPhone and iPad, Apple have been going from Early Mover to Early Mover, which has allowed them to keep their high margins. Unless they can keep finding even more new markets to move into, they are going to find it harder and harder to maintain high margins. They will then almost certainly have to lower their prices to remain competitive, or lose huge amounts of market share.

cobolorum2• 13 years ago

These days, OSX is simply a better product than is Windows (stability, security, feature set). OSX also has things like iTunes (largest provider of digital content world-wide... besides Pirate Bay), FinalCut, Logic, Aperture, and GNU/BSD tools. That's a hard line up for Windows to beat. More importantly, I think, is that OSX and iOS work well with one another. If I have an iPad, an iPhone, and an iMac my content syncs easily and transparently. When taken with iTunes this is simply tough to compete with.

tl:dr digital content delivery made Apple king.

mdasen• 13 years ago

One of the things that must be considered is that from 1995-2006, Windows machines were better.

I was a Mac user through that time. Windows 95 came around with preemptive multi-tasking. The Mac was still more polished, but Windows 95 was a better operating system. This period also saw Intel processors far outpace the PowerPC. When OS X came out in 2001, it was so slow as to be nearly unusable. 10.1 helped, but comparing it to a Windows XP machine was simply disheartening.

Looking back on this period, I find it hard to believe that I (mostly) stuck with the Mac platform through it. OS X is wonderful today. However, I think it's important to realize that during the dark days for Apple, they were really selling inferior machines and an inferior operating system. From 1995-2001, Apple was selling a cooperatively multitasked operating system against a more technologically sound Windows 95/98. Intel processors were very significantly better as OS X came around and Apple was having trouble getting good PowerPC processors out of IBM and Motorola. Apple introduced a 700MHz iMac in 2002 against around 2GHz PCs. Apple did try to spin it and we all know that MHz isn't everything, but there was quite a gap - a gap that would simply become larger until the Intel switch.

So, it's easy to say that "Windows machines competed on price," but I think looking at the history, Windows machines were substantially better for a decade. Mac OS was still better polished and a more pleasant interface (in my opinion), but the classic Mac OS was ancient by the technology of the day, OS X was dreadfully slow when introduced, and Intel processors wiped the floor with PowerPCs. The Windows machines weren't just "competing on price", but were better.

While people may prefer Android or Windows phones, the iPhone's processor is as fast or faster than what is being offered in the competition. You may want a different mix of features than iOS offers, but I don't think a reasonable person would say that it's technologically inferior to its competitors. In many ways, Apple is still the state of the art. The A6 processor runs circles around the Galaxy S III (http://www.anandtech.com/show/6330/the-iphone-5-review/10), iOS is well liked, the build quality of Apple's devices is arguably the best in the industry, etc. Apple does have competitors and it would be foolish to discount them. However, Apple's current situation is absolutely nothing like 1995-2006. In that period, a dispassionate person would look at Apple's products and find them woefully inadequate. Today, dispassionate people don't find Apple's products lacking.

EwanG• 13 years ago

TLDR - The cost of competing against Amazon is a magnitude higher than competing against Apple (see Android).

cobolorum2• 13 years ago

Android only competes in a supercilious way. Android powered phones compete with the iPhone and Android OS does not compete with iOS. You cannot install Android on an iPhone and Apple does not offer iOS without an iTrinket. Samsung is a competitor of Apple not Android.

bfwi• 13 years ago

The article states that a company with high margins, is at risk of being outcompeted by companys with lower prices. This makes sense, but in the case of Apple, lower priced products have been there for a while and people still choose Apple.

rednukleus7• 13 years ago

Apple have <10% share of the desktop/laptop market, about 20-25% of the smartphone market, and <50% of the tablet market.

Most of their profit comes from phones and tablets, and in both of these markets their global marketshare has decreased, or at best held steady, in most quarters over the last few years.

arrrg• 13 years ago

… but in an overall growing market.

It’s not necessarily true that competitors are converting owners of Apple devices en masse, it’s much more likely that competitors are able to convert more non-smartphone or tablet users than Apple can.

I foresee Apple being just a company that doesn’t grow much in the future but still makes tons of money.

TomAnthony• 13 years ago

There are a few things about this article that I must not be following correctly:

- Apple's core business is something 'everyone can do'. If so then why aren't there more people chasing down their position as 'most profitable tech company'?

- 'Practically nobody wants to' do what Amazon do?

I get the premise: Amazon are playing a long game but will be entrenched, whereas Apple's products tend to have a far shorter lifespan, therefore Amazon isn't being chased as furiously as Apple. However, it still seems a bit... wrong?

pavanky• 13 years ago

I think it means building phones and tablets is easier than building warehouses, developing partnerships and affiliates.

Keep in mind that Apple has been doing this (building touch screen devices) for about 6 years, while Amazon has been doing this (e-retail) for more than twice that time. Apple already has serious competitors, while Amazon maintains a near monopoly. I think this is the essence of what the article was getting at.

rednukleus7• 13 years ago

You misinterpret what "core business" means. Apple's core business is making phones and tablets. There is now fierce global competition in these sectors.

I can't think of any other company that competes with Amazon at anywhere near the scale they are operating at.

sliverstorm3• 13 years ago

If so then why aren't there more people chasing down their position as 'most profitable tech company'?

Competitors are not yet successful at giving Apple's profitability a run for its money, but you'd have to be willfully blind to think they weren't trying.

LG, Samsung, Nokia, RIM, HTC, Huawei, Acer, Asus, Motorola, Sony...

lumberjack• 13 years ago

I think he means to say that there are already various smartphone and laptop manufactures whereas there are few (none?) who have Amazon's worldwide logistics infrastructure. So in effect, the hurdles to be tackled by a promising competitor are more easily monitor in Amazon's case than in Apple's and therefore Amazon is a potentially safer investment.

I myself think the view a bit too simplistic and as a counterpoint I would say that Apple's continuous influential presence within the market despite the hostility imposed by the numerous competitors is a testament to Apple's ability to navigate treacherous waters.

guard-of-terra2• 13 years ago

Amazon is very far from being world-wide. Amazon is patchy, here and there in some countries in the world, which is much bigger than that.

Apple can cross borders much more easily, which it does.

rohamg2• 13 years ago

it's very wrong. take a look at the latest batch of 500.co or YC or AngelList. compare # of companies gunning for AMZN and ecommerce compared to those gearing up to build phones and tablets. if i was apple i'd rather compete against HTC armed with margin than the hordes of YC. the article implies Amazon's scorched earth approach is preferable to Apple's continuing innovation. braindead if u ask me.

niggler4• 13 years ago

After seeing many cases where Amazon is not the cheapest, I wonder if Costco (and costco.com) could ultimately eat away at Amazon. It has incredible pricing power and an efficient infrastructure, and costco.com itself is growing rapidly. Most importantly, on many items Costco can beat Amazon's price by a significant margin (even comparing Amazon's tax-advantaged price to Costco's after-tax price)

mrfairladyz2• 13 years ago

And remember, the tax advantage doesn't hold everywhere (certainly not in California anymore). Amazon has to offer something better other than price, and I think Prime is a large part of that.

niggler4• 13 years ago

FTA, Amazon's core business is "build[ing] a massive online database and offline infrastructure to transport boxes from warehouses to hundreds of millions of doorsteps", and I would argue that Costco's physical presence, existing warehouse efficiency, and brand identity positions them well for a foray into Amazon's business.

As for "offer something better other than price", most people point to customer service, and in my experience Costco's customer service completely blows away Amazon.

ars• 13 years ago

They don't have even a fraction of Amazon's inventory.

They might compete of some selected products, but it's a long way to the "we have it all" of Amazon.

sparky• 13 years ago

How much of that pricing power would remain if Costco carried as many items as Amazon? Amazon is predicted to eclipse Costco (and Target) in terms of sales this year (http://money.msn.com/top-stocks/post.aspx?post=34532428-58cf...), so given an equal catalog, Amazon would be able to sell more of each item and command a lower price, no?

Amazon's catalog is so much bigger than Costco's along two axes; more kinds of products, and more varieties of a given kind of product. The latter axis can be good for Amazon, since people have different utility functions, brand loyalties, etc. But one thing I like about Costco is that their catalog seems to be curated; whatever brand/model of a given thing they happen to carry, it's usually pretty decent. Amazon, by comparison, carries good and crap versions of pretty much everything, but you can use the customer reviews to separate the wheat from the chaff). By removing the paradox of choice, Costco not only reaps the usual benefit on the buyer's psychology, but is also able to negotiate better wholesale prices on the items they buy due to higher volume. Maybe that's a way for them to compete?

mjmahone17• 13 years ago

Right, but the whole point of Costco is "currated" content: they get good deals on huge quantities, because they make sure not to carry every type of product. Variety isn't necessarily a good thing, and if Costco implemented free two-day shipping (for an additional fee), as well as an improved UI, they probably could become the biggest online "everyday" retailer (i.e. for things like cereal, toilet paper, etc.). Though I think it might be more likely that Fresh Direct, or a similar company, could get a stronger toehold on that market than Costco or Amazon.

gingerlime• 13 years ago

As the update to the article quotes:

> The chances I leave [Apple] are minimal because I have all my music and photos and such on the phone. The inertia or friction of moving is fairly high.

This is also starting to become true with the kindle for consumers.

Another advantage of Amazon however is its many business customers - i.e. those who use and rely on AWS. I would imagine the friction of moving away from AWS are even higher for a business than for an end-user to transfer their songs and videos...

mrfairladyz2• 13 years ago

>This is also starting to become true with the kindle for consumers.

I disagree. In my experience, buying books on Kindle has been almost a reassurance that it could be read on any other platform, either through a web browser or iPhone/Android app. Amazon has made it easy to switch platforms and still be hooked on their services, whereas Apple essentially locks you in to their ecosystem with only allowing their content (iBooks and movie rentals, but not music in some sense) to be enjoyed on Apple devices.

Services like Spotify and Rdio make it easier to switch platforms -- if I want my music library on another platform, all I need to do is download an app. That kind of flexibility and availability is more powerful and consumer-friendly in the long run, in my opinion.

Here's an interesting read from Paul Miller of The Verge: http://www.theverge.com/2012/1/4/2669066/ecosystem-the-winne...

rscale• 13 years ago

This is also starting to become true with the kindle for consumers.

Anecdata: I'm an Apple customer who purchases Kindle books specifically because they're cross-platform. I like that they're at least future-resistant.

codeflo2• 13 years ago

Article claims that it's easy to compete with Apple, yet hard to compete with Amazon. Fair enough, makes a lot of sense to me.

And yet, last I checked, a lot of companies made serious money in retail, but very few companies managed to earn substantial profits in smartphones, tablets and notebooks.

I seems to be harder to compete with Apple than most investors think it is. (I say that as a developer who hopes that an open platform will win the smartphone wars.)

sliverstorm3• 13 years ago

Your second line doesn't make sense. What does companies making money in retail have to do with being able to compete with Amazon?

Now, if you could say that incumbents attacking Amazon's base stole serious revenue from Amazon that would be something. But what does it mean to say WalMart makes serious money in retail, ergo it is easy to compete against Amazon?

codeflo2• 13 years ago

I don't quite follow you either, maybe I misunderstand you. Every sale that Walmart makes is one that Amazon didn't get, right? They are direct competitors (at least for a subset of their respective product portfolio).

niggler4• 13 years ago

How do you define "competing against Amazon"?

If you define it as general retail (who manages to capture the consumer dollar), then Walmart and its physical stores can be considered a competitor.

If you take the article's concept: "build a massive online database and offline infrastructure to transport boxes from warehouses to hundreds of millions of doorsteps.", then clearly stores aren't competing with Amazon.

thechut• 13 years ago

This is first year business school stuff here. In a five forces analysis[1] of Amazon, Wal-Mart would certainly be a substitute, not a rival.

In general it is true that Amazon has a high threat of substitutes. I think what @silverstorm, and this article, are trying to say is that rivalry for Amazon is pretty low, given how expansive their business is.

[1] http://en.wikipedia.org/wiki/Porter_five_forces_analysis

ahoyhere• 13 years ago

I recently bought a pair of pajama pants from Walmart.com and they shipped the same day. How many online retailers do that? Other than Amazon, of course.

Certainly Walmart believes they are competing with Amazon. (I would have bought my patio furniture there, too, if they hadn't sold out. Instead I bought it on Target.com.)

Frencil• 13 years ago

The retail comparison is apples to oranges, in my opinion. Amazon is purely eCommerce, no brick-and-mortar, so the comparison is strongest when considering other eCommerce outfits.

Consider a site like NewEgg. At ~250M annual revenue they're an appreciable fraction of Amazon's size with a lot of catalog overlap. Certainly for commodotized consumer electronics they are direct competitors.

I think the difference the author is trying to articulate is that NewEgg's overlap with Amazon (for example) is considerably less impactful on Amazon than, say, Samsung's overlap with Apple. Phones and tablets are a huge proportion of Apple's profit generation - an area where they cannot afford to be dethroned. With Amazon and consumer electronics, having NewEgg overtake more of their sales in that area would hurt, but Amazon has such a vast catalog that the company, investors, and stockholders know they'll soldier on in a variety of other markets.

That's Amazon's power. Apple's no one-trick pony but they are a pony with a countably limited number of tricks. Amazon is a platform for selling anything and everything. They've abstracted out their distribution network to adapt to selling the Next Big Thing before it's even been conceived. Competitors can take a swipe at a chunk of their market but at the end of the day they're in so many markets that it's a truly monumental task to dethrone Amazon in any meaningful way.

umbrella• 13 years ago

Theoretically it would be possible to compete with Apple because their price position makes them vulnerable (high margins). A competitor offering an equivalent product could undercut them and come out on top. This is textbook from an investment point of view.

This was all said in the article I think but I'm just trying to rephrase it.

But yes, as Microsoft demonstrates competition in this sector doesn't always go by the book. Because it really isn't such a free market with non-captive consumers.

pvdm• 13 years ago

It is tough to compete in the public relation and marketing arena. It is a soft-skill that many competitors have not master.

simonh3• 13 years ago

And yet 5 years after the launch of the iPhone Apple still hoovers up a vast proportion of the profits in both the mobile industry and the desktop computer industry. Meanwhile 17 years after it launched, Amazon earned in total as much as Apple does in a single quarter.

The point is that Apple's devices are not easily disrupted by low end competitors because building software platforms and ecosystems is incredibly hard and once established they are very resilient to disruption.

If low end disruption was such a dire threat, the Zune would have rolled the iPod and Amorok would have supplanted iTunes. The majority of Android handset makers wouldn't be on the ropes financially and Microsoft's Phone and tablet software would be rapidly accumulating credible market share. And yet....

The author is trying to explain why what has been manifestly and irrefutably happening in front of our eyes for the last 10 years plus, and at this point is a matter of historical record, is impossible.

SonicSoul• 13 years ago

wow! you're right

comparing the net income of Apple to Amazon.. in 2012 the difference was astounding at 98,000 vs 41,733,000!

http://finance.yahoo.com/q/is?s=AMZN http://finance.yahoo.com/q/is?s=AAPL+Income+Statement&an...

acchow2• 13 years ago

In case people are wondering, the unit is '000 USD.

So that's 98 million vs. 41 billion USD.

lucian1900• 13 years ago

It's called Amarok.

acchow2• 13 years ago

Exactly.

fspeech2• 13 years ago

You are right about the ecosystem but that is not how Apple makes so much money. iPod and app/music sales are minor portions of Apple valuation. The main profit center is driven by high iPhone margins, which are carrier subsidized so that people upgrade without second thought. When there are good enough lower cost alternatives carriers have all the incentive to reduce the subsidy, which either show up as lower gross margin for Apple or higher prices for consumers (which leads to less upgrades and less unit volume). Pick your poison.

simonh3• 13 years ago

I know that's not how they make their money, but it's a large part of their value proposition to customers. iPods might have been successful without iTunes, but nowhere near as much as they were with it. Just because something is free doesn't mean it has no value. That's the fundamental principle the free/libre software movement is built on, but they're not the only ones that can leverage the power of free. Apple is very sophisticated in the way they use free or break-even software and services to massively ratchet up the value of their paid-for products.

There's not wishful thinking in any of this. Amazon and Apple are not startups, they are both mature businesses in their prime. They still have a lot of risks and opportunities ahead of them for sure, but Amazon started business I think 17 years ago. Arguably Apple's reconstruction into the company it is today started at around the same time with the NeXT acquisition and the return of Steve Jobs. That's a significant track record on which to evaluate them.

zyb09• 13 years ago

> and it also hints at potential complacency.

Hints? Potential? Have you guys not seen the kool-aid their employees are watching internally: https://www.youtube.com/watch?v=-AkLOvjl5jo

ricardobeat• 13 years ago

That's actually very bland for an in-company motivational video, and a good lesson in store design from Apple's perspective.

lnanek2• 13 years ago

Wonderful, someone summarized stories we've had posted directly and discussed already, and they get voted up? I'd rather the originals just get reposted, honestly.

rohamg2• 13 years ago

amzn see themselves as an infrastructure company, their legacy ecommerce business is being kept at low margin precisely because they're unable to innovate further. aapl keeps selling at high margins because they're building differentiated products. this junk argument is getting tired.

rjegundo• 13 years ago

This is completely focused on the financial side of the business. The innovation & marketing factors are not being considered, and those are precisely the elements that allow Apple to keep their high margin.

If a product is - or at least is perceived - to be 100% better than the others, paying just an extra 30% is a win in the mind of consumers

guard-of-terra2• 13 years ago

That's why I always struggled with the concepts of dividends.

If you have so much money you can pay dividends, it means you have grossly high margins and not investing in growth enough; which means someone will come and not only destroy your margins but your business also.

If we're talking tech not mining.

msrpotus• 13 years ago

Some companies are cash cows and don't have to worry much about huge new innovations. Think of Coca Cola. Sure, they have to compete with Pepsi and are probably investing in new equipment but at the end of the day, they aren't entirely reinventing themselves the way most tech companies have to.

gfodor3• 13 years ago

The primary duty of the company's executives is to deploy capital effectively. Paying out dividends in many cases is a sign of good management since it makes it clear they understand the limitations of what they can do with deploying capital internally. The assumption is that unless they can earn more on the capital than shareholders could by investing it elsewhere, they should return it to shareholders.

cageface• 13 years ago

They should invest at least some of it in making Xcode less terrible.

saosebastiao• 13 years ago

Since when does P/E matter for any company that is not paying dividends? If you buy a company's stock knowing that they aren't paying dividends, then you are obviously paying for growth.

OGinparadise• 13 years ago

Growth with no profits after 15 years? Amzn should make $5-$10 billion to justify it's $130Billion valuation. They will not gobble the world, Walmart, Costco and others are not going to roll over on a trillions and trillions of market.

By the way: a Good P/E is probably correlated with cash in bank, a higher buyout /sale price and likelihood of getting some cash back via dividends or share repurchases.

gfodor3• 13 years ago

You have a point but only if you replace "paying dividends" with "returning capital to investors."

michalu• 13 years ago

What this article basically says is that Apple is not special because it is likely to become (in case of price wars) Amazon. But I don't get what makes Amazon so special to be valued at P/E 3000 while Apple a company with enough capital on books to buy 100% of Amazon stock in cash is valued at P/E 10. Possibly a stupidity and self deception of investors.

( On another hand I totally admire Jeff Bezos and the company he built )

gfodor3• 13 years ago

Wow, I never made the connection but you are right. If AAPL really wanted to, they could buy AMZN in cash right now, even with their absurd valuation. Nuts.

codex2• 13 years ago

Apple is special because it is the paragon of the tech. innovator. There is always some new big thing in technology, and while Apple may not remain king, there will always be a company like Apple doing amazing things.

Amazon, on the other hand, is in retail. Very little magic or innovation happens in this old business, though Amazon is doing its best to squeeze some from a stone. Their music business was successfully disrupted by the iPod and they're scrambling like hell to prevent disruption in other digital media. It is not a place of wonder, and Amazon will never make anything but a token profit due to the nature of retail and Bezos' desire to constantly reinvest in the future.

jseliger2• 13 years ago

>Amazon, on the other hand, is in retail. Very little magic or innovation happens in this old business

This isn't really true. Check out Emek Basker's famous paper "The Causes and Consequences of Wal-Mart's Growth" (econ.missouri.edu/working-papers/2006/wp0611_basker.pdf (and its citations)) and the work of other economists who estimate that WalMart, on its own may be responsible for an appreciable portion of U.S. productivity growth in the 90s and 2000s.

One major problem India suffers from right now is entrenched incumbents who prevent modern retail practices from reaching most of the country. A lot of people there would love for American-style retail practices to spread.

codex2• 13 years ago

I would draw a distinction between productivity and innovation. The source of Walmart's productivity gains was not innovation within Walmart, but advances in technology, from which Walmart was able to take advantage of more quickly than competitors. Just because retail gained in productivity and Walmart is the biggest retailer does not imply that Walmart is the source of innovation. I do give Walmart credit for their aggressive play, but the business of retail is still that of a middleman with a storefront, inventory management, customer service and thin margins.

I applaud Amazon's efforts to prevent disruption with the Kindle and to move into the cloud. AWS is fairly innovative.

Riesling• 13 years ago

> Very little magic or innovation happens in this old business

What about Amazon Web Services? Amazon was and still is a leader on the cloud computing front.

> Bezos' desire to constantly reinvest in the future

This is a huge advantage at least from an investor perspective.

lubujackson• 13 years ago

eBooks? Cloud computing? Amazon validated both of these in the past few years alone. Say what you will about their core business, but there's a lot of innovation at Amazon, more so in some ways than Apple.

prof_hobart• 13 years ago

I'm not sure if I'm missing something screamingly obvious here, but the article seems to me to be ignoring some rather critical facts.

People have been beating Apple on price for years, yet Apple are still here and still reaping their profits. These are not commodity products - I doubt that too many people would choose a Samsung tablet over an Apple one based solely on the fact that they were £100 cheaper. If I want an iPhone or an iPad, I'm only going to be buying it from Apple

Amazon, on the other hand, offer pretty much nothing that couldn't be copied or beaten by a big retailer (someone like WalMart, or Tesco in the UK) if they really put their mind to it.

alpeb• 13 years ago

Drawing conclusions of a company's performance given a stock price change is a classical mistake. The share price change only says if the announced figures were in accordance to the market's expectations and has nothing to do with the level of those figures. If amazon's stock went up is because the market expected its profits were gonna be worse than they actually were. It doesn't mean the market thinks amazon is awesome.

Why Amazon Is Special and Apple Is Not

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