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Apple retail vs. Amazon retail

As part of a continuing series on the iTunes economy I described how iTunes fits within Apple’s overall revenue and cost structure. The operation is a modest contributor accounting for single-digits percent of revenue and operating margins.

One additional question is how does iTunes compare with other non-Apple retail businesses. The obvious comparable businesses are Google Play and Amazon’s digital content businesses. Unfortunately we can’t compare iTunes with Google Play because Google does not reveal any details about Play revenues (or units sold/downloaded or payments to developers or any other data.)

Also unfortunately, we can’t compare iTunes with Amazon digital sales because Amazon does not provide that detail either.

What we do have is Amazon’s overall revenues (and operating margin.) So that’s what I have compared:

Screen Shot 2013-03-27 at 3-27-2.09.30 PM

Since we have Amazon’s overall retail revenues it seemed fitting to also add Apple’s physical store retail data on top of iTunes for additional perspective.

Here are some observations:

  1. Since 2008, Amazon’s sales grew by a factor of 2.18. Apple’s combined iTunes+Retail grew by 2.14x.
  2. Apple’s gross retail revenue was $11.1 billion in Q4, 52% of Amazon’s overall revenues.
  3. Apple’s operating income from retail in 2012 was $6.8 billion, over ten times Amazon’s $676 million.

Although Apple’s overall retail operations are only about half of Amazon’s they are far more profitable on an operating level. They are also growing at a similar pace. Amazon as an equity is priced at approximately twice sales. By that ratio, Apple’s retail business would be worth $70 billion. Of course, that valuation presumes that, as with Amazon, operating profits are disposable.

  • http://www.isophist.com/ Emilio Orione

    Another interesting comparison would be: how much iTunes economy impacts Apple’s device sale?

    The reason behind the aim to run the store at “break even” stated by Apple from the beginning was to create an electronic store to sustain hardware sales.

    The ecosystem is winning the market and the ecosystem is made by devices, digital content, digital store and accessories.
    Amazon only recently made hardware devices, but they sale them to sustain the digital store, the exact contrary of Apple.
    So break-even is no more the case for the store, due to the inflation of digital sales more than to a change in Apple politics, but is the store absolving is duty to be a strong leg for the ecosystem and boost devices’ sales?

    Is the iPhone/iPad/iPod/Mac selling more for the hardware it is or the apps/songs/books/movies it can execute?

    Perhaps a correlation can be found between the store economy and the hardware economy.
    One is already known and quite surprising: apple’s ios users buy more digital content than any other group of users using competing devices.
    It seems that people wanting to buy digital content is buying Apple’s products much more than products from other vendors.

    • Bruce_Mc

      “Amazon only recently made hardware devices, but they sell them to sustain the digital store, the exact contrary of Apple.”
      Amazon (probably) sells digital products to sustain their overall growth. It seems everything Amazon does is for growth, rather than profit.

      • http://www.isophist.com/ Emilio Orione

        It is believed that the short term growth will make profit in the long term, I don’t see any other explanation for wall street evaluation of the company.
        Anyway you are right, but sustaining the store means sustaining the overall growth.

      • Jocca

        I do not think the street’s valuation of AMAZ makes any sense at all because the company’s business model is based on very low margin sale compared to Apple’s. No matter how much Amazon can grow, its net revenue will hardly catch up with the valuation of its stock. As a matter of fact, the p/e and value of AMAZ have risen in lockstep with each other ever since I started to track the stock and so I will stay away from it. APPL is a way better investment, the number provided in this article does not even chart the revenue from Apple’s electronic commerce which is way bigger than that of its physical stores.

      • mjw149

        Well, in every other market, eventually the low end players move up. GM begat Cadillac, Toyota begat Lexus, Nokia begat Vertu.

        So I think the implied logic of the Amazon pricing makes sense as a long term play, however, that doesn’t mean that Apple is priced right. Cadillac didn’t put Mercedes out of business, after all. Apple’s model is durable and surprisingly self-reinforcing. Having the single well defined hardware and platform creates a surprisingly robust digital ecosystem. Why did I pick an iphone? Because it gets all the games first and most of the apps.

        Amazon investors should take a closer look at the details here, all the same. Fire has lost momentum and has no enterprise potential, Amazon auctions/third party sales are a mess, other online retailers have gotten strong and Amazon’s media investments (outside of books) aren’t going well. Their own video service is surprisingly bad compared to Netflix, considering that their own servers host both services. Their low end curated apps platform won’t work in phones (unless they are their own carrier, the carrier costs completely subsume the phone costs). Amazon is hitting a middle age crisis. It’s between a lot of things right now and the focus has been lost. Though I think they’ll end up in the right place, eventually.

        Their strongest stuff now isn’t the retail stuff, imo. It’s their cloud stuff, the potential of the robotic warehouses/shipping and digital sales. In other words, they’re closer to a MS or Ebay or Google (partner/business process-focused) than Apple/Nintendo/Mercedes (packaged product focused). They should focus on that stuff and keep the consumer stuff on cruise control.

    • Mark Jones

      Apple doesn’t run the iTunes store at break-even only to sustain hardware sales; Apple does it to also commoditize digital content sales (and put profit pressure on Amazon, and anyone else who might want to undercut Apple in selling digital content). (Each of the big players – Apple, Google, Amazon, Microsoft – are trying to disrupt how the others monetize their products.) However, back in 2002, iTunes was a defensive move (and thus, run at break-even) to ensure that its iPod and Mac products would always have digital content (since Microsoft controlled wma/wmv and RealNetworks controlled real audio.)

      Amazon sells hardware at break-even to promote all its sales – not just for digital content, but also physically shipped content. Each Fire is a customer-personalized storefront; Apple has 400 retail stores, but Amazon has millions via Fire (and more on the desktop), and will soon have more when it releases its smartphone. Finally, Amazon sells hardware at break-even to commoditize device sales and put profit pressure on Apple and other device makers.

      Amazon seeks growth instead of profit for now because online buying is still just a small portion of all retail purchases as the percentage of people who have bought online is still a minority (globally), and even those who buy online make less than half their purchases online. You know, Walmart, Target, Costco, Best Buy, Apple, Macy’s, and thousands of other retailers are still out there.

  • Vince Chen

    It would also be interesting to compare Apple’s P/E with Amazon’s P/E. I wonder what would Amazon’s market cap be if it traded at Apple’s P/E.

    • JS

      That would be a negative number.

      • ppetersson

        How about Price/Sales?

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Seeking Alpha has a writeup about every two weeks justifying AMZN share price as terms of gross revenue and not profit.

      • Gregg Thurman

        Seriously, you can’t be considering Seeking Alpha as an authority on anything other than self-promotion by the authors. Those that write for Seeking Alpha are the single largest cast of write very well about something they know very little in the world.

        Nothing on Seeking Alpha is vetted or checked for completeness or accuracy.

        By and large, Seeking Alpha is a venue for posting creative writing finals.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Many of them, Yes (the ones that try to justify AMZN with Price/Sales for example). All of them, No (Paulo Santos for example).

    • http://twitter.com/asymco Horace Dediu

      Amazon’s P/E is, in effect, undefined.

      • Sacto_Joe

        A writer on 2.0 (Jonshf) recently suggested looking at the mirror image, E/P, as a way of quantifying undefined P/E’s like Amazon’s. He calculated that Amazon’s E/P was about -3.5% and Apple’s E/P was about +9.5%. I noted that turning this number into a fraction gives one the number of years to “pay off” the present stock price at the present earnings rate (not counting cash buybacks). That is, 10.5 years for Apple, 15.5 years for Microsoft, 25 years for Google – and never for Amazon!

  • http://www.facebook.com/smackfu Scott McIntyre

    I know you like to complain about other companies not releasing detailed data for comparisons, but why does Apple release all the detailed breakdowns if their competitors don’t? What is the benefit to them?

    • http://twitter.com/ChristianPeel Christian Peel

      I guess that it just provides a nice foundation that everyone in and out of the company can reference. I’m happy that Apple is transparent about current and past finance numbers, and less transparent about future products. I think others should do the same.

    • Jocca

      Because Apple is a very transparent company when it comes down to dealing with its investors and that is something that I do appreciate. It only makes all the other companies look a bit shadier.

      • JohnDoey

        But apparently many investors do not agree with you.

      • rational2

        Many “investors” are momentum traders gambling with OPM. They don’t care about anything but short term price movement.

    • ChKen

      Funnily, Apple used to get complaints, pre-iOS devices, of not providing enough detail from corporate governance watchdogs, usually concerning the breakdown of Macs.

    • oases

      It’s not a benefit to Apple. It’s a benefit to investors.

    • poke

      My guess: Apple doesn’t rely as much on these metrics (unit sales, revenue, profit, etc) internally and so doesn’t consider them proprietary. Companies like Google, Amazon and Samsung, being sales-driven rather than product/customer-focused, do use these metrics internally and so tend to be more opaque about them (i.e., at Amazon, product development might be driven by sales or revenue goals, at Google by ad sales goals). Basically, Apple shares more information about sales because it doesn’t care as much about sales.

      Note that Apple is VERY secretive about what it cares about most: its products, its processes and its culture.

  • Greg Lomow

    Apple has one other retail operation that can be added to the analysis and that is Apple’s ecommerce operations (ie goods sold through apple.com). It seems these sales would be relevant since it includes all of the same physical products that are sold via the retail stores (ie computers, phones, and tablets). In fact I’d argue that apple.com is even more relevant than the physical stores since apple.com is much more similar to Amazon’s online sales.

    • http://digitizedsociety.tumblr.com/ DigitizedSociety

      I wonder if apple.com is already factored into Apple’s retail numbers. I find it hard to believe they would break their eRetail numbers out from their physical store retail numbers.

      • http://twitter.com/asymco Horace Dediu

        I too wonder the same thing. I wish I could find an answer one way or another.

      • http://twitter.com/asymco Horace Dediu

        I received a reply via Twitter https://twitter.com/ifostore/status/317013866422865920 that Online sales are not included in retail segment.

      • mhikl

        That would only make sense; otherwise Apple would be skewing the numbers and that would look terrible.

  • Brrriiiaaallliiiaaannnttt

    Greetings, just want to confirm what is being portrayed. So everything that Amazon sells as a retailing middleman (e.g. Books, Electronics, Gardening Tools, Popcorn, Etc.) is only 2X what AAPL sells of just Apple products – hardware_software, & 3rd-party media content_apps?

    That seems like what is being portrayed, but just wanted to confirm (because that ‘blows my mind’ to say the least). If it isn’t, it would be good to clarify, as others may be misunderstanding as well.

    =====

    The similarities between growth rates is astonishing, especially over a 5+ year period, great info! Thank You…

    • http://www.noisetech-software.com/Home.html Steven Noyes

      Not quite. What you should have said is:

      “Greetings, just want to confirm what is being portrayed. So everything that Amazon sells as a retailing middleman (e.g. Books, Electronics, Gardening Tools, Popcorn, Etc.) is only 2X what AAPL sells of just Apple products – software, & media with the iTMS?”

      This is just the iTMS for buying App, Music and books. This does not include hardware purchases like the iMac, iPhone, iPad and accessories.

      Apple has 3 primary sources of retail.

      1) Apple Retail Stores. This is a traditional brick and mortar type presence.

      2) Apple Online Store. This is a traditional on-line store.

      3) iTMS. This is Apple’s online media outlet.

      What I find interesting is every study I found discussing or rating online retail sales only looks at Apple’s Online Store (#2 above) and disregards the much much larger iTMS. From what I can tell, Apple’s Online Store makes about 1/4 to 1/3 of what Amazon’s revenue. iTMS makes 1/2 of Amazon’s revenue. Together, I think Apple is with 20%-30% of Amazon’s online retail volumes.

      From what I can tell, Apple’s 2012 online store was worth between $8-$12 billion in revenue.

      • Sacto_Joe

        A fourth is via non-Apple-direct sales.

      • http://www.noisetech-software.com/Home.html Steven Noyes

        ???

        Would that not be under #1, #2 or #3? I assume you are talking about buying a printer at #1 or #2 at the time of purchase of a computer.

      • Sacto_Joe

        Apple’s retail is not the only retail that sells Apple, nor is their online the only online that sells. Maybe I’m being picky….

      • http://www.noisetech-software.com/Home.html Steven Noyes

        Wouldn’t that be part of their distribution wholesale sales but not Apple’s retail sales?

      • DanPierce

        Maybe he is referring to Apple gear sold at non-Apple stores like Best Buy.

      • Mark Jones

        I think both Brrriiiaaallliiiaaannnttt and Steven Noyes are incorrect. It’s
        in-between both answers. All of Amazon’s sales are 2x the subset of Apple’s sales that includes all sales at its 400+ retail stores (which includes all hardware, software, services, 3rd party accessories), plus its iTunes Store digital content sales, plus Mac Store software sales, plus only the Apple software/services sold through all of its other geographically-categorized operating segments (including the online, education, government, resellers/distributors, etc, that is associated with those segments).

        In other words, what’s excluded from the Apple number in Horace’s chart is hardware (iPod, iPad, Mac, iPhone) and accessories (AppleTV, Airport, TimeCapsule, etc, and 3rd party) sold through its geographically-categorized operating segments (including the online, education, government, resellers/distributors, etc, that is associated with those segments).

    • http://twitter.com/asymco Horace Dediu

      The data shows Amazon revenues as they report them, so yes, that includes everything they recognize as retail sales. The Apple data is two items: sales through their Apple Stores (physical retail) and iTunes gross revenues. iTunes gross revenues were discussed in a series of posts over the past few weeks. What is not included from Apple is their online store (store.apple.com). I don’t have any data on that channel.

      • Brrriiiaaallliiiaaannnttt

        @Horace, Thank you for the clarification, that helps…I’ll look back on the previous iTunes posts, I know they have been realigning business lines…

        ===========

        Would be interesting to see the ‘store.apple.com’ sales channel and its respective growth over that same period though…

        Why?

        1. Because Apple dramatically increased the promotion of that channel to take the load off the physical stores (Remember the original iPhone 3 cycles had no direct pre-orders at all, physical store only).

        2. Apple Store iPhone App – released mid-2008

        3. Apple promotions – Apple has increased the discounted online store promotion for Black Friday / Back to School / V-Day etc. considerably over the last several years.

        Anyway, if that sales channel data isn’t available, so be it…but it would be interesting…Thank You…

  • http://twitter.com/Alishsayd Alisher

    The risk/return profile for the two revenue streams is vastly different. Amazon does not need to come out with hit devices in order to maintain its retail business.

    • http://twitter.com/asymco Horace Dediu

      Indeed, and Disney, unlike Pixar does not need to make every movie a blockbuster in order to maintain its empire.

    • mjw149

      That’s no longer true. People like myself chose the iphone 5 not because it’s a brilliant phone but because of the ‘retail business’ aka the content. The games are better, the media management is better, the ecosystem is fuller and more reliable than anyone else’s. This is less true with new versions of Android out, but it’s certainly the case that people can buy Iphones despite their design (I think it’s too small and the controls are too fiddly but the games and apps are superior by far).

  • the Ugly Truth

    The “perception”

    AMZN can sell “anything to anybody”; all it needs is to control costs and the EPS expansion is exponential. Any “losses” in EPS is almost always attributed to “building for the future”.

    AAPL can only sell “premium cool gadgets”; the market for these pricey gadgets are limited. Hence, its PE may not command a premium as a slight hiccup in its sales (gadgets not cool anymore, no innovation, etc…) will lead to an EPS compression.

    • http://twitter.com/asymco Horace Dediu

      Anything to anybody? Apple has 500 million registered iTunes accounts with customers in most of the world’s countries. How many customers does Amazon have and in how many countries do they reside?

      • the Ugly Truth

        unlike you, I seriously doubt the majority of the street really understands AAPL. regardless of its registered users; the “street” continues to believe AMZN can do no wrong…hence, its nosebleed valuations.

        AAPL (while I have no empirical proof) is being systematically attacked by Sammy by:

        – copying slavishly and flooding the market with good enough copycat products.

        – wage a public PR public using recognizeable figureheads/media to lie and spin the truth..

        – short the stock with rumors; this creates doubt and frustration with shareholders…crappy stock price leads to resentment and dissention.

      • http://twitter.com/asymco Horace Dediu

        The first step to understanding the market (or a company) is to stop personifying it. It’s not an entity but a system and a process. Analysis involves breaking it down into components not building it up into an abstraction.

      • the Ugly Truth

        Absolutely agree if trading the market was devoid of any human bias. But it is not.

        Furthermore, there are usually 2 sets of information available – those that are available and those that aren’t publicly available. Isn’t it interesting why AMZN or Sammy wouldn’t release actual sales figures? This lack of info usually leads to “abstractions”.

        No amount of “breaking down the components” can justify why (for example) AMZN trades at a higher multiple than AAPL.

        How is AMZN valued then? …I would submit that it is an “abstraction”.

        I agree that good “data” should provide one with a great foundation to understand the market/stock when there is “no skin” involved.

        On a side note, I do appreciate your work on AAPL. There aren’t very many useful sites that would provide such level of analysis without a fee.

    • Mark Jones

      The “perception” is superficial. With Amazon’s thin margins, a slight hiccup in its initiatives or business processes, and Amazon incurs losses. Amazon needs to expand to new markets and to innovate to increase sales – most people aren’t buying online at Amazon by default (though possibly that’s true for those who have a Kindle Fire!!!) How much growth, profitability, and customer satisfaction is there with selling groceries? Or Subscribe & Save? Or Amazon Prime? Or what is the ROI for the Kindle Fire? As usual, Amazon has said very little, and analysts don’t seem to much care.

      With Best Buy’s local store price matching Amazon, I’ve been buying my higher-cost electronics at Best Buy because it is so much much much much easier to make a return.

      • the Ugly Truth

        superficial or not, the “truth” has not helped AAPL since November. why is AAPL, despite its fundamentals, trading less than market mutliples?

      • Mark Jones

        As you’ve already remarked regarding Apple, the ugly truth is that most investors doubt Apple’s business model will work in the long term. The “story” is out there that Apple with its Mac failed against the PC (without and with Steve Jobs), and that Apple has begun failing against Android smartphones (especially now that Jobs is dead) as shown by Samsung’s success. Because Apple is already the largest consumer electronics company, investors believe there are no further markets for Apple to disrupt that would have significant revernue or profit growth.impact.

        Investors have forgotten or been misled as to what really happened in the 2000s with iPod. The consensus today is iPod succeeded because no one else competed for a market that has no long-term value (unlike PCs and smartphones and tablets). Investors have also forgotten that the Apple Store, iPod, and iTunes show how Apple can move into seemingly unrelated (at the time) markets. Because of this and other factors, it may again take a long time for AAPL to reflect Apple’s success. One could argue Apple was succeeding from 2005 through 2012, but AAPL didn’t reflect it until 2012,

        Horace’s work has provided much insight these past few years. Hopefully, investors will incorporate his findings in their investment choices, rather than rely on the superficial story.

      • the Ugly Truth

        Exactly!

        Begs the question…given the quality of work that you see here using facts; why is the market swayed so easily by half truths (in this case…AAPL).
        Hence…the truth alone isn’t enough sometimes to make a difference (at least not right away).

      • Mark Jones

        Why is the market swayed? The market is made up by humans. Humans have the ability to see what they want to see when presented with the “truth”, whether it’s because of mental models, or being irrational, or emotions, or wanting to be deceived, or marketing, or you name it. We’ve all heard about how people who observe or even live through the same event still wind up giving very different descriptions and explanations. We are not Mr. Spock; we are Dr. McCoy or Captain Kirk.

  • Mark Jones

    Horace, did you make sure you didn’t double-count for Apple?

    Apple’s Retail includes all sales made at its 400+ retail stores – this includes hardware, software, services (like AppleCare, 1-to-1 training) and accessories. iTunes/Software/Services includes iTunes Store and Mac App Store, but also the software and services sales made in all the operating segments, including Retail.

    The overlap would be the software and services sales made in the Retail stores. Software sold at Retail has likely rapidly shrunk (due to having little or no shelf space), but services should be a little above the proportion of devices sold, to account for special Apple Retail-only services like 1-to-1.

    Also, if you’re looking for an apples-to-apples comparison, you’d possibly also need to confirm how Amazon accounts for digital content sales revenue, given what you wrote the other day about Apple’s two different schemes (non-agency vs. agency). So for Amazon, is it gross or just Amazon’s cut? (I’d think gross is most likely.)

    • http://twitter.com/asymco Horace Dediu

      A certain part of services could be double-counted but services are (a) a small part of iTunes (b) consist of cloud services which are not sold at retail. I also did think about the question of revenue recognition for Amazon content. My understanding is that they don’t use the agency model for their content retail but I need to confirm this. Any input would be appreciated. Note however that I did not include Apple’s online retail of other products (store.apple.com). That in itself would likely swamp the error. Hopefully this comparison will spur more research.

  • jago

    Horace, how do you estimate retail profits? Is it just based on Apple’s overall gross margins?

    • http://twitter.com/asymco Horace Dediu

      Apple publishes this information and I post several times a quarter details and further analysis. For example: http://www.asymco.com/2012/11/09/minding-the-store/

      • jago

        Thanks. So you are using Apple’s full operating income for the retail segment. Makes sense, but then it’s not directly comparable to Amazon, which must share profits from all sales with product vendors.

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