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The Anti-Apple

Building a successful business is hard. Many try, few succeed and those that do tend not to thrive for long. So success in business it should be respected. Especially in highly competitive industries like technology. The fragility of success however should also give one pause to think about how delicate a business model is.

The presumption that companies can shift business models at will is usually false. Businesses are balanced on a knife’s edge of dependency on multiple variables. Almost all resources are expended on preserving this balance.

This being my observation, I take issue with assumptions that large companies can “pivot” on a dime or that they can change their business models “when conditions are right”. Consider Microsoft’s dilemma. They have all the resources in the world and yet they could not pivot to take advantage of a change so mundane as a low power microprocessor (which enabled a mobile computer and hence a new ecosystem and profit model for software.)

Or consider the dilemma of Apple which after building a successful computer business which included system software, could not pivot to license that system software so others could build computers with it.

Or consider the dilemma of Nokia which had an early and large leadership in smartphones including having its own OS and platform and large volumes and users bases. It could not pivot to allow into an ecosystem and had all its advantages disappear.

Each company thought they could manage change but none of them actually did.

It’s with this thinking about inertial navigation that came to consider the idea that Amazon has a flexible business model which, though unprofitable today, will be profitable some day.

The premise that Amazon can, on a whim, change its business model from selling other people’s products at a razor thin margin while investing in capital-intensive distribution to selling other people’s products at a large margin while not investing in capital-intesive distribution is not credible.

I would argue that Amazon’s existing business model is a direct consequence of the market it’s in: that it could not be anything else given the circumstances it finds itself in. Enlightenment may be an illusion.[*]

That’s not to say that there is no wisdom in the management of Amazon. Quite the contrary; recall the respect that’s called for in creating a great business. Managing the business to this point was a work of decades of vision and creativity.

What I take issue with is the premise that Amazon is the “anti-Apple” in its hunger for growth and patience for profits. Apple has its own “Amazon-like-business”: iTunes has been growing at a steady 25% or more and it also has its ancillary zero-profit hardware analogue to the Kindle called Apple TV.  iTunes is a great business in the Amazon vein, harvesting hundreds of millions of users (and their credit cards.) Presumably iTunes could also some day “flip the switch” and become profitable, but something magical needs to happen. Something like becoming a payments processor or retailer of other things. Analyst beware however. There might be conditions that make such switch flipping extremely difficult.

At an even deeper level, Apple and Amazon are much more alike than they are different. They are both hired for similar jobs (convenience, ease of use and a controlled, predictable environment for average users interacting with technology). They both focus on delighting customers and controlling all the variables which come into contact with that delight. They both have long-term views and are driven by vision rather than competition.

Where they differ is in others’ perception of sustainability. Whereas Apple is perpetually given an expected lifespan of less than a decade, Amazon is expected to have an indefinite lifespan. This is because Amazon is seen as having no competition and Apple is seen as having infinite competition. In other words, Amazon is perceived as a monopoly and Apple is perceived as the  innovator that is in a permanent state of being disrupted by the low end.

I disagree with both assumptions. I’ve always thought Apple fragile but dedicated to moving into new markets as older markets are disrupted. It’s a tough strategy and one which (literally) nobody believes possible. But I’ve also thought Amazon’s monopoly status fragile. This too is not a popular idea but the company depends on many variables.

Retail is hard and it is being disrupted by technology wielded well by Amazon. But it’s also subject to further disruption. Amazon’s job to be done can be done by alternatives. Buyers are typically hiring Amazon for convenience, not just price and ease of use is where the value is. But again, new information technology which makes shopping, discovery and delivery of products directly from the vendor, bypassing the aggregator (i.e. retailer) could shift value along the value chain yet again.

By the time Amazon reaches some point of monopoly in distribution it could be too late to make the switch to profit generation.

I don’t want to suggest that failure is inevitable, but I want to point out that success is not certain by any means. Disruption happens.

* It’s possible that Enlightenment is also an illusion at Apple. Even if they once had it, there are forces which act on companies that make them lose their wisdom.

  • enigmaticleo

    There is so much here that I find myself agreeing with. The question however is: Does Amazon need to generate profit (ever)?

    • The Silver Fox

      ” Does Amazon need to generate profit (ever)?” I’ve pondered that question myself a few times. It would seem that Wall Street has given Amazon a blank check, so for the foreseeable future, it would appear that the answer is “no”.

      I’m also struck by the parallels between Amazon’s strategy and Walmart’s disruptive strategy when the company was founded. Walmart took out smaller companies one at a time, and slowly established itself as the king of retail. In terms of profit, Walmart blows Amazon out of the water, but maybe that will change over time.

      By the way, before the haters attack: I love Amazon (buy pretty much all my stuff there) and I think Bezos is a genius comparable to Steve Jobs

      • obarthelemy

        Actually, owning Amazon shares has been vastly more rewarding than owning AAPL recently.

      • reply

        You shouldn’t start a sentence with “actually” when it’s unrelated to the comment you’re replying to. Actually, I guess you shouldn’t post a reply at all in that case.

      • obarthelemy

        Actually, my point is that Wall Street is being nice with Amazon because Amazon, in spite of no profits nor dividends, have provided value through stock price growth. Got it now ?

      • http://www.swift2.blogspot.com Swift2

        So the gamblers are putting lots of money in there, betting on a future unstoppable monopoly? They giving you play money.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        That’s a catch-22 because the stock price is a direct result of Wall Street loving Amazon.

        They love Amazon because of all the things they promise. They have so many pots on the stove while analysts are clamoring to find anything Apple might do next.

      • obarthelemy

        Agreed.

      • Kizedek

        Uh, the result can’t be the reason. Actually, you are extremely tautological in a lot of your “reasoning”.

      • reply

        Definitely a tautology.

      • obarthelemy

        indeed, but isn’t that how market work ? How many bubbles to we need to get the point ?

      • matthewmaurice

        Not really. Yes, depending upon when you bought, a share of AMZN may have more unrealized gain than a share of AAPL, but that’s not very “rewarding” in a real sense. On the other hand, over the last year, each share of Apple has generated $14.05 of dividends, a much more tangible reward if you ask me.

        As AAPL has shown, Wall St. is a fickle lover, and they can turn cold on you quite quickly. When they do, all that unrealized gain goes away, but those dividend checks have already been cashed.

      • addicted4444

        Except for the fact that it takes far more time, effort, and money to setup so many B&M retail stores the way Walmart did, than it does to setup an online storefront. In other words, it will be far easier for Amazon competitors to establish themselves than for Walmart competitors.

        Additionally, Walmart’s strategy was deliberately targeted towards tiny rural towns for the longest time, precisely to avoid bigger competition. Amazon, on the internet, does not have that luxury.

      • The Silver Fox

        “Additionally, Walmart’s strategy was deliberately targeted towards tiny rural towns for the longest time, precisely to avoid bigger competition. ”

        I’ve noticed that in the UK (where I live), Amazon has targeted lots of smaller business (sometimes directly, and sometimes via Amazon Marketplace partners). That’s where I draw a parallel with Walmart’s early strategy (i.e. not immediately going head to head against the largest incumbents).

        If you add in Amazon’s aggressive tax strategies (in the UK they pay virtually no corporation tax), they can basically take out any smaller business they want. Over time they can then attack larger incumbents. Just my personal speculations – of course I may be wrong.

    • Walt French

      Amazon has been in business for 18 years, some kind of combo of insight and great timing as far as an internet-based business is concerned.

      They had some great disruptions in low handling and inventory costs, some clever optimizations on shipping costs, and a brand new refresh of the “catalog” / mail-order business thanks to the new technology. These innovations are win-win.

      They also exploited some not-so-great advantages in bypassing states’ sales tax laws (thanks in part to some friends in Washington) and tax arbitrage of being able to pay staff in a state with no income tax, and managing their corporate taxes by state, too. Tax arbitrage is a zero-sum game for the economy, maybe worse.

      Amazon has plowed its cash flow into internal investments, which is good (and investors seem to agree). But the whole story of disruptions is that investments in old tech turn worthless very suddenly. As Horace notes, Nokia’s $8 billion in cutting-edge, increasingly-vital mapping technology turned out to be worth far less, as Google and others upped the game of aggregating and managing the information. Amazon’s situation, as he notes, *could* suddenly turn just as rapidly, leaving Amazon needing to tap debt or equity markets for fresh capital *if* some other clever innovator shows up.

      The reason that no company exists forever is that new ideas keep bubbling up at places that have the incentive to try things differently; when those work better than the old ones, the old capital goes down. Business acumen — and Bezos certainly has plenty of it — can mean that Amazon lives longer than others, but if he needs new capital he’ll have to face investors who want to see some signs of how they’ll get paid back.

      Apple has been so stunningly successful that it has nearly saturated some of its best markets, e.g., US phones and US laptops. As Horace notes, they recognize they have to find new businesses, as they have. But they face relatively few actual competitors.

      Amazon, however, appears to have more headroom and has been steadily expanding into new businesses. Amazon is more subject to competition both from big — eBay, CraigsList, Google, Apple — and small — thousands of small co-lo companies, markets, exchanges, even Square. Eventually, it faces the same type of challenges and will need to keep honing its current model.

      • Space Gorilla

        That is an excellent point that most miss about Apple, in the segments they operate in Apple faces very little actual competition. And yet analysts continue the hand-wringing about competitors that operate mostly in segments Apple does not.

      • addicted4444

        I believe there is an assumption that Amazon’s internal “investments” are for growth, and not part of the cost of doing business. However, what if that assumption is false? What if Amazon NEEDS to invest in more datacenters and warehouses to keep treading water the way it does now?

        If that is indeed the case, then the bull argument for Amazon disappears.

        I find it interesting that since its inception, Amazon has made only a combined $2bn in net profits. In 18 years, that is. What leads us to believe that the next 18 years will be any different (esp. since Amazon has not continually grown margins, and in fact has swung back to making losses).

      • fivetonsflax

        Has Nokia written down the Navteq acquisition? A casual web search finds no evidence of such an event. If it’s not worth $8B, what is Navteq worth now, I wonder.

    • templewolf

      The answer is likely no. But as an investor profits mean dividends, buybacks and future investment to capture greater profits. We know Amazon can make investments to capture more revenue, but without profit where is the incentive for ownership.

    • Sacto_Joe

      What do Amazon and Apple have in common? Revenue growth. Gobs of it. But interestingly, both companies are seeing the rate of revenue growth start to tap out. For Amazon, we see growths in the last three fiscal years of 40% (FY ’10), 40% (FY ’11), and 27% (FY ’12). For Apple, we see growths of 52% (FY ’10), 66% (FY ’11), and 45% (FY ’12). In price per share, we see Amazon going from about $120/share three and a half years ago to about $300 a share today, about a 150% growth. For Apple, we see them going from about $190/share to about $465/share today, or about 145% growth.

      (Over the last four quarters, Amazon has earned about $90B. This compares to $61B in fy ’12. In the last four quarters, Apple has earned about $170B, which compares to about $157B in fy ’12. Of course, Amazon had a monster quarter in July-Sept ’12, and that will drop out this quarter, while Apple had a fairly weak quarter in July-Sept ’12 that will drop out, so unless Amazon pulls a rabbit out of its hat, its yoy revenues are about to drop precipitously, bringing them more into line with Apple’s yoy revenue.)

      What does all this mean? It suggests to me that the market is valuing Revenue much more strongly than Earnings for both Amazon and Apple. If true, and Amazon has another weak quarter this quarter like the last three quarters, then I would expect Amazon’s share price to nose dive.

      Looking into the future now, Apple seems primed for good revenue growth. And again, if Revenue is being valued over Earnings, that bodes well for Apple’s share price to rise. And looking even farther into the future, Apple, which has a proven ability to create industry-wide disruptions, would appear to have the potential for continued growth. I’m not convinced the same can be said for Amazon.

      I like to use the analogy that Amazon is like a shark: It needs to keep swimming at the low margin end of the tank just to keep growing. Apple, OTOH, is like a mammal. It has lungs, and can keep evolving into a more and more complex organism.

  • beidaren

    When amazon achieves monopoly status in distribution infrastructure, Washington trust busters can force it to share or break it up. Hence Bezos needs to own politicians. The cheapest way to own politicians is owning WASHINGTON POST.

    • The Silver Fox

      Ha ha. At last the Washington Post purchase makes sense! Pity Apple didn’t buy it, then they might have avoided the ebook price fixing case.

    • hannahjs

      Jeff Bezos didn’t buy the Washington Post as political insurance. He’s diversifying Amazon’s services. At the same time, he’s shoring up the slippery slope that Journalism is clinging to.

      • James

        Of course he is.

  • ADB

    So, why can’t Apple be the disrupter of Amazon? iTunes would be the portal and the suppliers deliver directly from their warehouses. No need for capital for Amazon warehouses & overhead. The idevice then becomes the tool to order, much like Android supports the Google ad model. Location awareness, object recognition – think Shazam, iTunes account, security… add Siri.
    After a night of heavy drinking don’t you just want to roll over grab your phone and say “Siri, I need my hangover breakfast delivered now”… “your bacon and egg McMuffin has been ordered and will be delivered in 15 minutes. Should I have another bottle of Tylenol delivered with your breakfast?”

    • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

      When “deliver directly from the warehouse” will mean “teleport things directly to the customer on an almost zero cost” then iTunes and many other companies will be able to disrupt Amazon. Until then, the delivery part is a pretty complex and costly logistics puzzle and Amazon.solves it very efficiently.

      • Tatil_S

        Solves it very efficiently? What is the metric for this assertion? Walmart is cheaper store than Amazon and it is profitable. It seems Walmart is the one solving this problem efficiently and Amazon is only able to hold on to its customers by losing money on every first party sale.

      • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

        That is a reasonable question, although it extrapolates a bit too much my assertion. I do not claim that Amazon is the most efficient retail organization in the history of mankind, just that they are very good at it. Slim profit margins fit pretty well with the predictions of economics theory regarding commoditized markets. Every new wave of innovation in retail came with a profit margin decrease, compensated by high inventory turnover and higher number of transactions. Walmart has lower profit margins than the dominating retail chains before them. Amazon’s attempt to combine razor slim profits per transaction plus high inventory turnover and a huge number of transactions is a logical conclusion to the history of the low end (“general store – like” might be a better term) retail sector.

        Amazon might not be a successful profit story, but I do not see why they would shut down their business as long as the funding stays open and investors keep on hoping (market efficiency seems highly overrated if you look at how Amazon is treated). If nothing changes (cheap teleportation is my suggestion :-) ) they will be hard to disrupt as long as they can keep this way of operating. How they will start to make money is another story and a mystery for me also.

      • Tatil_S

        Slim profit margins fit the theory and I agree it should be more or less the permanent ways of doing things on the internet where price comparisons are very easy. However, in such low margin environments the companies with the highest costs end up going out of business. Amazon is an online retailer wrapped together with a cloud computing business. If it is unable to make money on the retail side despite the profitable, it seems, third party sales, while its competitors can make money, why burden AWS with the retail? Without the irrational exuberance of the market, I doubt Amazon could avoid a spin off or a substantial realignment of its retail business, such as getting out of streaming movie business.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        You do notice that the thing Adrian said was “Apple can’t disrupt Amazon” and you interject with “Yes but Walmart is also good if not better than Amazon”.

        Following the laws of logic all you said is that Apple then also can’t disrupt Walmart. Nothing more, nothing less.

        So you actually have no point at all in favor of Apple, e.g. you are arguing a straw man.

      • Tatil_S

        What makes you think my comment has to have something about Apple, when the discussion is about Amazon’s efficiency and this original blog post is primarily about, let me check, oh yes, Amazon?

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        Maybe because the post you are commenting on is comparing Apple with Amazon?!

        Did you really just ask me why I thought you were arguing on-topic?

        Obvious troll is obvious.

    • tmay

      Well, isn’t that pretty much Apple’s modus now? FedEx pickups up a shipment of iPhones in China, flies them to Anchorage, splits shipments to to various FedEx logistics centers, and drivers spread them out to customers. Apple doesn’t need to touch them. Of course, Apple also has retail stores and a warehouse on each coast, and a very small number of SKU’s for hardware.

      Maybe the cost is higher for Apple, but the logistics investment is picked up by someone else, in this case FedEx. Will FedEx, UPS, USPS end up being the disruptors of Amazon in concert with Google? But I don’t see Apple entering a low margin business.

  • obarthelemy

    I’m not sure I get your point.

    Apple are a maker of trendy gadgets, with an ancillary business in content distribution.
    Amazon are an e-tailer, with side businesses in cloud computing and physical goods logistics. And own-name brands like any retailer.

    I understand that the la

    • Kizedek

      Then let me spell out Horace’s points for you:

      1) The businesses are more similar than at first appears.

      2) Apple is no more fragile than Amazon, and Amazon’s success is no more assured than Apple’s.

      Trendy gadgets? Apple sells more laptops than any other single computer maker. Apple products are consistently the top sellers of their kind on Amazon… and this is because Amazon forgoes its margins/retail markup and sells Apple products at about 50-100 bucks less than anywhere else. That business for Amazon could move to another retailer tomorrow. Point made.

      Logistics? Apple does very well on logistics, thankyou. They just move mostly their own products from one side of the world to your doorstep, with fewer stops (warehouses) in between. I think both companies use third-party delivery like UPS or FedEx. Amazon is really no better at logistics than IKEA. I have everything that IKEA offers at my local store on my doorstep, or they will deliver.

      A lot of Apple’s physical product retail business (apart from iTunes) is done online, and “E-tailing” owes a lot to Next and WebObjects.

      • obarthelemy

        Best sellers… let’s see:
        laptops: http://www.amazon.com/Best-Sellers-Computers-Accessories-Laptop/zgbs/pc/565108 . Nope.
        tablets: http://www.amazon.com/Best-Sellers-Electronics-Computer-Tablets/zgbs/electronics/1232597011 . Nope
        smartphones: http://www.amazon.com/Best-Sellers-Cell-Phones-Accessories-Unlocked/zgbs/wireless/2407749011 . Nope.

        0 out of 3, no wonder you never source your claims.

        Also, yes, Jobs invented e-tailing too, while at Next. Others where holding it wrong. Hence Next’s huge success.

      • Kizedek

        I said consistently. I didn’t say they are #1 right now. Anyway… out of ALL laptop models by ALL makers, Apple (which makes very few models) has 3 in top 10 — and such a performance is very consistent.

      • Space Gorilla

        I think we all need to stop feeding the troll. Just let it go. I need to take my own advice as well. Although it is hard not to step in and correct such flawed analysis.

      • fring

        I’m thinking of calling it the DbD syndrome.
        Drive-by Dementia…but really there is no difference to trolling.

      • mshipe

        You are entitled to your own opinion but not your own facts

        Best sellers… let’s see:
        laptops: http://www.amazon.com/Best-Sel… . Yes.
        tablets: http://www.amazon.com/Best-Sel… . Yes.
        smartphones: http://www.amazon.com/Best-Sel… . Yes.

      • yoshipod

        You are going by Amazon’s sales to determine what the best selling products are?

        You know they have these places called the Apple store where you can also buy Apple products, you can even order them online….from Apple.com. Really, who buys an ipad or an iphone from Amazon?

        And if you knew your history, you would understand the importance web objects played in online sales. Dell used that to build their online empire in the early to mid 1990′s. As the first company to do $1B/year in online sales, it was webobjects that ran it all.

      • obarthelemy

        Read the discussion, it’s about what’s the best sellers on Amazon, so yeah, I read Amazon’s bestsellers lists.

        As for WebObjects being used by Dell… even that’s true, so what ? They used something else before, something else after, and others were using something else at the same time.

    • http://www.lazyprogrammers.com Eugene Kim

      “As long as people buy stuff over the Internet, Amazon will sell stuff. they don’t need to come up with a brand new product category every few years, only to see their marketshare evaporate to 15-ish percent after a few years.”

      That’s exactly the assumption that Horace covered near the end of his article; that Amazon is expected to have an indefinite lifespan; that Amazon has no competition. He makes the point that advances in information technology make disrupting Amazon lower in the value chain easier, and that Amazon might be unable to “pivot” and start charging more and increase profitability, simply because their edge is based on those razor-thin margins.

      • obarthelemy

        Sure. Because Amazon don’t have the customer relationship, databases and the IT power to pivot into anything, when warehouses become obsolete (which won’t happen).

        Put another way: Apple know which customers have too much money. Google knows what customers look at. Amazon know what customers buy. I’ll take Amazon.

      • Vega

        Coming from you, this is hardly a surprise. I enjoy a contrarian from time to time, but your constant, often harldly reflected negativity towards Apple is tiring.

      • TheEternalEmperor

        “Apple know which customers have too much money. ”
        Yet another variation on “rich, Apple sheep” is hardly contrarian and is certainly NOT any real insight.

        A more ludicrous statement would be hard to find.

      • peter

        As a source of conventional wisdom you provide a valuable service.

      • obarthelemy

        Sorry, I’m just an unwashed coutnry bumpkin, and no longer enthralled by word substitution (“job to be done” for “use”, etc) nor the latest business theory. In my experience, they last about as long as the coattails of the temporarily successful companies they were dreamt up from.

      • Kizedek

        Ah, I see where you are having some difficulties. Many would assume that you, as a French person, are familiar with subtlety and nuance.

        It’s not strictly a case of substitution, but an effort to be precise (which in Analysis is an asset). You see, “use” and “job-to-be-done” have subtle nuances, possibly in how we are asking the question.

        As in:
        1) What’s the *job-to-be-done*?
        “What do you need to do?” “What was your intention or purpose in buying that particular product?” “What is your hope for it?” What are your expectations?”
        Possibly unconscious until reflected upon.

        Versus, 2) Describe your *use* of it; How have you actually *employed* it?
        “How did you find using it?” “What did you actually accomplish with it?” “What do you find yourself doing with it?” “Does it meet your expectations?”

        Possibly a source of irritation or pleasure, depending on answers to #1.

      • obarthelemy

        No it isn’t. It’s a trick to be pompous and separate the illuminati from the unwashed masses. The best way to rebrand old ideas as new stuff is to change the words around. You start with “job to be done” and end up with “They both focus on delighting customers and controlling all the variables which come into contact with that delight.” Fluff, but highfalutin fluff.

    • Roland

      I don’t think it is correct to call apple’s products “trendy gadgets”. Many people purchase apple products to get work done. A modern mobile is hardly a “trendy gadget”. Many companies provide these “trendy gadgets” to their employees so they can do their jobs better and more effectively.

    • FalKirk

      “Apple are a maker of trendy gadgets…” – obarthelemy

      The shallowness of that statement is breathtaking.

      • Chris

        Right. Computers and mobile communications devices–trendy indeed! He must think we’re going back to the stone age in a few years.

      • obarthelemy

        If that’s untrue, why is “Designed in California” featured on all products, same as “Paris, London, Milano” or somesuch for other brands ?

      • Kizedek

        Probably because the designer actually lives there, and not in Bangladesh where the product is sewn together.

        But what that has to do with the utility and value of a Mac as a computer vs a Prada shoe as a shoe, I don’t know. I really don’t see what one has to do with the other. I get all kinds of people saying good things about Macs, but I don’t know a single person with a pair of Prada’s, let alone anyone giving me a good reason to get a pair.

        How do you function in life making such snap judgements and false comparisons about things you know so little about?

      • obarthelemy

        Maybe because I do know people who were Prada. Not because of the brand mind you, but because they are sooo comfortable and well built and well designed.

        To me, a fake attribution (“California” is meaningless, but “Cupertino” is not glamourous) is a clear indication that there’s over-the-top marcom going on.

      • mdelvecchio

        pride in locality != trendiness

      • obarthelemy

        That’s not what it is, “California” is not even a town, it’s a very large state. But the actual town would probably not get enough recognition from the people who care about these labels.

      • Mayson

        “Apple are a maker of trendy gadgets.”

        True, but beside the point: the fact is that those “gadgets” also satisfy needs and desires, and do so better than their competition, by all the surveys I’ve seen (except a few of those pumped out by Strategy Analytics). And the latest generations of those “gadgets” are getting picked up by businesses at increasing rates.

    • FalKirk

      “Apple are a maker of trendy gadgets…” – obarthelemy

      The shallowness of that statement is breathtaking.

    • pricedumping

      If they are not aiming for a monopoly then why do they need to force competitors out of markets with price dumping/predatory pricing, something which is anti-competitive and illegal in many countries?

      • obarthelemy

        For the same reason that Apple force exclusive and predatory contracts: it makes business sense ?
        BTW, Apple, not Amazon, are the ones being sued about those…

      • templewolf

        There is nothing predatory about the way apple negotiates. If your referring to the Most Favored Nation clause, then it has been around long before Apple and others can enter the market and sell the product at the same price. Now what Amazon did in the eBook market, selling books below cost is anti-competitive and I agree with the use of the term “dumping”.

      • pricedumping

        I don’t know what “exclusive and predatory contracts” you are referring to.

        I guess I need to be clearer for you. Predatory pricing makes absolutely no business sense unless, somewhere in the far future, it either results in an exploitable monopoly where you can raise prices without competition or a monopsony where you can force your suppliers to lower their wholesale prices.

      • pricedumping

        Or, obviously, both simultaneously, which is what people think Amazon’s eventual angle will be.

    • Cogito

      Please, everyone, don’t feed troll. You are not going to neither shame him nor enlighten him.

      O: Why don’t you post one of your ‘original and constructive idea’ on any subjects. I am sure Horace will not mind if you post it in his blog.

    • mdelvecchio

      “Apple are a maker of trendy gadgets,”

      i didnt know that my mobile phone and home & office computers were “trendy” — i see them as invaluable, inseparable tools i need in order to do the things i do. i shop for the best tools, not the trendiest….

      get it thru your head.

      • obarthelemy

        Shure. As are clothes, cars, and home electronics in general…

        Maybe not you, but a large segment of the market is in it for the ego boost.

        Also, I’ve been asking for *months* what Apple does that Andorid doesn’t, and apart from “music creation” (which I brought up myself), I never got any valid answer. I’m sure Apple gadgets do a lot of valuable things. I’m also sure Android gadgets could do the same at 1/2 or 1/3 the price.

  • John R. Moran

    To play devil’s advocate, I think the assumption has always been that Amazon will eventually begin to slowly raise prices as as their customer base size, loyalty, and ecosystem lock-in reach a tipping point.

    Is that really a feat of business model reinvention on the scale Microsoft faces?

    • Doctor Biobrain

      Well the reinvention is the theory that they can raise prices and stop pushing new services to the point of making real profits, and still keep those customers. I mean, if they want a billion dollars in profit, someone’s got to pay for it and it’s going to be us.

      I don’t know about you, but if I could get cheaper products from someone else, I would. I mean, what do they have *besides* their low prices to keep me as a customer? Even as it is, I often use their website while shopping to check product reviews, and then buy the product in the store if it’s the same price as on Amazon. I’m a regular Amazon customer and am currently waiting for two shipments right now, but my loyalty extends only to their low prices and free shipping. I don’t see how they could keep me if they expect to make real profits on my business.

      • John R. Moran

        Agree Dr., but that’s a fairly common issue retailers face – can I get growth through raising prices and still keep (most of) my customers? And Amazon is clearly thinking about its non-price hooks and loyalty (things like Kindle and Prime) that would presumably prevent many people from switching if prices were 2-3% higher.

        My point is that doesn’t feel like “changing the business model” to the same extent as, say, Microsoft making hybrid tablet/laptops, or Apple making smartphones / entering bricks-and-mortar retail years ago, etc.

      • Doctor Biobrain

        But they’re losing big money on Kindle and Prime. If they want to make real profits, they’d have to charge more for ALL of these things. Sure, you like Amazon Prime now (as do I), but imagine if they charged you what they’d need to charge in order to make a 20% profit on it? Would you still be loyal? And a 20% profit margin *still* wouldn’t give them Apple-sized profits.

        And that’s what we’re talking about. Amazon’s entire business model rests on their ability to sell things cheap while expanding into new areas. This isn’t a regular pricing decision to mark up their prices by 2-3%. This would be an epic shift in how they do business, which is so engrained that you’re still assuming they could give you free 2-day shipping and cheap Kindles while making real profits. But if they want profits, that’d have to change.

        I just bought a new iPad charger from Amazon after losing my last one, and while Apple made a sizable profit on the sale; Amazon lost money because they shipped it for free. And if I had to pay $13 for shipping, I just would have bought one at Target since I’m not going to pay $13 shipping on a $19 product. That’s Amazon’s business model and changing it will doom their company.

      • John R. Moran

        I disagree that they’d have to charge more for Kindle and Prime. There are plenty of businesses that give away something at near-cost to make money off a complement (see: Gillette, Google, even Apple with iTunes!). They could focus on making money on the content and use the devices as a platform.

        Also disagree that they need “Apple-sized profits” to ensure their company isn’t “doomed.” If investors expected them to reach 30-50% margins, their valuation would be insane! A 5% net profit margin (typical of retail) would be fine.

        So the question is, could they reach a point where they could raise prices 5%+ and keep most of their customers? Maybe you would leave, but I bet a lot more wouldn’t – especially 5 years from now, when their model is even stickier (maybe my Kindle book library really grows…) and other competitors have long since left the business.

      • JohnDoey

        You would probably be surprised how easy and cheap it is to switch from Amazon to a small group of 3–4 other stores. It is likely that most of your Amazon purchases already come from only 3–4 stores.

        I am much happier since I stopped using Amazon. It was like removing a level of faceless beaurocracy and bad vibes.

    • David Olson

      Is that really a feat of business model reinvention… ?
      .
      Yes. I think part of Amazon’s business model is keeping Wall St. happy so the stock price is high. Right now Amazon has it all. Only when they try to collect on expectations will there be real numbers to show that their plans will not be as successful as many hope. Amazon is wise to keeps its current model as long as they can.

  • http://madeby.hm/ Henning M ツ

    We all need to profit however there is a difference in how greedy you feel you have to be in order to succeed. What I like in particular about Amazon Web Services is that they seem to carry savings over to the customer and not the shareholders. Something Apple has NEVER done. The continue to keep high margins on products they easily could have made cheaper. Ever bought an extra cable for your iPhone? Or perhaps a new battery for your old Macbook Pro? Amazon IS a very different company than Apple (especially without Steve Jobs.) Listen to Jeff Bezos once and it is very clear.

    • aws

      They need to pass cost savings on their web services onto the customers because it’s a highly competitive field that they’re not always cost-competitive in.

      • http://madeby.hm/ Henning M ツ

        It is Amazon that is forcing this competitiveness by always lowering prices. They could have taken another route and based their business on high margin profit and mainly big enterprise customers.

        Imagine if Apple started to do the same? Great products at lower prices? It would push innovation because you have to in order to survive.

        Before it was being small that did it for Apple but he cat got fat and lazy. We will see if they have what it takes to innovate and not just make money.

    • Doctor Biobrain

      Uhm…but Amazon *isn’t* profitable. And the reason they’re not interested in profits is because they’re trying to build marketshare. This isn’t altruism or friendliness. They’re trying to drive their competitors out of business.

      And the theory is that some day they’ll be profitable by raising their prices, once they’re no longer threatened by the competition. The idea that Bezos is keeping prices down because he’s not greedy is a joke. The man is wealthier than any of us have any hope to be, and could even plunk down $250 million to buy a newspaper as a hobby. Low prices isn’t Amazon’s way of thanking their customers. It’s their way of keeping them. And if you like their prices, you better hope they never succeed in their ultimate goal of killing the competition. They’re just Walmart with a flashier website.

    • JohnDoey

      In 2001, I paid about $4500 for a PowerBook and in 2011 I bought essentially the same Mac for $1300.

      In 2001, I paid $499 for an iPod 4GB. A few months ago, I bought a 16GB iPod nano with touch for $99.

      In 2003, I paid Emagic $2000 for the complete Logic app. Today that costs $199 from Apple and installs itself.

      The cheapest portable Apple computer in 2009 was $999, then in 2010 it was $499, then in 2011 it was $399, then in 2012 it was $329.

      Mac OS 2003 was $129 and yet the 2013 version is $19.99.

      MacBook Air was $1799 to start in 2008, and by 2010 it was starting at $999.

      So what are you even talking about?

      Seems like your complaint is really about the high quality of Apple cables and accessories. You know, the ones that didn’t kill 2 people recently? When you buy an Apple accessory, just think of it as $5 for the cable and $14 for “won’t kill your wife with electricity” and “won’t kill your kid with toxic poisons.” That is literally how it works. Removing BPH and other chemicals costs money. Ensuring the devices are electrically safe costs money.

  • peter

    The technology industry grants very few long-lasting monopolies, most players get
    disrupted within 20 years. At the same time, retail is really really hard and many big retail chains have lost their way in the past. Also, the combination of razor thin margins and a capital intensive distribution process is not something that bodes well.

    Given that Amazon sits at the intersection of two unforgiving industries, it would be foolish to assume that they are not constantly at risk of becoming irrelevant or losing their way. Put differently, I have been a loyal Amazon customer since 1997, but I was also a loyal customer/user of Yahoo, Altavista, Tower Records, CompUSA and ZIP drives until they lost their way or got disrupted.

    The notion (which has been around for 15 years) that eventually Amazon will raise their prices relies on the assumption that currently they are deliberately ‘leaving money on the table’ in order to buy customer loyalty. I’m not convinced. As Horace notes, it is much more likely that Amazon’s existing business model is a direct consequence of the market it’s in and it is not something they can actually change.

    I’m a strong believer in team, brand and product loyalty (think Coca-Cola and Gerber baby food), but count me out when it comes to distributor, retailer or manufacturer loyalty. Amazon is as good as its recent prices and Apple as good as its recent products.

  • Pete

    While interesting, the views expressed are highly theoretical. Apples weakness stems from the need to hit a new home run every few years.

    Apple is built on incredibly strong but ‘soft’ foundations like brand preference and it’s ability to disrupt product categories with a certain cadence. That is a balance that can easily be destroyed in the medium term , and while by no means sure that will happen, there are signs that it could.

    Amazon is built on ‘hard’ foundations like their minutely tweaked logistics infrastructure and warehousing, and the economics of scale therein. Those are sustainable by nature. Not impossible to disrupt either, but not easily replaced. Ideas suggested that distribution direct from the supplier could easily replace this do not take into account the vast array of products that Amazon sells (one of its key strengths). It is practically impossible to organize an equally large range of suppliers to have them distribute directly to the customer.

    So while I agree with the author on key themes (pivoting is hard for large businesses and every balance of success is fragile to an extent) I remain to see key differences in Apples and Amazon’s long term strengths. And I understand Wall Streets preference. Apple is by no means is losing stock, it’s just a much riskier bet with more downside and possibly upside as well.

    • peter

      I think you would need to count the iOS platform as part of Apple’s strong foundations. As Microsoft demonstrated, operating systems are very sticky things that last quite long.

      Amazon’s logistics are impressive, but not unique when compared to Walmart, Target, FedEx, the Post Office or any major retailer. Their strong points are their prices, their generous return policies and the customer reviews from their user community (which help inform my buying decisions).

      An important part of Amazon’s attraction is convenience. The reviews help greatly, but discoverability of products is also important. When searching for photography equipment, for example, a website like B&H offers a much ‘cleaner’ and focused search experience, compared to the somewhat cluttered Amazon user experience (many irrelevant products with similar names, lots of uninformed reviews, etc.).

      Keeping that convenience factor high is very difficult and many retailers have disappeared because their competitors’ shops felt and looked better. Amazon is not at risk of being able to enjoy a lazy monopoly and will need to continue to be on top of their game.

    • peter

      I think you would need to count the iOS platform as part of Apple’s strong foundations. As Microsoft demonstrated, operating systems are very sticky things that last quite long.

      Amazon’s logistics are impressive, but not unique when compared to Walmart, Target, FedEx, the Post Office or any major retailer. Their strong points are their prices, their generous return policies and the customer reviews from their user community (which help inform my buying decisions).

      An important part of Amazon’s attraction is convenience. The reviews help greatly, but discoverability of products is also important. When searching for photography equipment, for example, a website like B&H offers a much ‘cleaner’ and focused search experience, compared to the somewhat cluttered Amazon user experience (many irrelevant products with similar names, lots of uninformed reviews, etc.).

      Keeping that convenience factor high is very difficult and many retailers have disappeared because their competitors’ shops felt and looked better. Amazon is not at risk of being able to enjoy a lazy monopoly and will need to continue to be on top of their game.

      • Pete

        All true, but demonstrably Apply has had a lot more impact from competition than Amazon had recently. At the very least that shows that Apple s market position has an element of fragility to it.

      • Bob

        A lot more Impact on what?

        Stock price? Sure.

        Profitability? Some, but as compared to Amazon’s loss?

        Market share? Yes, but is that what they’re after?

        Not sure what’s so demonstrable.

        Care to clarify?

      • obarthelemy

        OSes become sticky when there are network effects. Even with the push to get lock-in, customers’ investment in a given ecosystem is quite low, and “consumer” network effects are a lot more limited than “entreprise” network effects.

        Switching smartphones/tablets is really painless. Budget $50 to replace apps, and you’re done.

      • JohnDoey

        Ha ha most people don’t pay $50 for their whole phone!

        You also forgot the step “laboriously transfer all data without losing any” and the step “learn all-new functionality” and the step “learn how to live without Genius Bar and iTunes and iCloud.”

        A really good tip for making realistic assertions about I-T tasks like this is to imagine that the user has zero I-T skills and budget a $50–$100 per hour I-T consultant and trainer into the mix. That is how the real world works. Phone users are not Bill Gates PC nerd wannabes.

        Consider that the main reason PC’s are running XP instead of 7 is the cost of user training. Same hardware, same Microsoft platform, but weeks of training just to get back to the same productivity.

        So, no, it is not an easy switch to replace the phone a user knows and relies on with another platform.

        And if the user is on iOS, they are totally spoiled by hundreds of unique features and 100,00 totally irreplaceable apps. The idea that I can switch over to Android is absurd. My iPad and iPhone have replaced 2/3rds of my Mac time. No other mobile Csn do that. They don’t have the PC class apps.

      • obarthelemy

        You’re confusing “upfront cost” with “total cost”. Most smartphone users pay way more than $50 for their phone.

        As for people not migrating from XP to 7 which uses all the same software, and has essentially the same UI, you’re wrong. It’s due to hardware requirements, no obvious benefits, and the hours needed to reinstall Windows and apps. None of which apply to our discussion.

        My Android tablet and phone have replaced about 75% of my “PC-Time”. No other mobile platform can do that, obviously, since you’re only at 67%.

      • handleym

        “discoverability of products is also important”

        This is, I think, an insufficiently appreciated point.
        On the side of Amazon’s weaknesses, yes, they can have really bad discoverability, and it seems to be getting worse. Attempts to look for something specific (let’s say a USB webcam with particular features like HD) can easily bring up pages and pages of useless crud — firewire webcams, USB cables, webcams that are not HD, and so on.
        I don’t know if it’s less curation than before, or if 3rd party vendors are spamming the Amazon system with thousands of keywords attached to their products, or if Amazon’s suggestion algorithms are “self-spamming” — throwing up random crap in the hope you’ll buy some of it.

        So it seems like there is scope for competition on the basis of providing better discoverability. But it’s really hard to make such a business of course. What will happen is that some people will use your great discoverability engine, then, with an SKU or exact name string in hand, will head over to Amazon if they are 5% cheaper than you.
        But not all of them will…

        Which gets us to the other half of the issue, which is, bad as Amazon’s discovery is, it is better than almost anything else. For books it is REALLY good. In particular it is vastly superior to any bricks and mortar store. True story — I recently bought a very particular small coin purse on Amazon not because of price or even convenience, but because I was sick of trudging around ten stores at the mall, all of which made it really hard to find what I wanted.

        SO a different attack on Amazon is for physical retailers to get their act together. Suppose that when you entered a store, it provided a WiFi signal you could easily connect to. (Easily meaning no passwords, no legalese crap, a fast experience that just works.) You can then run an app which provides things like QUALITY maps of the store — not some crappy PDF scaled down to your phone screen — and a search functionality every bit superior to what Amazon offers.
        Even better, you can do this same searching at home. You can put items in a “cart” and then at the store be directed by the app down each aisle in an optimal pattern to pick up your stuff (or pay a little more for some employee to do that for you).

        Next, do the same service mallwide, so that when I am looking for a particular type of item, I do one search, not ten store-specific searches.

        Could this happen? I honestly don’t know why it hasn’t already happened. The mallwide co-ordination is tough, but I do not understand why Barnes and Nobel (to take an obvious example) never got their act together on this. Why not Target (who supposedly know IT and aim at the iPhone demographic)? Why not Walmart who supposedly are always looking to the future of retail? WTF not J C Penney when they were reinventing retail? The only company that does it is Apple — the one company that doesn’t NEED to do it because it’s stores are so small and carry so few products you don’t need help finding things.
        All I can think is that these companies are crippled by management that is too old to understand the future. But at some point, someone is going to get this right…

    • moat

      Apple has similar skills or “foundations” in supply chain management, manufacturing, logistics, yearly software and hardware cycles etc. Why is this such a “moat” for Amazon and not for anyone else? Not sure I understand your point.

    • moat

      Apple has similar skills or “foundations” in supply chain management, manufacturing, logistics, yearly software and hardware cycles etc. Why is this such a “moat” for Amazon and not for anyone else? Not sure I understand your point.

      • Pete

        I agree with you, but for Apple the type of foundations that you mention are merely input variables, their market preference is driven by brand and the temporary lead they take when they disrupt a product category. Supply chain gives them cost benefits and increase profit, but at stage it does little to protect their market position. Especially with Samsung sitting next to them who owns significant parts of the supply lines.

        For Amazon, logistics defines their product. It enables their low prices, low delivery cost and easy returns.

        Again not saying that Amazon can’t be disrupted, I just think their market position and growth is deeper anchored than Apple’s. Apple could end up being the greatest company of the next 20 years, but in my view there is a lot more risk involved in their growth model.

      • Kizedek

        Temporary? Like the iPod? How about all-in-one computers? Anyone else topping the iMac? How about “Ultra-Books”? I don’t think anyone has been able to build a viable contender to the MacBook Air, despite Intel’s reference designs and help.

        Tablets will be interesting. We went from Apple being the only builder to now being only 55% or so of sales according to the most pessimistic/flawed reports.

        This sounds terrible, until we look at Horace’s other articles suggesting smartphone and tablet sales are eclipsing TOTAL historic PC sales already (on a trend for a likely penetration of one or two mobile devices for every person on the planet, vs. one PC for a certain number of households that peaked long ago).

        “Supply chain gives them cost benefits and increase profit, but at stage it does little to protect their market position.”

        Why not? Apple are the only ones in a position to buy up production and make that many tablets and smartphones. Apple is only gearing up, making more devices than ever per new product launch, into more countries than ever. No other single company can hold such market share in a world where the market for smartphones and tablets are growing so quickly. Nokia has peaked, RIMM has peaked; even Samsung may have peaked (they can only make, ship and sell so many smartphones). For one single company to have 50% of the smartphone or tablet markets would be amazing.

      • disposableidentity

        @Pete, I don’t understand what you’re talking about.

        Apple’s supply chain & logistics advantages lets them sell their products (physical & digital) at steller margins. They could just as easily use these advantages to sell at lower prices with resultant higher volumes (like Amazon, or Samsung for that matter).

        Apple has chosen the path that leads to sustainable profitability (the ultimate goal of any enterprise).

        I’d argue that it’s easier to convert profits into volume than volume into profits. Apple is in the driver’s seat, Amazon and Samsung are in a much more delicate position.

    • mjw149

      I’d argue that there is an exception for branding. A ‘soft’ foundation like brand preference is not ‘soft’ when applied to physical, highly personal objects like .. cars or phones. Yes, many premium carmakers have gone bust, but add in the economies of scale for smartphones, and it’s even more centralized than car building.

      Plus the smartphone is a permanent form factor, and maybe the only one, the only device that can survive the next century without drastic change or disruption. Apple is very well positioned for the future.

      In other words, Apple is Mercedes and will probably be around for a very long time.

      Everyone assumes that Amazon is the next in line after woolworth’s, sears, Walmart, etc. And they’re right, but that’s not as important as it used to be. Netflix, itunes, PSN, XBL and google play show the limit of Amazon’s reach already. Amazon can compete on price and scale, but that’s it and so there is no Amazon phone. That’s their Achilles heel and a fatal flaw, because phones are going to end up driving all the other devices wirelessly. They’re well positioned to dominate enterprise cloud computing and obviously department store type sales that they already do. Same day deliveries will be great but at best it’s an incremental win at great expense and distraction. Ultimately they might have peaked. There’s very little left to grow into that makes sense and would move the needle.

      All the investors expecting great things from Amazon like Walmart should reconsider what our new economy looks like and how digital sales work more like fiefdoms than malls.

      • rationalchrist

        Apple is Toyota and Honda, good and consistent quality, retaining high resale value. Samsung is GM and Chrysler, some time good, most of time crap, losing resale value instantly.

      • JohnDoey

        Apple is Rolls Royce. Their main feature is they are only real high-end vendor. There is Apple or Rolls Royce and then there is everything else.

      • obarthelemy

        Tell that bit about smartphone branding being “hard” to Palm, RIM and Nokia.

      • Space Gorilla

        I don’t think we can equate market share and recognition with the value and experience of a brand. Nokia, Palm, and RIM were never equal to Mercedes, as an example.

      • Sander van der Wal

        Nokia had excellent brand value in Europe and Asia. They were the Mercedes of the mobile phones.

      • Tatil_S

        I’d say they were the Volvo of mobile phones with a reputation for being rock solid, rather than luxurious. :)

    • Kizedek

      You use terms like “hard” and “soft” to refer to “foundations”. But this can lead to erroneous conclusions (which Wallstreet is perhaps guilty of). “Hard foundations” are indeed good when you are building a building (like Apple’s data center, new HQ, or an Amazon Warehouse).

      But “hard” and “soft” can only be abstract or philosophical or opinion when applied to business model. And if *those* foundations for Amazon are “hard”, then you have made Horace’s point — Amazon can’t pivot or change business model when circumstances change. Sustainable by Nature? Until a cataclysm comes along, like Mobile overwhelmed MS. For how long will Amazon’s infrastructure be an asset? And what kind of sea-change might render it practically obsolete.

      What you have called “incredibly strong but ‘soft’ foundations” of Apple are more like the fruit of their labors.

      When talking about sustaining businesses, disruption, and self-disruption, then “soft” (read, “flexible”) is probably exactly where Apple wants to be in terms of business model. What Apple has that is hard, is “hard” cash, capital assets, great DNA, supply-chain relationships, etc. All of these are extremely “hard” and disruption resistant.

      Apple has shown the ability to gear up from a couple of million Macs and 10 million iPods a quarter to 40 million iPhones and 20 million iPads a quarter without the bother of owning their own factories. The facts and figures are pretty hard. Contrast that with Samsung, who does indeed have “strong” foundations in the traditional building sense… but pretty soon, their factories could be struggling to remain busy.

      And this is the disconnect: Amazon has a lot of physical (“hard”) infrastructure, though their online business model presents the perception that their potential is “boundless”. But Apple buys up manufacturing capability, specialized equipment and small specialized firms. Then you have to wonder whose outlook or potential is the more “boundless”… and whether that is actually due to “softness” or flexibility.

      • Pete

        I guess where some of this comes down to is to what extent we live in a ‘new normal’ or not. Do we live in a time frame where the fundamentals of business longevity are different from before? Arguably a lot of change has been driven by digital technology advancement, but that does not impact all parts of industry. We still need cars to be made, aircraft engines, we need to physically get our hands on food, clothes, and other physics goods, and now that pricing has become transparent, logistics and efficiency are the key variables. What I am interested to see play out is whether the life cycle of companies is really getting shorter, or whether this is just a temporary acceleration of innovation, that has led to constant disruption. General Electric has been around for a long time, does Apple have what it takes to reach that kind of longevity?Same can be asked of Amazon. I have my own views on who is better positions, but we shall see.

      • Roman

        Pete,

        I found your original post intriguing, even if I don’t necessarily agree. I also found Kizedek’s response convincing.

        Consider another example of “hard” assets: retail space. Walmart used it brilliantly, building huge warehouse-sized one-stop shop destinations in the US (and now world-wide) that squeezed out thousands upon thousands of mom-and-pop shops (perhaps not unlike Amazon squeezes out small electronic merchants today). But look what this “hard” asset is doing to companies like JCPenney — it’s a liability! They’ll need to close half their retail space and sell it as a real-estate play (at a time when real estate is still very soft) just to stay afloat while they bleed money. Now look at Apple: they *lease* all of their retail… So they can take advantage of this “soft” asset that appears “hard” to the customers — it’s the most profitable retail operation in the world, bar none, as Horace has shown many times.

        In short, I agree with Kizedek — “hard” assets may be both a competitive advantage, and a heavy anvil dragging you down in the water, depending on circumstance. Certainly cash seems to be the most flexible “hard” asset, so Apple appears to be better poised for the (inevitable) change of business conditions.

        Finally, to your question about the lifecycle of companies: it is *definitely* getting shorter, and there has been research done on this. Check out the Deloitte Shift Index. One of the findings is that the “topple rate,” the rate at which big companies lose their leadership positions, has more than doubled since the 1960s. This isn’t news for anyone who read the Innovator’s Dilemma.

        As just a singular example, DEC had 140,000 employees worldwide in 1987 (more than Apple and Google today, combined). Its remains were sold for scraps to Compaq just a decade later. Compaq itself then got sold to HP… and I guess you’ve heard about what’s happening to HP now. Dell is in a similar situation, despite its “hard” assets of JIT manufacturing.

    • mg_nyc_2013

      Test

    • mg_nyc_2013

      Apologies about the previous “test”.

      Pete,

      Your argument pretends that somehow there is a more solid foundation to Amazon’s business model than Apple’s. You merely assert that Amazon has certain attributes like “minutely tweaked” logistics infrastructure and “economics of scale”. There is ABSOLUTELY no proof of this whatsoever, if one were to look at Amazon’s financial disclosures. It makes little to no sense to rate a company’s logistics as good or “highly tweaked” when it results in no operating profit. Miraculously, logistics “laggards” like Wal-Mart, Costco, and Target can all make money and made money back when they experienced Amazon’s current revenue growth levels. They, too, were investing in growth infrastructure at the time, yet somehow those companies were profitable along the way, whereas Amazon is given a pass to be a non-profit.

      Second, your assertion about “economies of scale” lacks any evidence. In fact, there is significant evidence of DECREASING RETURNS to scale for Amazon. In the last 3 years, they have had to spend more incremental opex to drive incremental revenues. The revenue contribution of each incremental employee has been less than before. Amazon has had to spend more on capex and acquisitions to get an incremental dollar of revenue. Moreover, Amazon’s days payables are about 80 or so, relative to 35-40 for Wal-Mart. Thus, it is obvious that the break even cash flow was achieved by jamming their suppliers — a tenuous and certainly unsustainable business practice, as Wal-Mart is certainly not known as a “generous” business partner.

      Thus, the only real strength Amazon has is an investor base that is willing to forego profits for some mythical time in the future where Amazon can BOTH keep its growth rate up AND generate higher margins through pricing power. If expectations on either of these issues changes dramatically, then so much for Amazon’s “strength”.

    • JohnDoey

      I think you underestimate how sticky Apple is. Apple spoils people. I literally do not participate in generic technology anymore. It is not worth my time and trouble. Hit products or not. There are a lot of people who go to Apple Store for tech gear and nowhere else. And not because of fashion but rather because of the results. They require Genius Bar and Time Machine and iMovie for iOS now. Require.

  • FalKirk

    “The premise that Amazon can, on a whim, change its business model from selling other people’s products at a razor thin margin while investing in capital-intensive distribution to selling other people’s products at a large margin while not investing in capital-intesive distribution is not credible.”

    Brilliant.

    I am totally going to steal this and pretend it is my own. :-)

    • Pete

      Amazon does not have to increase margins and lower investments in order to become profitable. They only have to do one of the above. I think the premise is more that today they chose to reinvest all profits in pure growth, and that they have a choice to change that dial. Not arguing with you whether that will work our or not, but I think that this is the assumption that is generally made. It is not the margins that will magically increase indeed.

      • Tatil_S

        As soon as it increases prices, the competitors will be trumpeting them. Even now Walmart is able to beat Amazon on price on many items such as consumer staples. On occasion Best Buy and Fry’s beats it on electronics, B&H usually matches or beats it on cameras, Monoprice is more convenient to shop for cables and basic peripherals at usually lower prices and Google is there to help every consumer run a price comparison. These are competitors that manage to stay profitable, well OK Best Buy is just above break even, at roughly the same price points. If the price pressure from Amazon eases up, they will have an even better time.

        Let’s say Amazon stops investing in capex, What will happen to AWS or streaming movie business? There are many competitors in cloud computing and storage and they will kill off Amazon unless Amazon keeps on investing. Considering Amazon puts 100% gross margin on its AWS business, that may be its most profitable division in a company struggling to make profits overall. It is already well behind Netflix or Hulu, without further investments and expenses it may never catch up.

        Either approach will kill off its growth without making it much more profitable. What will happen if Amazon’s revenue stops growing and it only makes a billion dollars annually? I am fairly certain its stock price will crash.

      • rationalchrist

        And Bezo already has made billions from his “ponzi” game, ie. late shareholder dollar pays earlier shareholder dollar.

      • studuncan

        The point of the ‘game’ that Amazon is supposedly playing it to eventually turn a profit. But if they increase margins, they open themselves up to competition. If they lower investments, they open themselves up to disruptions. And either of these moves will make Wall Street discount their stock price.

        The only winning move to the ‘game’ is to not change anything ever.

        Bezos is in the ‘game’ to make money for himself. He knows he’ll never make it for Amazon. Wall Street just keeps believing that he eventually will. He’s playing them like a fiddle. So Amazon is the anti-Apple in that sense too.

  • FalKirk

    “The premise that Amazon can, on a whim, change its business model from selling other people’s products at a razor thin margin while investing in capital-intensive distribution to selling other people’s products at a large margin while not investing in capital-intesive distribution is not credible.”

    Brilliant.

    I am totally going to steal this and pretend it is my own. :-)

  • http://cananito.com/ Rogelio Gudino

    People also say they’re in it for the long term and want market share, but I don’t understand it. Amazon is pretty much USA only. How long will it take them to expand? Another 2 decades? What happens if a competitor achieves Amazon market share in any other country before Amazon starts expanding?

    • obarthelemy

      USA is 60% of revenue, so no, not USA only by far.

      • http://cananito.com/ Rogelio Gudino

        Interesting, they are present internationally (http://www.amazon.com/gp/feature.html?ie=UTF8&docId=487250). Still seems like not much coverage though, and only 3 countries have “Kitchen and home products” (which I think includes most of the physical shipments). Not so sure what percentage of their profits comes from physical shipments, but I think it’s still one of the most compelling Amazon “features”.

      • obarthelemy

        I have not clue why you think “kitchen and home products” is of particular relevance compared to toys, computers, books/CDs/DVDs, apparel, IT…

      • http://cananito.com/ Rogelio Gudino

        My bad, I just assumed “Kitchen and home products” involved most of the physical shipments except CDs, DVDs, and Books. But apparel does go to that category I believe.

        And it’s also confusing because they don’t split out the digital products. For example, I’m pretty sure you get absolutely no physical shipments in Mexico, yet they list Books, CDs, DVDs, PC accessories; this makes me think that they’re listing them because they can sell digital media (books, songs, movies).

      • Kizedek

        I don’t know how it works in Mexico, but it is possible to get physical shipments without a physical, in-country presence (warehouse). For example, there is no Netherlands Amazon store, but I can get things shipped from the UK Amazon store.

        I presume Amazon affiliates (when I purchase nearly new) get sent from where ever the seller lives).

        (And of course, when I purchase Apple products online, they get shipped to me from Ireland, not from the physical NL, UK, DE or FR stores).

      • obarthelemy

        There’s also the very frequent case of Amazon handling the logistics for 3rd-party sellers.

  • AlanAudio

    “Or consider the dilemma of Apple which after building a successful computer business which included system software, could not pivot to license that system software so others could build computers with it.”

    Between 1995 and 1997 Apple did license OS 7 to other manufacturers, the so called Mac clones, but Steve Jobs judged it to be a bad business decision and they stopped doing it. Only UMAX acquired a license for OS 8, which continued until 1998.

    There’s a significant difference between not trying something and trying something, but deciding it was a bad idea.

    • David Leppik

      They stopped doing it because it was killing their margins. Power Computing could not only build Macs cheaper than Apple, they also were able to sell beefier machines. The latest PowerPC chips couldn’t be supplied in high enough volume for Apple, but Power Computing snapped them up. Apple couldn’t compete on the high end or the low end.

    • disposableidentity

      Exactly. The point is they “could not pivot to license that system software”.

      That business model failed for Apple. They could not successfully change.

      • mdelvecchio

        but instead they successfully remained the same — and now collect the lion’s share of PC-maker profit.

      • matthewmaurice

        Yeah, but let’s not forget that there was a period when things were particularly bleak for Apple. When Jobs returned, Apple had less than 90 days of liquid operating capital.

      • Shawn Dehkhodaei

        Thank you for the reminder …. but still 90 days of liquid capital which was more than Amazon’s entire profits in the last 15 years !!!

      • Pooka

        But *could* it be done successfully? Either Apple had to go pure OS and let others build hardware (and collect a fee for each machine sold), or have license terms stating the licensee only pursue markets outside Apple’s current targets. Huh. Guess I answered my own question. :)

        I can see an iOS license, for example, a company that wants to build a ruggedized iPad for various types of field work.

      • disposableidentity

        Sure it *could*.

        IBM could move from mainframes to desktops. GE could start with power generation and end up making toasters and jet engines. Nintendo could move from playing cards to video game consoles.

        But Kodak could have moved from film to digital. And Polaroid could have moved from instant photography to photo printers.

        The point of the article is that even when the moons are aligned and everything would seem to point to an easy course correction, it’s not as easy as it sounds.

        On the raceway it’s hard to pass the competition when everyone already has their pedal to the metal.

    • matthewmaurice

      The problem was not that Apple “could not pivot to license that system software” at all, it was that they couldn’t do it until it was too late. By the time they did license Mac OS, its the huge advantage had been lost to Windows 95. Licensing System 7 when the other option was Windows 2.x or 3.0 might have changed history.

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  • Mark Trencher

    “Or consider the dilemma of Apple which after building a successful computer business which included system software, could not pivot to license that system software so others could build computers with it.”

    Huh??? Bad example. Apple didn’t want to go that route. Pundits suggested it and, in the end, Apple’s sticking with the unified (harfware/software) approach was very successful.

    • Doctor Biobrain

      Apple *did* go that route, but it was a dumb idea. Why? Because it was a bad business model for them. Hence the statement that they couldn’t do it.

      Saying they couldn’t do it doesn’t mean it was impossible; only that it wouldn’t work for them. A business model that was hugely successful for Microsoft was a blunder for Apple, because it undermined their main business. That’s the point. Shifting business models isn’t as simple as deciding to go in a different direction. Just ask the guy that screwed JC Pennys up and was fired for it. What works for one company won’t necessarily work for another.

    • mdelvecchio

      yep. apple now has the most profitable PC line while the others raced to bottom.

      poor example.

      • Doctor Biobrain

        That’s right. Most profitable PC line, because they stopped trying to copy Microsoft by licensing their software, but went back to their original business model of keeping their software on their own machines. Thus proving that they couldn’t change business models, because a model that worked for Microsoft wouldn’t work for Apple.

        That was the point of this entire article: That it’s easy to say that a company can shift business models, but reality disagrees. And while people say that Amazon can some day become profitable by changing their business model by increasing prices and cutting costs; that’s easier said than done.

      • mdelvecchio

        good point…

    • JohnDoey

      Apple licensed Mac OS in the 90′s and almost went out of business. They killed the licensing and thrived. Today, Microsoft is trying to pivot to be like today’s Apple.

      So — bad example.

      The problem with using the PC-DOS/MS-DOS/Windows licensing scheme as a broad example is it is a unique monopoly-extending situation. The exception, not the rule. Microsoft made money because they were constantly “importing” stolen goods from Mac and Unix into the walled garden of the IBM PC compatible, which was always 10 years behind in software. It was a very unique situation.

  • http://sumocat.blogspot.com Sumocat

    The glory of Amazon is they are constantly moving ahead of the disruption. Amazon, an empire built on physical media distribution, has already moved into digital media. As software services move into the cloud, Amazon is already there providing the servers on which they run. And forget about bypassing the retailer. Vendors can’t compete on price when Amazon sells below wholesale, and Amazon is increasingly moving into publication and production.

    The real difference between Apple and Amazon, I would argue, is that we know how Amazon is not only ahead of the disruption, but driving it. With Apple, on the other hand, due in part to their intense secrecy, we’re always waiting to see what’s next.

    • jameskatt

      When it comes to books, Apple can play Amazon’s game better since it has tons of profits while Amazon doesn’t.
      Apple can sell books at a lower price than Amazon. If Amazon tries to match prices, it will have a bigger loss of income. Eventually, Apple will then become the dominant book seller.

      • http://sumocat.blogspot.com Sumocat

        They can but they won’t. Apple has stuck with the agency model even through losing court battles. That model does not allow them to sell below costs. The only way they can compete against Amazon’s pricing is by switching to wholesale (or forcing Amazon to adopt agency, which they tried and failed to do). Of course, that’s only on pricing. They’ll still have to match the breadth, knowledge and convenience of Amazon’s operation.

      • Shawn Dehkhodaei

        Well, the courts recently ruled that Apple is NOT allowed to use the Agency model. In fact, the courts want to abolish the Agency Model …. So this whole thing might backfire on them.

        You see the DOJ is just a puppet for Amazon in this case … they’re mandating everything that Amazon wants. Wholesale model, and linkbacks, etc. This whole charade was put up and paid for by Amazon’s shareholders (since Amazon doesn’t have any money themselves).

      • http://www.iheavy.com/blog/ Sean Hull

        This ties right into Jeff Bezos purchasing wapo as an individual rather than Amazon. Nicely sidesteps antitrust issues…

    • Shawn Dehkhodaei

      You mean Amazon is more transparent as a company? Really? We never know how many Kindles or Kindle titles they sell. We never know which divisions make money? We don’t know how many customers AWS has?

      And exactly what disruption are they driving at any given moment? If you mean ecommerce as a platform, sure ….

      But on everything else, they were followers with a cheap knock-off sold below cost. Music, Movies, Tablets, App Stores, etc.

  • nuttmedia

    “But again, new information technology which makes shopping, discovery and delivery of products directly from the vendor, bypassing the aggregator (i.e. retailer) could shift value along the value chain yet again.”

    Where the puck is truly heading—which brings us back to the third player of tech’s current royal triumvirate, Google, and their lofty ambition to play the lead role in that shift.

  • Doctor Biobrain

    I don’t understand why anyone thinks Amazon doesn’t have competition. Did you not realize that Walmart has a website? A website that, in fact, sells many many more goods than their stores do and offers free shipping? Other companies have websites as well. And sure, maybe they’re not as good as Amazon’s, but…will that last forever? Will it even last five years?

    Last year I bought a weight set from Amazon for $45. I wanted another one to supplement it and saw that they now had that same set for $60, and didn’t include Amazon Prime shipping; making it even more expensive. So I went to Walmart’s website and saw they had a similar but better weight set for $40 in their store, so I went there and bought it the next day.

    Now imagine if Amazon decided to finally make real profits by jacking up their prices, while Walmart and other retailers improved their web experience. Sounds like competition to me. I’m sure Amazon realizes this, which is why they keep prices low and spend so much to stay on top. I find it odd that anyone imagines they can stop doing this and still stay on top forever.

    • Below$550AShareIsPathetic!}:-D

      Jeff Bezos has friends in very high financial places of which one is known as the Oracle of Omaha. They believe in Jeff Bezos and are willing to carry the company on their backs for as long as need be. Jeff Bezos has made many friends in high places but Apple has made too many enemies and there are no believers in Apple and without Steve Jobs magical powers Apple’s shareholder value will suffer immensely.

      It’s been claimed that Jeff Bezos inherited Steve Jobs magical powers when Steve died. I really enjoy using Amazon and have Amazon Prime, but I can only say that Amazon as a company is valued arbitrarily from other companies and that there is almost no way Jeff Bezos friends are going to let him fail. I just wish I had been smart enough to see that a few years ago that a company making no profits can still provide unlimited shareholder value when the CEO has the right financial connections.

      • Doctor Biobrain

        I wasn’t saying that Amazon would fail, as I don’t see how we’d define “fail” for a company that has no plans to make profits. I’m a CPA with many small business clients and the only ones I’ve seen “fail” are the ones that can’t make enough profit for the owner’s needs; which is a problem that Bezos seems to have solved. I just don’t see how they can safely switch their business model by raising prices and/or cutting their investments in new areas. As soon as they make a dash to big profits, their business will suffer. I’m sure they know that, which is why they have no plans of doing so.

        As for Jobs and Apple, there’s no such thing as magic and Apple is essentially the same company it was when Jobs was still alive. If anything, I could see it doing better, as Jobs made some irrational decisions that he was extremely stubborn about, while Cook doesn’t seem to suffer from that at all. Not sure why anyone sees Jobs’ messiah-complex as a good thing, but it’s no way to run a company.

        Anyone betting against Apple is making a mistake. Sure, it might fail; but I’d put their deep pockets against Amazon’s any day. And if Amazon and Google were held to the same ridiculously high standards Apple is, they’d be deep in the basement by now. Apple might not be the most amazing company in the world anymore, but that’s not supposed to be the standard we use to judge a business’s success.

      • http://oficeandfire.wordpress.com/ Paul Stark

        I do believe that Jobs had some kind of magic. I mean, he was able to make the entire world believe that the iPhone was the first smartphone when they were in the market since like 1997, he made the iPad, which made the people forgot about all the tablets made before. I don’t mean that those products couldn’t have been designed by other company, I say that those products wouldn’t be as successful if they were designed by another company. In 2007, Google was no more than a bunch of web services and Samsung was an appliance company which made phones.

        Maybe it’s not magic, call it charisma if you prefer, but there was something in Steve

      • effervescent

        I don’t know why you are talking about connections. I don’t think that is relevant at all. Amazon has value because of monopoly, trustworthiness with costumers and ease of use.

    • jameskatt

      Walmart has to advertise more that it has a website.
      It’s website also is poorly designed. It is difficult to find things.
      It’s website also doesn’t allow interactions very well where we get to write our reviews of products.
      Amazon is like Facebook in that it has a lot of social interaction built in. Walmart is too impersonal.
      Walmart, do a better job. Slay Amazon while making profits.

  • Relentlessfocus

    Here in the UK there is a company called Ocado which started as an online grocery-ordering company selling primarily Waitrose (high quality) produce and name brand packaged food products. Like Amazon they are based on an incredible logistics system with mega warehouses, highly sophisticated backend software, 1 hour delivery slots, a massive fleet of delivery vans and a fantastic website that puts Amazon to shame. For £99 year you can order groceries and merchandise delivered, not to your door but to your frig if you so choose. They deliver between 6am and midnight as you choose. They’ve slowly and then not so slowly integrated other merchandise from dishes to kiddie pools to fashion and beauty products, office supplies and have just hired a big name CEO. Shares are up 300% y/y. They recently signed a deal with Morrisons (maybe the 4th or 5th biggest food outlet) to set up and run a logistics/shopping/delivery service for them.

    I mention all this because of the meme that Amazon has no competition. Once you’ve worked out the logistical system and developed the software and proven the system to the investors, the company scales easily IMO and geographical borders pose few problems.

    I like Amazon a lot, have a high regard for Bezos but think AMZN is about as close to a Ponzi scheme as is legal and see a company like Ocado easily disrupting AMZN.

    • Avi Unobtaniumstein

      But Amazon buys companies like that.

      • Relentlessfocus

        Really? Name one $2.5billion market cap company they bought. Closest I can think of is Zappos at half that.

    • studuncan

      Sure, tell us about it AFTER it’s stock is up like 500% this year!

      • Relentlessfocus

        I know, I dithered on investing at the IPO a few years ago. I dither better than most. :(

      • studuncan

        The real question is if it’s still a good value now.

      • Relentlessfocus

        That oldest of questions…

      • orthorim

        If you knew the answer you’d not be posting here; you’d be on your Yacht in the Bermudas drinking with models….

  • JohnDoey

    From my own experience, when I decided to stop using Amazon, it was totally painless to stop. About half my Amazon orders were coming through one vendor — B&H Photo Video — and along with Apple Store and Target.com I am having a better shopping experience, better support, same prices, same products. So how Amazon is a monopoly, I don’t know. I haven’t used them for a long time.

    With Apple, the only thing that has made me tempted to switch over the past 15 years has been iOS 7, but the best I could do at replacing iOS 7 was iOS 6 for the next year and be hopeful about iOS 8. There were simply no PC class touch apps anywhere but iPad, and my most-used iPhone app has no replacement on any other platform also. And my Mac is even less replaceable — there is no other high-end PC OS and only a few of my apps run on Windows.

    If Apple has so much competition and Amazon is a monopoly then my experience should be backwards.

    I think the truth is that Amazon appears to be a monopoly but is not, and Apple appears to have a ton of competition, but does not actually have that competition because the non-Apple devices lack essential functionality.

    So the stock market is reinforcing a very unsophisticated view of both companies. In the view of the stock market, I can only get that rice cooker at Amazon and nowhere else, but if I want computing, no need to go to Apple at all. It’s totally backwards.

  • jameskatt

    Amazon has a big problem: It has to charge sales tax. This means it immediately has a price disadvantage to businesses which don’t charge sales tax. B&H Photo Video sells products at the same price as Amazon but don’t charge sales tax. Who will I shop with when I want to shop for something that both have? Obviously, Amazon loses.
    B&H Photo Video has a huge advantage compared to Amazon because B&H Photo Video exists only in New York. It doesn’t have affiliates in other states. It doesn’t have distribution centers in other states. Thus, it is immune to lawsuits from other states to collect sales tax.
    These single state vendors who can match Amazon in price will eventually disrupt Amazon’s business. Amazon will never be able to turn a profit because someone can always sell it for less.

  • jameskatt

    What if Apple decides to play Amazon’s game with books, yet use it huge cash pile to play. Amazon riles publishers by selling books at a loss – which kills traditional book stores and is killing rival book sellers. The Department of Justice stopped the publishers and Apple from playing a different game. But Apple can easily turn around an play Amazon’s game. It has the money to sell books at an even lower price than Amazon. If Amazon tries to match Apple’s prices, Amazon faces even larger losses which will eat into its meager to no profit business. Amazon won’t be able to play this game as long as Apple can since Apple has to much profit, it can’t spend it all.
    Thus, Apple stands a chance of killing Amazon by playing Amazon’s game. Consumers won’t complain since they will get lower prices. Apple will then become the dominant book seller. It can even come up with a cheap version of the iPad which just has enough power to read books.

    • greendrawer

      Someone said (I read) Apple should raise prices of iPads by $9, and then sell iBooks for 99¢
      I love this idea (fantasy). Would shove it right up Amazon’s a$$

      • rationalchrist

        And DoJ’s a## and judge’s a**

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        Was that the same guy who buys a new iPad every time he wants to read another book?

      • Kizedek

        No, it was the guy who told Amazon that Kindle buyers were going to buy sooo much more from Amazon that it would cover the cost of the Kindle AND help Amazon to start to make a profit. ‘Cause, you know, if you just buy more of something that carries no profit, it will magically produce a profit.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        So what you are trying to tell me is that everything Amazon sells has the same operating margin as ebooks?

        Hooookay. *thumbs up* *backs away slowly*

      • Kizedek

        No, that apparently Amazon has this great business model whereby they are a retailer that keeps everything so tight that they barely turn a profit on lots of revenue. Only, this isn’t so new and wonderful: Walmart does it, too.

        But somehow, Amazon is valued off the planet, and Amazon investors are going to get wise and wake up one day and ask why.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        http://www.nasdaq.com/symbol/wmt/financials
        http://www.nasdaq.com/symbol/amzn/financials

        Amazon grew 248% in four years, Walmart grew 15%. Now adjust that for inflation and Walmart stagnated.

        Is is really THAT hard to understand basic ecnonomics?

  • Stephen Olson

    One disadvantage of shopping on Amazon that people tend to forget is that returns can be time-consuming and expensive. This makes buying off of Amazon riskier, necessitating Amazon’s low prices. If I buy a grill from Walmart or Home Depot I have 30 days or so to return it. The same isn’t true with Amazon.

  • Stephen Olson

    One of the main reasons I purchase from Amazon is so that I don’t have to pay state and local sales taxes. How competitive will their prices be if this substantial (roughly 9% where I live) price advantage is removed?

    • TK421

      That’s coming very shortly and you are actually required to pay taxes. Better hope your state never audits you.

    • Tatil_S

      For third party sales, it still does not have to collect sales tax in CA. For books, its prices are still pretty good and it does not really have a competitor left. (Borders could match its prices before tax with its weekly discount coupons.) For much else, many brick and mortar stores have instituted price match policies or their everyday prices are similar to Amazon. I have a feeling they scan prices of each other anyways.

    • orthorim

      I think the majority buys for Amazon for the convenience and great service.

      There’s a million sellers on the internet – when I see something on Amazon for a similar price – and Amazon sells most things – I’ll buy it from them. Because I know one-click shopping works, and I know they’re trustworthy. Great customer service and an awesome logistics backend.

      I think that’s the whole thing with Amazon – they have tech that’s hard to beat. They have logistics that’s hard to beat. And they live on margins so low that they’re very hard to undercut so price is not a reason to leave.

      Why should I waste time messing around with whatever crappy web store somebody else built when I can just one-click on Amazon. It’s all about convenience.

      • effervescent

        I totally agree. Amazon has made shopping extrmely easy.

      • Students

        Don’t fool yourself. If I have to pay tax online local business will be getting a lot more of my business.

  • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

    “They both focus on delighting customers and controlling all the variables which come into contact with that delight.”

    That is so wishy washy I am not even close to understanding what you actually mean.

    I suggest you read the Amazon Kindle tests Marco Arment did and compare his findings with any iPad test on the internet. Apple has retail stores – Amazon doesn’t. Apple builds software (hey remember when you said iTunes is now turning a profit after Apple crammed their software division into that row in their quarterly results? 3 billion in software revenue) Amazon doesn’t. Amazon publishes books – Apple doesn’t. Amazon builds awesome infrastructure for reading and listening to audiobooks and music – Apple doesn’t. I mean have you looked at iTunes and compared it to the Kindle Apps on all platforms?

    And that’s just where their businesses overlap. Amazon now produces content (books, movies/TV shows). Amazon sells everything under the sun and is turning a huge profit with their countless warehouses where Apple had to stuff their Apps into iTunes to pretend they turn a profit with their 30% margin on software sales. Remember when John Gruber kept talking about Apple’s business is Hardware not Software, e.g. they don’t really want to turn a profit on the sales of 3rd party software? Well they obviously don’t (it’s in the low three digit millions of dollars last time I checked).

    Amazon is a huge store for EVERYTHING while Apple produces hardware and digital goods that make that hardware fun to use. Basically Amazon is selling those digital goods and also everything else OTHER than the hardware apple is doing. Their hardware is a means-to-an-end.

    tl;dr: strongly disagree.

    • terranbarron

      What do you mean “

      • Tatil_S

        Why let get facts in the way of an opinion?

      • matthewmaurice

        Or a good story.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        It’s really beyond me why it is so hard to understand that Amazon IS making profits but re-investing everything they make directly back into growing their business?

        Again, like I said on another post: they increased their workforce five-fold in the last five years, adding 20,000 new workers every year. They added 3bn in revenue every quarter for the last three years.

        This is like saying you don’t make any money working at your job because you spend everything on your new car.

        On top of that the post is about why Apple and Amazon are alike and destinctly NOT about Amazon not making any profits.

        And the kicker: you get upvotes for that.

        This is ridiculous. Scores and scores of people patting each other on the back for not understanding numbers on a page that is mainly dealing with numbers. It’s mind-boggling.

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

        The sad thing is you do not understand what “profit” means and attempt to tell others to go educate themselves. It was you that brought “profit” into the discussion by stating Amazon is making huge profit and you have been trying to back away from the glaring error you made in that statement without admitting you were fundamentally wrong.

        Amazon has HUGE revenues but piddly profit.

        And yes, many many companies like Walmart, Apple, Google, Microsoft, Exon,… have been able to heavily invest in their business WHILE still making profit. Amazon has shown (either by choice, accident or other) they can’t (or don’t).

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        Steven, when you said they don’t make any profits “of their existing businesses” and then try to evidence that by their quarterly numbers you ate, quite frankly, embarrassing yourself.

        The reported numbers are revenue minus expenses minus write offs.

        If there are hundreds of millions in expenses for expanding the business, that is called a one time expense.

        For a new warehouse for instance.

        The only way you would be right is if Amazon were loaning that money to grow. They aren’t. If they weren’t expanding they would report all those one time expenses as revenue.

        That is what MG Siedler talked about.

        All you are showing here is a lack of understanding of basic economics and quarterly reports.

        Either show me proof that Amazon is lending or accept that you are wrong.

      • Kizedek

        Apple, for example, invests, say 12 Billion per year in growth (capital expenditures on assembly line equipment, property development, etc.), pays suppliers up front to secure components and production, and STILL puts some 4+ billion per quarter in the bank — which they call profit.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        And that pertains to what I said how exactly?

      • Kizedek

        That Amazon are making “profits”, only we don’t *see* them, because they are being re-invested in the company. Accounting facts will tell you otherwise, as others have repeatedly pointed out to you.

        That’s the whole issue: you say Amazon is making lots of profit, and most people are disagreeing with you.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        I still don’t get it. How does rattling off Apple’s numbers show that Amazon is not re-investing profits?

        That’s like telling me I don’t earn anything at my job because you put away 2k every month while driving a new Porsche.

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

        Because Amazon has almost no profits. They are investing existing REVENUE but not profits.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        *spit take* *laughs*

        Why don’t you just write that you don’t understand accounting?

        But nonetheless a wholehearted “Thank you” from me for that., you couldn’t have tipped your hand more profoundly.

        Anyway, I shouldn’t drink when I read your comments *cleans his monitor* but still thanks, that was priceless. “Having been right” is a nice fun way to start the day.

        I’ll provide you with another link
        http://en.wikipedia.org/wiki/Revenue

        Small wonder you don’t agree with MG Siegler.

        Anyway, have a nice sunday :-)

    • http://patientambition.com/ Nick

      You are confused. First and foremost, Amazon doesn’t turn “huge profits”! http://online.wsj.com/article/SB10001424127887323971204578628392365153684.html “Amazon has trained Wall Street to expect meager earnings and even small losses with the promise that it can become profitable with the flip of a switch.” Of course Amazon produces hardware (5 types of Kindle). Apple and Amazon have competing ecosystems that focus on selling and distributing movies, music, books etc. Comparing the two companies is perfectly valid.

      It sounds like you think Amazon has the superior business model, the problem is that most of what Amazon sells isn’t unique to Amazon, they’ve just made it convenient to purchase there (even if it isn’t the cheapest price) and they are still not making a profit, just promising profits in the future. No one makes better hardware than Apple. Until Microsoft/Amazon/Google/Samsung etc. come up with better hardware (complemented by a great ecosystem), Apple will remain the most valuable company in the world.

      • fivetonsflax

        I believe ExxonMobil is once again the most valuable company, by market cap.

      • http://patientambition.com/ Nick
      • fivetonsflax

        Thanks. Interesting that nobody in the office noticed or mentioned it.

      • Kevin Kee

        When it’s good news for Apple, nobody cares. When it’s bad news for Apple, everyone shout on top of their lung. See the pattern?

      • fivetonsflax

        Yes, I have noticed that. I also remember a brief period when those rules were suspended.

      • Shawn Dehkhodaei

        Market cap doesn’t mean anything … it’s not an indicator of success or failure …. Microsoft has lost more than half their market cap, and in fact are about double Amazon’s market cap, yet they have a much more successful business than Amazon. Even with their long tail in irrelevance, they’ll continue to make BILLIONS in profit, vs. Amazon’s small losses.

    • fivetonsflax

      Amazon doesn’t build software? Of course they do. Off the top of my head:

      - Amazon.com
      - EC2
      - Kindle OS (based on Android but with significant customization)
      - Kindle apps for iOS, Mac OS X and Windows

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        That’s like saying BMW is a sofware company because of all the computers in their cars.

        All the things you listed are there because Amazon needs them to run their business.

        But on the other hand: good point. You make a great example of services that Amazon built for themselves and then turned into a business. Four examples where they monetized all those millions of credit card numbers.

        Apple has iTunes and iCloud. And both kinda suck.

      • Jessica Darko

        I’ve worked for Amazon as a software engineer. So, yes, they do build software, but it is terrible. Their software engineering is low quality compared to Apple. They have some good engineers, but terrible management and hire a lot of H1B types with a goal towards cutting costs rather than getting good engineering out of them (and like any undifferentiated group of people, some of them are great some of them are medicre.)

        But amazon’s management is organized around being retailer and they couldn’t give a damn about software.

        EC2, and all the rest of AWS is just off the shelf technology wrapped with APIs and ultimately is a major con to get people to pay too much for hosting. And they have been lying about it from the beginning- saying it ran Amazon.com when it never did (though some of amazon.com may be there now…)

        But Amazon is the kind of company which tells lies as almost a pathalogical impulse, because they see everyone– employees and customers– as suckers to be fleeced.

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

      “Amazon builds awesome infrastructure for reading and listening to audiobooks and music – Apple doesn’t.”

      Are you even remotely serious on this or is your post a bazinga?

      • Shawn Dehkhodaei

        I think everyone has finally realize that he was a joker … It almost bordered on sarcasm (to be polite).

    • AdamChew

      Amazon maybe to you is huge but they have to consistently search for new revenue stream and it is like a ponzi scheme. New money to replace the old.

      Furthermore the enemy of every retailer is unsold stocks which formed the bulk of their capital unless Amazon has a way of returning them back to the seller otherwise they are the capital of Amazon.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        I thought about your comment for a couple of hours and honestly I think the only thing I can reply is that you should Google “ponzi scheme” and try to find another anology.

        Amazon is making profits from their investments and they re-invest those profits. That is nothing like the way a Ponzi scheme works.

        About the second paragraph, just as an example: Amazon pays book manufacturers/publishers every 90 days and they turn around their inventory TWELVE times a year, meaning they can use all the money they make via selling books for those 90 days and invest it anywhere they like. Other book retailers like Barnes & Noble turn around their inventory TWICE a year if they are lucky.

        In short: you clearly have no idea what you are talking about, sorry to say it that bluntly.

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

        Actually, Ponzi scheme is very appropriate. Because Amazon shows little profit to losses, they are 100% dependent on growth to stay anywhere near solvent. The whole “investing” in the business is little more than a smoke screen to placate shareholders into thinking profit will someday come.

        Also, while Amazon USED to have a turn over rate of TWELVE that is no longer the case. It is close to 7-8 now and has been for some time. Still impressive though.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        No, it isn’t. If they simply stopped re-investing what would happen is all their profits simply showing up in their quarterly earnings reports.

        Like MG Siegler said.

        In that Techcrunch article that is linked in this blog.

        There are TWO things that you were supposed to read here. This blog post by Horace Dedui and the Techcrunch article that it is in reply to.

        It’s really kind of silly to have people comment who are too lazy to at least read the things that they are commenting on.

        A Ponzi scheme relies on fresh money because there are no actual profits in it. What is similar to a Ponzi scheme are startups that need fresh money in so-called funding rounds every couple of months which they take on via the promise of a future IPO (e.g. the first time they offer shares the venture companies who funded them can get their money back via the shares they bought via funding the startup).

        Amazon already had their IPO and last time I checked they also don’t take on funding at all.

        Again: they re-invest money. That is all they do. They build their empire based on profitable businesses they own. Calling this a Ponzi scheme is outright ridiculous and to be quite honest it’s annoying to me having to explain this to you. It’s not even that I (!) postulated this, it’s MG Siegler and on top of that there’s nobody who disputes this.

        So if you chose to reply to this please find sources that report that Amazon relies on external funding for their business to grow.

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

        “No, it isn’t. If they simply stopped re-investing what would happen is all their profits simply showing up in their quarterly earnings reports.”

        And I fundamentally disagree with Siegler on this point. Amazon’s investments fuel existing businesses for the most part. If they stop “investing” their quality will take a serious nose dive and people will STOP using Amazon. It is that simple.

        “There are TWO things that you were supposed to read here. This blog post by Horace Dedui and the Techcrunch article that it is in reply to.”

        I had already read Siegler’s piece and disagree with many (but not all) of his points. The point with Amazon simply being patient is one of the biggest issues I take with his write up.

        “It’s really kind of silly to have people comment who are too lazy to at least read the things that they are commenting on.”

        It is also silly to assume people did NOT read what they are commenting on.

        “A Ponzi scheme relies on fresh money because there are no actual profits in it. What is similar to a Ponzi scheme are startups that need fresh money”

        In many ways, this explains Amazon very well.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        It’s nice that you disagree but would you at least care to explain what _evidence_ you have for your opinion? You just say stuff without even the slightest hint at WHY you think this way.

        Have you even read a single line of Amazon earnings reports? You sound like a young earth creationist. All the data is vehemently countering your opinion. You basically just told me that you _believe_ that things are the way you think “because of reasons”.

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

        Go look at the past decade of predictions of Amazon’s earnings per share and compare it to how they actually performed. It is interesting research. While they met revenue growth predictions, their earnings per share have been solid misses. This, IMO, points to the vast majority of investments primarily supporting EXISTING business and not fueling FUTURE business.

        So if you take the view that Amazon’s primary expenditures are supporting existing businesses then they will NEVER be able to post a substantial profit like analysts have been predicting for years. Their stock price 4 years ago was based on Amazon posting a profit of around $3.00/share this year. They will be lucky to get $0.10/share. AMZN, as a stock, is a child’s pipe dream. People happily parrot an inventory turn over of 12 when it has been going down for years and is now at 7.5. People happily parrot about Amazon making “huge profits” when they have an undefined P/E ratio.

        They have decent products and services and a great on-line shopping experience. Their digital media shopping for music and movies is a sad state compared to using Netflix or iTunes. So they have good services but as a stock, they are a dog IMO.

        Yes, I disagree strongly with Siegler’s primary premiss that Amazon is simply patient for profits. I contend there will never be substantial profits and their current operations are exceedingly dependent on continued revenue growth to makeup for the lack of net profits.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        Steven, I’m sorry, but that is just ridiculous.

        http://www.nasdaq.com/symbol/amzn/revenue-eps

        That doesn’t fit ANYWHERE with the things you just said. Their EPS was NEVER at 3$. Not 4 years ago, not eight years ago. NEVER. It was 2.50 in 2010 and that’s three years ago, and if you look at the numbers between 2002 and 2010 you see that they’ve been at 0.10 EPS for years on end because they were investing like crazy and that’s evident if you just READ THE EARNINGS REPORTS listing all the sh*t they buy and all the things they are building and the amount of new workers they employ.

        So as long as you are unwilling to actually do your homework I’m going to back away slowly now, hmmkay?

      • Shawn Dehkhodaei

        You’re funny ….. I think you have a reading comprehension problem. What grade did you finish?

        Do you know what EPS is? Do you understand what projection is?

        “homework” … pffft.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        And here I was thinking that “So’s your face” was a three letter sentence…

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        Here, have another chart:

        http://www.geekwire.com/2012/amazon-employment-rising-56000/

        AMZN increased their number of employees from 20,000 in 2008 to 60,000 in 2011. According to Wikipedia today they are at 97000. That’s a five-fold increase in five years.

        Pretinding that that is even remotely possible when you need to funnel all your earnings into sustaining your “existing businesses” when existing evidently means a fith of your current size is ludicrous.

        Nothing you postulate fits Amazons actual numbers. I hate to use that old trope but “Go educate yourself”. Please.

      • Shawn Dehkhodaei

        So adding to your headcount will increase your profits?

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        That depends on workforce productivity and revenue development. Find out how Amazons quarterly revenue developed in the last five years and search Google for Amazon worker conditions. That’s pretty much your answer.

      • Shawn Dehkhodaei

        You don’t need evidence for an opinion … you need evidence for FACTS. I think you need to read up a little on the concepts of discourse and logic.

        On top of that, the oweness of proof is on you, since you consider MG Siegler to be FACT. Therefore you should show us your evidence.

        And yes, I’ve looked at Amazon’s financial statements and 10K reports. What’s in there that I missed?

      • Shawn Dehkhodaei

        I think you have a misconception here … (as does MG Siegler) …. I think you also have an issue with reading comprehension … I’ve read both articles. You need to familiarize yourself with financial markets and definitions of profits/losses/cashflow, etc.

        You assume that cash flow is something you keep … Any re-investment of cash flow is short-term … i.e. if you can float your cash for 90 days, that’s all you have …. 90 days at most. After 90 days you have to pay back those book sellers their money. In Amazon’s case, they’re taking a loss on most of the books they sell. So they actually pay more than they collect (negative cash flow after 90 days).

        So again, I fail to see how “profits will simply show up in their quarterly report” ???? It’s not an arbitrary document that you just edit … you ACTUALLY have to make a profit (really money in the bank). I think you’re stuck on the dotcom era.

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

        You need to read what I wrote. 4 years ago Amazon was PREDICTED to make around $3/share by 2013. There is no way they will come close. Year after year after year Amazon is predicted to make tons of money in just a few years. It will never happen. Their costs keep going up as they have to hire 10′s of thousands of low paying fulfillment jobs in their many warehouses.
        You really need to do your homework before commenting.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        Predicted by whom?

        Certainly not Amazon.

        http://www.wikinvest.com/stock/Amazon.com_(AMZN)/Financial_Guidance

        Seriously Steven we have to stop here. You are basically telling me that because analysts predict that Amazon will stop re-investing (e.g. all their earnings will end up on the balance instead of them using it to buy more warehouses and hire more people effectively bringing down their earnings to pennies per share) their costs are rising.

        Yes of course their costs are rising – proportionally to revenue and income! They’ve added 3bn in revenue every quarter for years now. 48bn in 2011, 60bn in 2012 and they again added 12bn in revenue in the first two quarters of 2013.

        This is really getting ridiculous. MG Siegler wrote this down very succinctly and I really lack the time to hammer this really basic information into your thick skull.

        Analysts on Wall St. DON’T CARE if earnings are ZERO as long as Amazon keeps growing their business at the current pace and you are sitting there pretending that Amazon is losing money because they don’t make analysts’ predictions. And of all places you do that on asymco.com where Horace has been telling you for a couple of years that anaylsts keep pulling things out of their collective asses for years when it comes to, oh, APPL for instance.

        And because AMZN doesn’t hit the guesstimates of analysts you call their investing and growing a Ponzi scheme.

        I’m sorry but I provided you with numerous links now, all from credible sources. The numbers are on my side, MG Siegler is on my side and I think it’s time to end this thread. This isn’t worth my time.

      • Shawn Dehkhodaei

        Amazon isn’t making any profits. They have cash flow, but not profits. Since you’re good at looking things up, you should try it.

        Their investments are all funded by a rising stock, which basically means their investments come from shareholders, not profits (which don’t exist).

      • AdamChew

        Thanks for being blunt it helps to make my point.

        As I mentioned they are always looking for new stream of revenues and it is like a ponzi scheme of looking for more suckers.

        How much do you think they make from selling those books and you very sure they sell everything they can or you just hope they do.

      • http://www.appleoutsider.de/ AppleOutsider.de – Sebastian P

        Adam, you don’t even know who “those suckers” are.

        Who is giving Amazon money? Who?

        Just name that mystical source that is giving Amazon money. That is all I have been asking for this whole thread.

        You guys keep calling it a Ponzi scheme yet you don’t even know that. It’s like talking to a baby about mortgages.

    • Chris Blanchard

      I don’t get why this is such an unpopular opinion. I think there’s a kernel of truth in this.

      In my opinion, Apple and Amazon aren’t as similar as Horace says. Their jobs are very different. But I would concede that they *accomplish* them in a similar way (i.e. being customer-centric). Even so… Apple seems far more customer-centric. Exhibit A – Apple’s unprecedented vertical integration to deliver a good customer experience

      Although I strongly agree on the point they are driven by vision

      • Chris Blanchard

        Furthermore, aren’t most successful consumer tech companies convenient, easy to use and a controlled, predictable environment for average users interacting with technology?

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  • braindrainers

    Apple’s only dilemma is how to keep their transfer pricing international tax haven strategy viable.

    • jameskatt

      So long as rich Republicans like Mitt Romney want to keep their fortunes in overseas bank accounts while paying little in income tax, Apple and other multinational corporations will continue to have their international tax havens.

      • Jessica Darko

        It’s cute how you think avoiding being robbed is somehow a bad character trait. It’s sad that you want to practice slavery, though.

      • matthewmaurice

        It’s cute how equate taxation with being robbed; on the internet, the invention of which was entirely government-funded.

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  • Galt2013

    Last year’s operating cash flow: Apple $50.8Bn, Amazon $4.2Bn. Actually Amazon’s operating cash flow has been $3-4Bn for the past 4 years, so there basically isn’t any material growth that matters. This isn’t a business model decision, this is not even a comparison. Amazon is built to be high volume, lower margin common goods. Apple is the opposite. And Amazon stock is probably the most overvalued stock on the market… it will crash someday when people realize $50Bn and $4bn are not the same.

    • Sivaram Velauthapillai

      Which one has the bigger moat? Which one is likely to survive in 20 years?

      A low-cost leader in a low-margin business is hard to dislodge.

      Amazon is overvalued but there are reasons the market is valuing it so richly.

    • Shawn Dehkhodaei

      On Wall Street, math is not their strong suit.

  • Dan

    Amazon is unlikely, in my opinion, to ever show significant profit because it serves no purpose for Bezos given the current Wall Street expectation. His net worth might actually go down if a sincere effort to make significant profit is attempted / signaled.

    If Wall Street ever realizes this, the stock price could fall off a cliff or at least would be expected to. Meanwhile, Mr. Bezos has been able to pay cash for the Post and has probably stashed even more funds in personal accounts away from the Amazon corp coffers.

    Beware of shorts changing the momentum.

  • effervescent

    eveybody goes to costco. Who doesnt? Unless you don’t live in the west coast, of course. I think Amazon is a company similar to costco. Steady growth and yes, a monopoly. I think the article got it exactly right. Amazon is valued for its convenience. And with other stuff (ie. prime, instant video, etc) amazon still has room to expand and grow.

    • jameskatt

      Costco is not similar to Amazon. Costco focuses on quality products and competitive prices AND it makes profit. Amazon doesn’t make profit.

      Costco doesn’t have a monopoly. It competes directly with other big box stores such as Walmart and Target. Costco is also laser sharp in its focus – having only about 1000 items it sells from its warehouse.

      • guest1221

        1000 items? i thought it’s about 4000.

    • Padova44

      “eveybody goes to costco. Who doesnt?” Me, so speak for yourself.

  • Studentx

    I love Amazon. It’s an awesome service and if it paid it’s workers a living wage, it would be perfect in my eyes.

    But I don’t give a rats ass about it’s stock holders at this point, they are dead weight and should be jettisoned with the trash.

    Who cares if Amazon ever makes a profit for so called investors, if it’s a win-win for consumers and workers. If only Amazon paid a living wage.

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

      But if Amazon’s stock was valued based on any type of fundamentals, it would be at about $10-$20 per share. This very low valuation would greatly limit Amazon’s ability to keep low prices since Amazon growth and compensation would require cash and not stock. So while you may have disdain for Amazon’s shareholders, they make your perceived utopia possible.

      Likewise, Amazon will never pay a “living” wage to the bulk of their employees because that would be a “loose” for consumers from your point of view. Pick one.

      • Walt French

        There’s no law that says capitalists are best served by paying rock-bottom wages. Henry Ford, an archetypical capitalist, said he aimed to produce cars that his workers could afford.

        Sometimes the “right” thing to do is right for you, too. Adam Smith certainly thought so, too.

        PS: God help us if we’re reduced to the cramped minimalism of Ayn Rand.

      • Studentx

        I doubt paying a few more dollars an hour is going to change the equation very much considering their volume and the amount of automation involved. It would probably add a few cents to every purchase.

      • Shawn Dehkhodaei

        Obviously AMZN disagrees with you !!!

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

        If nothing else changed , they would be posting 200+ million dollar losses per quarter on that few extra dollars.

    • Jessica Darko

      You socialists are so funny. And pathetic. Go read atlas shrugged and start thinking.

      • lenlayton

        And we were doing so well with civil discourse.

      • Studentx

        So you don’t care about a living wage for workers? I fail to see how we’re going to survive without a middle-class. With such razor thin margins Amazon would be better off worker owned. I fail to see why the workers cannot also be the investors… Like so many family owned business, but I guess mom and pop shops are just a bunch of socialists too.

      • Shawn Dehkhodaei

        In American parlance, anything that remotely resembles “fair” or “decent” is considered ‘socialism’ and therefore should be avoided like the plague. Things like living wage, good education, health care, old age pension, etc ….

      • http://oficeandfire.wordpress.com/ Paul Stark

        Yeah, I suppose us the europeans are a bunch of socialists who only think in equality and abstract things.

      • Studentx

        Paying a living wage is not socialism. What’s wrong with taking a little less profit?

        http://www.slate.com/blogs/moneybox/2013/08/08/paying_workers_more_the_alternative_to_a_higher_minimum_wage.html

      • http://oficeandfire.wordpress.com/ Paul Stark

        What about paying a fair wage to factory workers to create a consumist middle class to buy Amazon products? Is that socialism?

      • Will

        You libertards are so funny. And pathetic. Did you know that Ayn Rand was (secretly) on the government dole herself? Also a crappy writer, disgusting human being (personal life), and general hypocrite.

  • Padova44

    It’s a testament to Horace and his Horations ["Dr. Who" fans being 'Hovians'?] that the Comments are worth our time. Check out the Comments on the Bezos Bugle [formerly known as the Washington Post] discussing gun control or Hillary for how different ‘Comments’ can be.

    • Padova44

      Oops, replying to myself: Until AppleOutsider.de came along!!

  • http://www.iheavy.com/blog/ Sean Hull

    Horace you make a lot of very interesting and salient points. In particular your point about Apple in the early days. Yep they had built hardware & OS, but weren’t able to license the OS to other hardware makers successfully. I believe they tried this briefly under Scully the guy from Pepsi.

    On the Amazon side, I would add one big caveat. A large & growing portion of Amazon’s business has nothing to do with books, widgets or warehouses. That part of their business is often fairly invisible to consumers, Amazon Web Services. Amazon pretty much defines the cloud these days, being miles ahead of most of the competitors including the likes of Rackspace, Joyent & others. Server & infrastructure automation will only continue to grow. Gartner says 77bln in 2010 & predicts 210bln in 2016.

    • Shawn Dehkhodaei

      Yes, but we don’t know if they’re actually making money on AWS. Amazon will certainly not tell us … and so all the rest are also assumptions.

      • http://www.iheavy.com/blog/ Sean Hull

        True we can only guess. Though I’d guess big. Everyone is using AWS

      • DocNo42

        “Everyone is using AWS” – that’s a scary thought. What if Amazon decided to pull a Google and pull the plug? Or those razor thin margins weren’t a crazy as a fox strategy but indeed a ponzi scheme? I hope Netflix and others have a plan B. Not just because it’s Amazon – anyone with cloud and who doesn’t own their infrastructure needs to have a plan B. Yet it’s the first thing people moving to the cloud seem to relish not thinking about any more. Completely daft if you ask me…

      • http://www.iheavy.com/blog/ Sean Hull

        If I read you right, you agree with my premise and look at the situation with concern. I can’t agree more.

        Whether it’s Bezos plan or not is no matter. As that monopoly builds, so too will be fees, costs & the overall pricetag of the service everyone has grown to rely on.

      • Will

        ” As that monopoly builds, so too will be fees, costs & the overall pricetag of the service everyone has grown to rely on.”

        As an AWS customer (small-time), I can tell you that so far their fees have been dropping consistently for some time, not growing.

      • http://www.iheavy.com/blog/ Sean Hull

        It’s true Will. I’ve seen that too. My prediction for the longer term, but then again there may be a lot of competition to contend with.

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  • Chris Blanchard

    Just to further your point on Amazon being disrupted down the line. There may already see early signs of disruption what some regard as its core future business – Amazon Web Services.

    A growing majority of developers I follow these days avoid AWS because its becoming overly complex and expensive (rel. performance). It’s now mainly catering to large corporates who demand massive scalability and a wide array of software stacks. But if you look at the low end, small and independent developers are flocking to services like Digital Ocean and Linode who offer much simpler, limited and cheaper service (at the expense of the scalability & flexibility) that uses (mainly) open source software

    It seems to me, that much of the profit being invested into Amazon’s online infra may not yield its anticipated return in the years to come. The end game may be overcapacity in Amazons datacenters as the appetite for AWS (in its current state) stalls with startups moving to the disruptors. In other words, the small guys will eat AWS from below.

    Also completely agree that we need to acknowledge Amazons success thus far. Businesses don’t get enough credit for that

    • http://www.linkfest.com/ StreetEYE (@streeteye)

      Interesting. Or BS. Not sure which.

      Show me the numbers on Digital Ocean and Linode. They’re a drop in the ocean compared to Amazon.

      Where do they have any advantage, except maybe thinner margins?

      I think the AWS model may have increasing returns to scale and hence some winner-take all dynamics. Your typical web business or SaaS provider or Netflix doesn’t want ‘simpler, limited.’ (Cheaper maybe, but Amazon is pretty cheap.) They want data centers on all coasts and continents from day 1. They want to know every SaaS service they may wish to integrate is a few racks over and negligible ping. The want something they can grow with, has any feature they may need going forward.

      So AWS gets the business, increasing their scale, and increasing the reasons for everyone else to host there.

      Not saying it’s going to be a Microsoft type of monopoly with pricing power, but the supermajor cloud PaaS provider.

      I think AWS has a significant lead and are hard to compete with and in many if not all cases the low cost provider. The low end $5/month VPS is not the problem, (maybe Amazon needs a better free tier) …unless someone truly builds a better mousetrap, comes up with a killer feature AWS’s architecture can’t support.

      • Shawn Dehkhodaei

        Well, why don’t you show us the numbers (i.e profits) for AWS ?? Yeah … good luck with that !! Amazon doesn’t publish them. Which probably means that they’re not that proud of them.

      • Chris Blanchard

        Perhaps you’re right. It’s just a hypothesis and I welcome it to scrutiny from greater minds

        I think you’re 100% right on the wants of the Netflix/large corporate front. They want scalability and global reach. But these are the hallmarks of disruption. Amazon is over-serving this segment because its lucrative and thereby neglecting the developers/startups at the bottom

        I’d posit (and please tell me if I’m wrong) that the Next Amazon doesn’t care about global reach and scale from day 1. They care about surviving until they are able to (in)validate their business model. They don’t have the time and resources to learn and integrate with AWS’s numerous and complex services… and they’re very sensitive to price/performance (http://bit.ly/13GDi2U)

        Perhaps the better mousetrap you’re looking for is simplicity and learning curve. AWS’s architecture can’t support this because its gone too far in the direction of serving the complex and lucrative needs of large businesses. That’s not something easy to rollback…

        Also I was wrong in saying “limited” was a feature. Developers are more interested in the benefits that a limited service allows for than being limited per se

        To offer up more than anecdotal evidence: http://bit.ly/15ZALiW. Again, you’re right… still small. But early days if this is the beginning of a disruption

      • http://www.linkfest.com/ StreetEYE (@streeteye)

        sounds like Digital Ocean is becoming a legit up-and-coming alternative to Linode and Slicehost for smaller sites that want the poor man’s alternative to EC2.

        to be clear, we’re talking about the difference between paying $5 a month for a low-end VPS, or paying $50/a month, and having multiple data centers, third party tools like ylastic, integrating with on-site SaaS and PaaS, Amazon’s own Paas services.

        the picture I have is there will always be some shoestring guys undercutting AWS. the question is whether they have any better mousetrap the Amazon doesn’t. if they do and Amazon can buy/build it, they should. if they can’t because it’s a whole different architecture, than someone could disrupt Amazon.

        my suspicion is, Amazon is on the right track, it should be a pretty decent business.

        tough stock to own for the reasons mentioned, basically managed for zero profitability, all their businesses are in low-margin ghettos where they need to out-execute competitors big and small, and who knows when they will actually monetize it.

    • Shawn Dehkhodaei

      On top of that, companies like IBM, Microsoft and Oracle are offering custom cloud-based solutions for computing and storage, which ARE NOT tied to Amazon, and are either hosted, or run in-house. You’ll find that in 5 years, many mid-size corporations will be going the custom cloud route.

  • Walt French

    Yow! 206 comments and Disqus is iPhone-hostile. So w/o knowing if Ben has commented here, let me call out his post at stratechery.com, where he complements the fine comments here.

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  • Derek Brown

    Monopolist? HA.

    As a former Wall Street analyst covering Amazon.com, I can assure you that competition (and the resulting pressure it puts on growth and margins) is the number one concern for investors. By far. Always has been.

    For an alternate view of Amazon.com and is business, opportunity, and perception, I offer this: Amazon’s Waters Could Flood Google http://oneblindsquirrel.blogspot.com/2013/05/amazons-waters-could-flood-google.html

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  • Mark Duran

    “Or consider the dilemma of Apple which after building a successful computer business which included system software, could not pivot to license that system software so others could build computers with it.”

    No, they chose not to license system software and kept it closed. What resulted was a machine that didn’t crash multiple times a day like all the hunk-o-plastic PCs, something that everyone from users to IT departments can enjoy.

    • Snafu

      Actually, previous to Mac OS X, their system software crashed multiple times a day. A single misbehaved application or hardware driver (say, a pro video card’s) could sink the whole OS. Those days I experienced that daily at my job.

      • Mark Duran

        Actually, I’ve been using Apple’s since the Apple 2 and Mac’s in particular since before their public release, and haven’t experienced those problems. In fact, Infoworld and Computer World did surveys of Mac, Unix and PC and found on average (and maybe this where we differ) that Unix systems crashed about 1/year Mac’s about 1/month and PC’s 5/week. Give me a Mac any old day.

        The point I was trying to make is that Apple choosing to keep the system closed, forcing software developers to develop to their guidelines made for a much better and stable computer.

      • Will

        Depends on which version of the Classic Mac you’re talking about — they spanned years, and weren’t all the same. I was a Mac guy from the very beginning. At its height (System 7) it was quite stable. But by System 9 (just before the current Unix-based OS X series) it was crash city, just as Avatar said. Apple couldn’t fix it, the company was going under, and it was only the complete replacement (Unix/OS X that accompanied Steve Jobs coming back) that saved them.

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