
Why Amazon Is Special and Apple Is Not - TomAnthony
http://www.theatlantic.com/business/archive/2013/02/why-amazon-is-special-and-apple-is-not-in-1-paragraph/272791/
======
simonh
And yet 5 years after the launch of the iPhone Apple still hoovers up a vast
proportion of the profits in both the mobile industry and the desktop computer
industry. Meanwhile 17 years after it launched, Amazon earned in total as much
as Apple does in a single quarter.

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

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

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

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

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

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

~~~
fspeech
I mostly agree with what you are saying. The reason we are having a discussion
here is that there are at least two ways to look at the fact that Apple enjoys
both mass volume and high margin:

1\. Apple has an amazing business.

2\. Despite 1 it is not sustainable to have both mass volume and high margin.

I am trying to come up with counter examples of point 2. Coca Cola, McDonald's
and Microsoft come to mind, but they share a common characteristic in that
these companies control a small but high margin part of their respective value
chains. The end products that consumers actually buy (Coke, burgers and PCs)
are mass volume and low margin.

~~~
simonh
I'd agree that mass volume and high margin is hard to pull off, and often
proves unstable. I think this is why Apple often doesn't try to address all of
a market. They only produce a handful of desktop and laptop models, they have
resisted producing a large format phone (though I do expect that to change),
etc. They value product consistency over feature and form factor
proliferation. They are perfectly happy to occupy the high end of the market,
and leave the low end to others.

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

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

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

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

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

~~~
niggler
How do you define "competing against Amazon"?

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

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

~~~
potatolicious
I actually think brick and mortar stores _are_ competing with Amazon - and
there is also an emerging hybrid approach that threatens Amazon as well.

In many places, suburbs and cities alike, people _don't_ want stuff delivered
to their doorstep. The existence of Amazon Lockers is proof enough of this -
sotres now offer online shopping with local pickup (Best Buy, Staples, and
IIRC Wal-Mart). This competes with Amazon.

Wal-Mart is also attempting to reposition itself as an Amazon alternative
(i.e., pure online shopping) and has the capital and existing supply chain
infrastructure to do so (they are one of very few).

On top of that Amazon continues to struggle with specialty goods. Amazon is
very, very effective at selling mass-market products, but their attempts to
move upmarket have been extremely mixed. Lower-volume, premium goods are not
their forte, and brick and mortar stores (as well as niche online shops) still
have a firm grip on that.

Not to mention we know that the public is extremely price-sensitive. Amazon
continues to price-compete with Wal-Mart, despite its substantially lower
volume, leading to even thinner margins. They do this out of necessity,
because at this point for many people the conveniences of online do not trump
a quick trip to Wal-Mart if the product is cheaper.

I don't think it's at all prudent to discount pure brick and mortar businesses
as competitors to Amazon. Amazon very much exists in the same sphere as all
retailers, online and off.

~~~
niggler
Amazon Lockers and local pickup solve different problems: the Locker solves
the delivery guy issue (will I be there to sign) but doesn't provide the
immediacy of in-store pickup for those items that are available in store.

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

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

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

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

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

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

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

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

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

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

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

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

~~~
lostlogin
Thank you. If anyone thinks they can beat Apples infrastructure, good luck to
them. Buying components by the 10s of millions, and getting completed products
to customers from the factory to the end user at the other end of the world in
a day or 3, whilst managing to have low inventory. Brand new iPhone models
excluded...

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

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

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

~~~
arrrg
… but in an overall growing market.

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

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

~~~
rednukleus
They may well be able to hold on to a niche segment in the market with high
margins, but the chances of them holding on to a dominant position _and_ high
margins are slim to none. This is the reason for their seemingly low P/E.

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

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

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

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

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

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

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

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

~~~
epo
I don't believe that for most people "Windows machines were substantially
better". Then, as now, Windows was bundled in with so much crapware and with
such poor out of the box defaults that the performance was, and remains,
dreadful.

Then, as now, Windows primarily thrived because corporate buyers bought more
of what they already had. The success of Windows between 1996-2005 was almost
entirely due to monopolistic abuse and buyer inertia.

~~~
rednukleus
Complete nonsense. Macs in the late 90s were _awful_ , and most Mac fans I
know agree with this, at least in retrospect. Slow, expensive, hardly any
software ran on the things.

Windows machines thrived for many reasons, including being faster, cheaper,
having the best office programs, by far the best games, as well as all the
advantages they had in enterprise.

I don't think any competent observer could say that late 90's Macs were good
value machines.

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

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

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

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

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

This isn't really true. Check out Emek Basker's famous paper "The Causes and
Consequences of Wal-Mart's Growth" (econ.missouri.edu/working-
papers/2006/wp0611_​basker.pdf (and its citations)) and the work of other
economists who estimate that WalMart, _on its own_ may be responsible for an
appreciable portion of U.S. productivity growth in the 90s and 2000s.

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

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

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

~~~
jseliger
>I would draw a distinction between productivity and innovation

Again, check out the paper, the papers citing it, and the papers cited in its
bibliography—based on that research, the distinction is fuzzy at best.

------
gingerlime
As the update to the article quotes:

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

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

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

~~~
mrfairladyz
> _This is also starting to become true with the kindle for consumers._

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

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

Here's an interesting read from Paul Miller of The Verge:
[http://www.theverge.com/2012/1/4/2669066/ecosystem-the-
winne...](http://www.theverge.com/2012/1/4/2669066/ecosystem-the-winner-takes-
it-all)

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

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

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

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

~~~
sparky
How much of that pricing power would remain if Costco carried as many items as
Amazon? Amazon is predicted to eclipse Costco (and Target) in terms of sales
this year ([http://money.msn.com/top-
stocks/post.aspx?post=34532428-58cf...](http://money.msn.com/top-
stocks/post.aspx?post=34532428-58cf-4dfd-acfb-0870492862f7)), so given an
equal catalog, Amazon would be able to sell more of each item and command a
lower price, no?

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

~~~
mjmahone17
Right, but the whole point of Costco is "currated" content: they get good
deals on huge quantities, because they make sure not to carry every type of
product. Variety isn't necessarily a good thing, and if Costco implemented
free two-day shipping (for an additional fee), as well as an improved UI, they
probably could become the biggest online "everyday" retailer (i.e. for things
like cereal, toilet paper, etc.). Though I think it might be more likely that
Fresh Direct, or a similar company, could get a stronger toehold on that
market than Costco or Amazon.

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

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

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

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

If we're talking tech not mining.

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

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

------
zyb09
> and it also hints at potential complacency.

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

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

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

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

------
lnanek2
Wonderful, someone summarized stories we've had posted directly and discussed
already, and they get voted up? I'd rather the originals just get reposted,
honestly.

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

