Great article about why investors are rewarding Amazon and punishing Apple

[Phokus]

http://www.eugenewei.com/blog/2012/11/28/amazon-and-margins

Wow, this makes a ton of sense. I don't see anyone who could compete with Amazon, but Apple really does have a target on it's back. Amazon still has a lot of brick and mortar retailers out their that they can (and will) destroy.

 

[DaveSimmons]

... or co-opt for the third-party seller program.

Even if they don't want to get into, say, the fishing lures business they make it easy for someone else to offer their store through Amazon.

Plus all the used stuff, without the horrors of eBay and PayPal.

 

[Phokus]

... or co-opt for the third-party seller program.

Even if they don't want to get into, say, the fishing lures business they make it easy for someone else to offer their store through Amazon.

Plus all the used stuff, without the horrors of eBay and PayPal.

Yeah, my hope is ebay and paypal are punished, i absolutely hate both of those companies. I especially hate having to use payapl because everyone else uses it.

 

[Markbnj]

Very interesting piece, but I don't see the negative spin on Apple that you do.

 

[KlokWyze]

James Hassinger about a week ago

I just figured out -- at my great age -- what stock is. It's the reputation business. It's being run by a bunch of stock manipulators for purely monetary reasons. Don't go to the market for wisdom. Go to it to bet. If you have great big wads of money you generate waves. Stock market value is to real value as... They have convinced people that what the stock babblers say is meaningful. It's because large capital pools are shorting Apple. Because they're big enough to affect the stock market. It's okay, in a way. Nothing personal. Turning around a reputation is easy: just hire a bunch of gossip columnists. What companies have to do is not get distracted by the Herb Tarletons of Wall Street. I'm shorting Wall Street.

 

[Skel]

Very interesting piece, but I don't see the negative spin on Apple that you do.

Same here. If anything I thought it did a good job of highlighting Apple's strength and vision.

 

[Krazy4Real]

interesting.

 

[bigrash]

Cool article

 

[Capt Caveman]

Very interesting piece, but I don't see the negative spin on Apple that you do.

The OP is an Apple troll.

 

[tynopik]

Very interesting piece, but I don't see the negative spin on Apple that you do.

Attacking the market with a low margin strategy has other benefits, though, ones often overlooked or undervalued. For one thing, it strongly deters others from entering your market. Study disruption in most businesses and it almost always comes from the low end. Some competitor grabs a foothold on the bottom rung of the ladder and pulls itself upstream. But if you're already sitting on that lowest rung as the incumbent, it's tough for a disruptor to cling to anything to gain traction.

An incumbent with high margins, especially in technology, is like a deer that wears a bullseye on its flank. Assuming a company doesn't have a monopoly, its high margin structure screams for a competitor to come in and compete on price, if nothing else, and it also hints at potential complacency. If the company is public, how willing will they be to lower their own margins and take a beating on their public valuation?

Basically he's saying Apple's strategy is unsustainable because someone is going to come in and compete on price (Android) and Apple won't be able to respond because they aren't built to survive on low margins.

On the other hand, no one can undercut Amazon so they are built for the long-run

Because technology, both hardware and software, tends to operate on an annual update cycle, every year you have to worry about a competitor leapfrogging you in that cycle. One mistake and you can see a huge shift in customers to a competitor.

Apple has to continue innovating and releasing the latest and greatest or someone could trump their products.

Amazon doesn't have that worry. No matter what the hot new product is, they can sell it. They don't need a new release to keep customers coming back to their store.

Basically their 'base' is more stable and isn't going anywhere.

 

[tynopik]

I was disappointed that Apple didn't price the iPad Mini lower out of the gate. Of course, they're largely sold out through the holidays, so pricing it lower means leaving money on the table in the conventional microeconomic analysis.

But in the long run, if you look at every iPad purchaser as a new subscriber to the Apple ecosystem of hardware and software services, there's value in fighting for every additional user versus Google or Amazon in the low end tablet market. Most customers who buy a low end tablet will stay in that producer's ecosystem for a while, at least a year. Graph the low end market and you see it trending towards zero, to that day when an Amazon or a Google will likely offer you a low end tablet for free, perhaps as part of your Amazon Prime subscription or if you agree to pay for Google Drive.

That's a world in which the switching costs are set by the software ecosystem of each of those companies, not the hardware. It's why Apple lovers are right to fret about iCloud and its underwhelming mail, storage, and calendaring services and substandard reliability, why Amazon might spend a billion dollars licensing videos, why Google tried so hard to switch people over to Google+. They're all looking for a path to software lockin, a more defensible moat.

Why fighting for high margins on the hardware may be counterproductive long-term.

I've always wondered if Apple's initial strategy of only selling iPhones through AT&T was a strategic mistake as it 'encouraged' the other wireless networks to wholeheartedly embrace Android.

 

[Markbnj]

Basically he's saying Apple's strategy is unsustainable because someone is going to come in and compete on price (Android) and Apple won't be able to respond because they aren't built to survive on low margins.

On the other hand, no one can undercut Amazon so they are built for the long-run



Apple has to continue innovating and releasing the latest and greatest or someone could trump their products.

Amazon doesn't have that worry. No matter what the hot new product is, they can sell it. They don't need a new release to keep customers coming back to their store.

Basically their 'base' is more stable and isn't going anywhere.

I'm not saying the strategic points don't apply to Apple, but Apple isn't mentioned directly in that section, and the author goes on to point out some of the strengths of Apple's model, and ways in which they could profit from moving more in the Amazon direction. Bottom line: the OP title is misleading, imo.

 

[tynopik]

I'm not saying the strategic points don't apply to Apple, but Apple isn't mentioned directly in that section

um, the title of the article is "Amazon, Apple, and the beauty of low margins"

Yes, in that section he is discussing Amazon and their low margins.

So that he can later contrast them with Apple.

If you don't think that section is aimed directly at Apple, I don't know what to say

Bottom line: the OP title is misleading, imo.

How so? He explains why Amazon's low margins are a strength but when Apple's margins start to decline, investors see it as the first sign that their 'traditional' business strategy is failing.

Once Apple has to compete on price, their future gets a lot more hazy. Hence why falling margins are a huge red flag. On the other hand Amazon thrives on low margins, so it's a positive for them.

Thus I find the title completely accurate, it explains why investors are rewarding Amazon's low margins while punishing Apple's falling (yet still massive) margins.

 

[KeithP]

A lot of folks, especially Apple supporters, like to characterize Amazon as irrational, even crazy, for its willingness to live with low margins.

I stopped reading at that point. I have never seen/hear such a thing. It looks to me that he just made that up to support what he writes next.

-KeithP

 

[Murloc]

interesting points, might come in handy.

 

[homercles337]

What does Apple have to do with Amazon? One sells books and cookware, the other sells shiny, cheap, overpriced junk.

 

[Markbnj]

um, the title of the article is "Amazon, Apple, and the beauty of low margins"

Yes, in that section he is discussing Amazon and their low margins.

So that he can later contrast them with Apple.

If you don't think that section is aimed directly at Apple, I don't know what to say



How so? He explains why Amazon's low margins are a strength but when Apple's margins start to decline, investors see it as the first sign that their 'traditional' business strategy is failing.

Once Apple has to compete on price, their future gets a lot more hazy. Hence why falling margins are a huge red flag. On the other hand Amazon thrives on low margins, so it's a positive for them.

Thus I find the title completely accurate, it explains why investors are rewarding Amazon's low margins while punishing Apple's falling (yet still massive) margins.

The article is not about why Apple is weak, it's about why Amazon isn't weak despite pursuing a low-margin strategy. More specifically, it's definitely not about "why investors are rewarding amazon and punishing apple." Maybe it gives some insights into current stock trends, but the author's purpose was not to answer the question that the OP posed in the title.

 

[darkxshade]

What does Apple have to do with Amazon? One sells books and cookware, the other sells shiny, cheap, overpriced junk.

Kindle vs ipad... article pretty much says Amazon isn't going to challenge the behemoth that is Apple on high end tablets but will instead nip at it slowly along with Google on the low end low margin side. The idea is that once you buy a tablet, you will stick with it for about a year on average which locks you into their ecosystem rather than Apples.

 

[Ausm]

I think Newegg has a similar business model to Amazon's.

 

[tynopik]

The article is not about why Apple is weak

no one said Apple is weak

it's about why Amazon isn't weak despite pursuing a low-margin strategy. More specifically, it's definitely not about "why investors are rewarding amazon

those are not un-related . . .

it's definitely not about "why investors are rewarding amazon and punishing apple." Maybe it gives some insights into current stock trends

what 'current stock trends' would those be? Rewarding Amazon and punishing Apple perhaps?

but the author's purpose was not to answer the question that the OP posed in the title.

It wasn't ALL the article was about, but it was certainly a major part.

If the company is public, how willing will they be to lower their own margins and take a beating on their public valuation?

. . .

Apple took some grief last quarter for seeing some margin depression

is that not talking about investors punishing Apple for low(er) margins?

 

[mshan]

Amazon Web Services and how it can increase Amazon's overall profit margins, despite increased competition from others in the cloud:

http://video.cnbc.com/gallery/?video=3000112384&play=1

 

[Markbnj]

no one said Apple is weak ... snip ...

We'll just have to agree to disagree. The article was clearly not _about_ what the OP said it was _about_, regardless of how many inferences you want to make based on the odd sentence or two.

 

[tynopik]

regardless of how many inferences you want to make based on the odd sentence or two.

The odd sentence or two? The entire article was explaining how Amazon thrives on low margins while Apple does not.

Once you understand the concept, understanding how it impacts investor thinking is self-evident.

If low margins are good for Amazon, investors are good with Amazon having low margins. DUH

If Apple is not built to fight it out at low margins, investors are not good with Apple having low margins. DUH

Do you need absolutely everything spelled out for you?