We love the new Kindle lineup of e-readers and tablets, especially the brand new Kindle with Paperdisplay and the super-charged Kindle Fire HD. At last week’s unveiling, the CEO Jeff Bezos underscored that Amazon wants to make money when people use their devices.
That’s why all Kindle devices display ads on the lock screen (don’t worry, you can opt-out for fifteen bucks). And just like Google, Amazon is selling hardware below cost, hoping to recoup losses through content sales on Amazon.com. The only problem with this strategy: Amazon’s profitability doesn’t even close to Apple’s….
Bezos laid out Amazon’s philosophy during the presser:
We want to make money when people use our devices, not when they buy our devices.
If someone buys one of our devices and puts it in a desk drawer and never uses it, we don’t deserve to make any money.
Above all else, align with customers. Win when they win. Win only when they win.
Dan Frommer of The Read Write Web put together a handy chart which highlights the astonishing difference between the two Silicon Valley giant’s profits.
Whereas Amazon prices really aggressively to undercut its rivals, the downside is that its profitability takes a back seat though Amazon bets sheer volumes make its strategy viable.
Now, there’s nothing wrong with this strategy – it’s a perfectly valid market approach.
Apple has generated more than $73 billion of profit over the span of this chart, while Amazon is around $2 billion. Some of that has to do with the relative size of the companies; Apple is about three times bigger, sales-wise. But Apple’s approach is still dramatically more profitable on a relative basis.
That said, there’s also merit to Amazon’s approach. By pricing its devices lower, it’s potentially bringing its technologies to more people in different economic positions.
But Amazon has now taken on Apple’s iPad with the $499 Kindle Fire HD with 4G networking, it better be profitable because Apple is earning billions of dollars on the iPad alone each quarter.
Asymco analyst Horace Dediue thinks “Amazon will sell as many Kindles as they make, but the number they will make will not be the most they could make”. He likened the new Kindles to the swag of sorts for another product, the Amazon.com web site.
What Amazon tries to do with the brand is ensure that the Fire is in the hands of its most ravenous consumers.
That is why it’s not sold in all markets or through all channels. They are sold through Amazon.com in the US (limited sales in UK as well).
This is because a large number of the product in the hands of users who only use it for browsing or in areas where Amazon does not have content deals or where its ads are poorly targeted (e.g. India, Indonesia or Madagascar) would be a disaster.
Why margins, and ultimately profitability, matter?
Because greater profitability lets Apple spend more money to advertise its tablet. It can also pour more money into research and development, a necessity for competitiveness.
Amazon is a high-revenue and low-profit company (think of it as the iTunes biz of sorts) so it doesn’t have a hundred billion dollars of cash reserves like Apple does. Therefore, Amazon cannot prepay billions to component makers in order to secure multi-year output of parts at the lowest prices.
This is crucial to margins and profitability so Amazon can only dream of approaching Apple’s 40+ percent margin on the iPad.
And should Amazon enter the cell phone market, as rumored, it won’t be able to beat Apple’s iPhone margins, often labeled as best margins in the business.
No phone maker ever did that.
Apple is now basically an iPhone company.
The iPhone sells like hotcakes and is Apple’s most-profitable product. Cupertino makes about as much off of one iPhone as it does on two iPads – that’s why Apple rules smartphone profits while rivals are left with loose change.
But don’t write Amazon off yet.
According to Google chairman Eric Schmidt, Apple, Google, Microsoft and Amazon form what he referred to as “the gang of four”.
That is, the four companies with far-reaching ecosystems and platforms that make today’s web services and devices tick.
As for Amazon, what do you think of their profitability?
Can Amazon keep making bold moves as it becomes a device maker without having to rise prices in order to improve its bottom line and fund pricey product development?