BMW could launch a bargain basement 0 series, or Wal-mart could start selling quality products.
Fundamentally there isn't much point for either because it's not the right customer base. This is what branding is about, if Apple acquires a whole bunch of customers that don't care about quality and then complain that their devices don't have half-baked features it doesn't do the brand any good. These customers will destroy the brand.
I don't want to have to walk into an Apple store and wonder which is the low margin device that will fall apart / fail to perform, if I wanted to ask those questions I'd go to Best Buy.
The low margin Apple market is craigslist, if you want a 3 year old Apple device that's where you can get it.
The most confusing thing about AMZN and APPL are their respective PEs. They are priced as if each are going to adopt the other's business model.
AAPL's P/E ratio is ~10x. For comparision, GOOG's is ~23x. AMZN's P/E is ~3,257x.
At $13.1B AAPL made 4.5x what GOOG ($2.89B) did last quarter, And, in that one quarter, earned profits that are ~7x what AMZN has made during its entire existence.
So, yes. It's not entirely clear how "Wall Street" is assessing these tech companies against respective share prices.
I think it might be fairer to look at AMZN's price to revenue ratio and compare that with other big companies which have margins AMZN might reasonably have when they start trying to make profits. That would maybe give a reasonable understanding of expected upside. Looking at their profits when they aren't trying to make a profit is a little silly.
GOOG on the other hand I think is a fair enough comparison. Actually GOOG has pretty much failed at all their attempts to make money off anything but ads, which I consider kind of worrying.
PS FYI you posted this twice and the other one is marked dead. I recommend deleting it.
For example, Amazon has about half the market cap of walmart, but has 10% of the revenue. If you think Amazon can expand 5x, then focus on making similar margins as walmart, that would justify the current price.
While I think Amazon could potentially grow their revenues 5x, I don't think it makes a lot of sense to own something that has to grow 500% to be fairly valued. To me that shows just how absurd their current valuation is. If I have a company grow 5x I'd like to think I'll make some money. In this scenario though, it just becomes fairly valued at that point.
Frankly, I'd love to own some Amazon stock. I think it's an amazing company with lots of potential. I just can't justify paying the current valuation. I'll probably regret it someday, but for now I'll stick with Apple and their 7 pe. Even if they lose all growth its worth much more than this. It's priced as if they are going out of business right now. I'd pay this much for either their iPhone or iPad business, not to mention having both, Mac, iPod, and anything new they come up with. They sold > 75 million devices last quarter. Doesn't exactly seem like a dying business to me.
If you "know" a company is going to grow 5x, other people are going to know that too. And if I know a company's stock price will soon be 5x what it is today, I'll happily pay 2x for it; 2.5x return is still amazing. Hell, I'd pay 4x today's price, because a 20% return is nothing to sneeze at. Other people will too. Pretty soon today's price becomes tomorrow's (estimated) price, with various discounts applied for risk and whatnot.
True, but based on our logic and math, it has to grow 5x to break even. Apparently everyone "knows" it's going to grow 6x soon. It just seems to me there aren't any discounts being applied for risk.
While I have no doubt amazon can grow 5x, I do have some doubt as to timeframe. If it did it this year I'd be happy to own it at these prices. I think it's probably at least 5-10 years from that. 0-20% return over that timeframe isn't very good.
That makes amazon overpriced by, what, 25%? Which is not particularly shocking. Lots of stocks are a bit overpriced. AMZN is popular. Don't buy it. Shrug.
When you compare a 3000 P/E to a 20 P/E, you might come away thinking amazon is overpriced by a factor of 100, which would be shocking. But I don't think there's any reasonable case that it's overpriced by a factor of more than 2.
Depends. If you think it's growing 10x, then it is discounted. I arrived at 5x by working back from the stock price, doesn't really mean that's the "right" answer. I'm not trying to justify amazons price, just explain what the people who do believe in it are thinking.
You should think of Amazon more like a real estate holding company. You could be incredibly successful buying and selling properties and never actually turn a profit, because you continually reinvest in new properties. You could easily have no profits and still have assets worth billions.
That's what Amazon is, except their assets are market share and infrastructure.
Maybe 20 years is too long for you to wait, but that's fine! The stock is priced accordingly so just cash out and let someone sweat the final liquid value of the assets.
>I think it might be fairer to look at AMZN's price to revenue ratio and compare that with other big companies which have margins AMZN might reasonably have when they start trying to make profits.
There is no indication that they will ever make huge profits. The Amazon you see is that Amazon you WILL see for the next 10-15 years at least.
It's absolutely clear how "Wall Street" assesses any company.
"Wall Street" assesses stocks based on whether they can make money at a given valuation. Full stop. They are not investing. The are not acting as agents for investment. They are identifying and executing trades.
If you're trading, an undervalued company you can't convince anyone else to pay more for (or less for, to profit via shorting) isn't a "value".
Because it's simply not about fundamentals.
I fully expect that when Wall Street can no longer convince anyone to pay less for Apple shares, they will begin building the "Apple is unstoppable" narrative and attempt to make money on increasing share price, driving it back up to a record peak. At which point they'll start the cycle over.
I think it's quite easy to understand Apple's low P/E. Smartphones isn't like other industries, it changes quickly. The fact that Apple earns so much money now doesn't guarantee it can still do it in 5 years, much less 10. Just look at Nokia, RIM, etc. The market thinks that Apple doesn't have a lot of headroom for growth but has a much larger danger of a huge decline, so its long term expected yearly income is lower than its current one. And the E you use to calculate P/E should actually be the long term expected earnings.
Wrt "...the E you use to calculate P/E should actually be the long term expected earnings"...
You may be thinking of Forward P/E. But Forward P/E only attempts to project earnings out 12 months.
The E in P/E is the measure of actual earnings over time. The P/E ratio is, quite literally, the number of years required to pay back a stock's purchase price at constant dollars and earnings. AAPLs P/E ratio indicates it would take AAPL 10 years to pay back its current stock price. GOOG's indicates 20+ years. AMZN's P/E ratio indicates it would take over 3000 years to do the same.
You may be right, and AAPL's P/E ratio may be closer to 5 than where it is currently (where the drop comes from a lower stock price). But then, so should AMZN's.
Wrt the "the E you use to calculate P/E should actually be the long term expected earnings" comment I made..
I was not trying to say that the standard financial metric called P/E ratio should be calculated this way. Rather I think that ideally or principally it should be calculated this way, because what matters is "how many year will it take for me to recoup the money?", not "how many years will it take for me to recoup the money assuming that the company's earnings remains the same?".
But obviously you don't know the company's future earnings, so to make an actually computable metric you can only use the current earnings as an estimate.
"The P/E ratio is, quite literally, the number of years required to pay back a stock's purchase price at constant dollars and earnings."
Yes, this is what I mean. I'm no expert on stocks and am not familiar with the terms, but the principle should be there.
Say the "normal" P/E is around 15, which means that people think it's fair to be able to recoup the stock's price in 15 years. Now why Apple's P/E is only 10? That's because people think its future earnings will drop (in statistical sense), so that the current price will still be recouped in roughly 15 years. Similarly, Google's P/E is 20+ because people think its future earnings will rise, so that again the current price can be recouped in roughly 15 years.
Amazon's large P/E isn't that abnormal if you consider that there are plenty of companies which are losing money yet still have a positive stock price. Maybe they have lots of assets, and maybe people expect them to return to profitability soon.
For struggling large companies this can even be a gamble. If you think the company has a 5% chance of returning to glory and earn big, and 95% chance of never earning a profit again, the company can still have a pretty decent expected future earnings in statistical sense.
It's also important to note that aapl has $150 per share just in cash. They actually have more cash than Amazon's entire market cap. If you discount the cash, their PE is closer to 7.
Share price is supposed to reflect growth potential. The skepticism around APPL at the moment reflects the suspicion many of us have that Apple's phenomenal growth spurt has peaked.
"Wall Street" values companies by projecting future cash flows discounted back to the present. Note AAPL is only making that much per Q for the second time in its history. In 2011 it made only 60% of what it makes now. In 2010 30%. If someone can guarantee that AAPL will continue its profitability at its present level of course it is very undervalued. But there is no guarantee and right now it looks like that investors does not give it a very high chance. Just to maintain its current pace AAPL needs to sell close to 200B this year or about $30 to every single person on the planet. But that is not enough it will have to do that year after year for an extended period of time. You say P/E of 10 -- then you better be able to do what you are doing for at least 10 years. And that is always hard to see for tech once a company stops growing -- so called inflection point. Case in point is to check out how long Motorola, Nokia, RIM each maintained their leadership position in mobile. And once they fell, they fell hard. Maybe this time it IS different.
> The most confusing thing about AMZN and APPL are their respective PEs.
I've wondered about this too, but the post seems to shed some light on it. Amazon arguably has essentially no competition, while Apple, for all that it's doing well at the moment, has plenty.
(I understand the point is debatable. I'm just saying, this appears to be how the market is thinking.)
The difference here is that, thanks to volume, Wal-Mart has the kind of market-making muscle that BMW could only dream of. This isn't as important in the world of cars or TVs but the network effects of software means there's a lot more at stake in the contest for market share.
Low margins, per se, isn't a strategy. Amazon is pursuing a cost advantage [1], and it's choosing to keep its prices very low, hence the low margins. With a cost advantage and low prices, Amazon gives away a lot of value to customers (instead of capturing a lot of value for itself in the form of profits). Its primary objective is to gain market share (i.e., both new customers and a greater portion of existing customers' everyday shopping). With an increase in market share, Amazon can further reduce its costs through economies of scale (i.e., spreading its fixed costs, such as infrastructure and R&D, over a greater number of customers served and products sold).
Amazon's cost advantage and low prices explains why most other online retailers have been unable to gain significant market share and why Amazon is posing an increasing threat to companies like Wal-mart, Target, and Costco.
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[1] I'd argue that Amazon is actually pursuing a dual advantage, both a cost and value advantage (at least for customers that favor convenience over impulse buying). The value advantage stems from the ability to shop at home, its product reviews, its excellent customer service, extensive selection, etc.
No Amazon does not have a cost advantage over Costco. It is operational cost is FAR higher than Costco: 18% vs 10%. It is easy to see why. Costco thrives on high volume/low count of SKU and customers pay for delivery themselves. Costco's gross margin is 12% vs 23% for Amazon.
Amazon's cost advantage over WalMart is only marginal. About 1 pt lower on the SG&A and 2.5 pts lower on gross margin. But Walmart is a lot more profitable.
The advantage of Amazon vs WalMart is really in the long tail. It can keep more SKUs than even the largest WalMart Supercenter could hope for and still turn its inventory over much faster. And for items you can wait for you get them delivered to the door.
My own family's shopping behavior is consistent with the data: we buy from Costco if it carries them, esp recurrent consumables; my wife occasionally goes to Target if she needs something soon; for things that we can take time to shop and do some research on I buy from Amazon, sometimes for price but mostly for convenience of not having to go to the store.
Great points on SKU counts and the long-tail. However, can you tell me the source of your financial data?
I had a quick look at Google Finance (Financials, Annual Data) and I see the following for 2012: Amazon's total operating expenses as a percentage of revenue was 98.2%. Costco's was 97.2%. Wal-mart's was 94.1%. Based on this data, you might argue that Amazon has a cost disadvantage relative to both Costco and Wal-mart. But before reaching any conclusions you would need to back out Amazon Web Services and the Kindle (from Amazon) [1].
As a quick and dirty analysis, we can back out the $2.909b Amazon invested in R&D in 2012. Note, neither Costco nor Wal-mart have a line item for R&D. In this case, Amazon's operating expenses as a percentage of revenue is 92%, or about 5% less than Costco's and 2% less than Wal-mart's. [2]
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[1] You might also want to back out Sam's Club from Wal-mart.
[2] Given Amazon has revenues that are just 11% of Wal-mart's, you could argue that Amazon's cost advantage will likely increase as it further scales revenue and operations.
I had these in a spreadsheet a couple of years ago when I was studying retailers. I think I got the data from Yahoo Finance like this: http://finance.yahoo.com/q/is?s=AMZN+Income+Statement&an... which breaks out Cost of Revenue and SG&A. I was quoting AMZN for 2010, which had been pretty stable -- in 2011 it looks like that it kicked up spending quite a bit.
You made very good points w.r.t. Sam's Club for Walmart or Kindle for Amazon. One needs to adjust the data in order to be precise. The effect though is probably second order and shouldn't change the picture that much. At least it seems consistent with my own anecdotal experience.
It is also that possible Amazon's expense is exaggerated by accelerated depreciation. In the expansion phase if your facility is not fully utilized you get dinged again on appreciation. WalMart owns a lot of real estate and has capitalized lease as well I think so some of the operational cost may show up as interest expenses. To get a true picture one needs to account for all those as well.
The beauty of Amazon's model is that it uses little to no capital (all operations can be funded by negative working capital and other liabilities incidental to operations), so it can expand unconstrained by capital needs, as long as it can find new customers.
That's actually the problem with focusing only on cost. Costs are in a lot of cases a calculated number and do not necessarily involve a cash component.
The high inventory turn Amazon and Apple have DO have a cash component (they are almost only a cash thing). And that's where the big advantages are compared to others.
Interesting thoughts, but I'm confused: how exactly is Apple going wrong here? Despite their sky-high margins, they're finding enough customers to rake in record-breaking earnings. New products are often hard to find in stock: even iMac demand still outstrips supply. Samsung actually ran commercials mocking supposedly stereotypical Apple customer loyalty.
How is Apple hurting exactly? What are the symptoms of their failure to go after the low end market? From here, it looks like their big ailment is not making money as much faster than everyone else as some people would like.
The only market in which Apple enjoys a healthy phone market share now is the U.S. and I strongly suspect that is largely a product of the carrier subsidy model. If people had to pay the full price of a phone upfront I'm sure a lot of iPhone buyers would opt for cheaper alternatives. Any company that's growing should post "record-breaking" earnings every quarter.
Luckily for Apple the U.S. market is also by far the most lucrative, at least for now.
I'm sorry, but almost everything you wrote is wrong.
Take Europe. The ratio of Android:iPhone may be higher in Europe than in the US, but it's still a MASSIVE share. And people are still extremely defensive if they've got anything but an iPhone here in the UK.
The European models also have carrier subsidy on ALL monthly contract phones, not just iPhones. Generally only poor people have pay-as-you-go.
It's not as if there aren't regular articles on here about the ratios of iPhones to Androids in all markets.
It's slightly confusing that you could believe any of what you wrote.
BTW, you're also wrong about any company that's growing should post "record-breaking" earnings. Earning are profits. Growing companies often post losses. It's not turnover.
It's worth noting that carrier subsidy system in the USA seem to be much sillier than you get elsewhere. It's a fair hypothesis that this is part of the reason Apple does better there. (Though of course, historically they were always much bigger in the US on desktop as well)
Australia is a market where Apple holds a healthy phone market share and has both subsidised and unsubsidised iPhones available. Anecdotally, people who can afford get it outright and those that can't take the 2 year carrier contract.
But really it's the Apple apologists that keep saying nothing is wrong that are doing the most harm. If you care about Apple then you should be doing what you can to help put a boot up their backside.
You purposefully chose a link from Dec. 5th, way before earnings and when everyone was speculating on AAPL numbers. Choose any of the articles about AAPL and China after 1/23, like say this one, and things aren't as bad as you keep trying to make them:
I think that Apple could reduce iPhone pricing to close to iPod Touch pricing if they wanted to. My suspicion is that the high price of unlocked iPhones is a concession to carriers.
Ok two markets, U.S. and Japan. From the same article:
In markets where Android is leading, it is consolidating its lead, accounting for over half of all smartphone sales in the 12 weeks ending December 23.
Doesn't sound like something Apple fans should be cheering about to me. Personally I'm not anti-Apple. I'd just like to see them get back to making interesting new stuff instead of polishing what they already have and suing everybody.
I've seen the exact opposite iOS vs Android numbers for Japan though I have no theory on why there is the discrepancy. And it's worth noting that the fancy phones a lot of people have in Japan don't count as "smartphones" so only 25% of people have "smartphones" vs 40-50-60% of the market in other nations, in other words there's more scope for these numbers to change (in either direction), assuming the Japanese move to "smartphones" en masse.
They're hurting because their super high profits and margins have attracted an amazing array of competition and left them plenty of room to get a toe in the water. The fear is they're going to go from being the absolute leader in this space in terms of volumes, margins and profits to a smaller bit player. There is a sense that history is repeating itself.
"Delving deeper into the retention and user metrics, iPhone and iPad users are 52% more loyal to their apps than Android users. A healthy 35% of Apple iOS users launched an app more than 10 times after downloading, compared to 23% of Android users."
I'm finding conflicting numbers on mobile browser share, but none of them are making the iPhone look particularly weak either.
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I see two scenarios that could theoretically actually hurt Apple (not just in a slowed growth kind of way, but by actually causing their revenue to fall): iPhone users ditch the platform for something else they like better, or another platform becomes more lucrative to develop for, causing developers to abandon the iOS App Store and leading users to abandon the iPhone over the lack of new and updated apps.
From the bits of data I can dig up, that doesn't look like a terribly immediate threat: iPhone users are still ridiculously loyal to the platform and still far more willing to spend money on apps. Some of this is old data and things change quickly, so life could be worse for Apple than I realize.
That said, the closest things I could find to reasons to worry: Android users do seem to be becoming increasingly happy with their phones, or at least the platform, and they're downloading apps at a rate approaching what Apple's App Store sees, even if it hasn't led to the same developer revenues iOS produces yet. Apple's dominance profit-wise is far from guaranteed, and Android is a legitimate threat that could eventually bring down the empire.
I'm having a hard time believing Apple's hurting at the moment though in any way besides a drop in share price. Revenue is healthy and growing. iPhone sales are healthy and growing. Profit is healthy if a bit stagnant. (Ironically enough, it's a decline in margins hurting Apple right now, not sales.) iPhone users seem to like their phones enough to buy upgrades, and to buy and use apps on them, and Apple is still winning new converts.
If this is what hurting is, Apple sure makes hurting look attractive.
Pay attention to context: the poster is responding to the grandparent's question of "How is Apple hurting exactly". Any response besides a straight denial would take the form "they're hurting because..."
From the article, the argument isn't that Apple is hurting, but it's market position is weak against newcomers because there are many vectors to compete on. While it holds a very strong position now, it's very conceivable that some brand can come up and compete on all aspects of design, quality and price.
Amazon then, can be considered to have a more stable position because newcomers cannot beat them on price, but merely match them.
This can't be overstated and I am loathe to admit it but I have a feeling that a large part of the panic today was the fact that it was widely reported that Apple's earnings were "flat" year over year. They weren't, they were up by about 7%, which isn't stellar but is a far cry from flat.
If this is correct, then it is technically record breaking:
"Apple just announced its Q1 2013 earnings, and the company posted a record $13.1b profit on a record $54.5b in revenue. That's just over last year's record of $13.06b profit on $46.33b in revenue at this time last year, and well over the $8.2b profit on $36 billion in revenue in the last quarter."
`Apple reported record-breaking net profits for the three months to 31 December 2011 of $13.06bn (£8.36bn), up 118% from the same period in 2010.`
- http://www.bbc.co.uk/news/business-16712089
I don't think they're going wrong - its just a different model to Amazon's.
If you pare back the reason why Apple is a profit leader in the markets it sells to, you might come up with design, quality and brand. In the end the competitors can eventually catch up on design and quality. But brand is something that's build over a long time, and takes a long time to change.
So what does Amazon do when it has finished using loss-leader pricing to drive its competitors out of business in every retail market where it wants to play? Clearly market share at any cost is the name of the game for Amazon. It is a well-oiled, market-share-taking machine. But when it has swallowed up so much of the retail market that it becomes a monopoly? Then what?
To be honest, I'd probably continue to shop at Amazon even if their prices went up 5-10% across the board. Even though I want to support small retailers, shopping at Amazon means I get to easily see product reviews, I don't have to create a new account, I don't have to worry about my shopping cart disappearing due to shoddy programming, I can save items on my wishlist easily, and with Amazon Prime, I get free 2 day shipping on everything. Except for specialty items like certain foods, I buy almost everything via Amazon. I buy all of my hardware from Newegg for the same reasons.
I get that a lot of consumers will still shop around for prices, but I certainly wouldn't ignore the millions(?) of us who will gladly ignore small price differences if it means I get a predictable, easy shopping experience.
Once Amazon reaches their peak, it's hard to say where it will go. But considering that they're aleady nailing the hosting industry, producing a very popular ebook reader and tablet, taking a slice of NetFlix's pie, and eating up all of retail, I'm sure they'll throw inordinate amounts of cash at whatever their next best ideas are.
On Amazon, you are supporting small retailers! Anything not sold directly by Amazon has a great chance of being sold by one the hundreds of thousands of small businesses on amazon marketplace, mine included.
Hardly. Smaller stores play with even smaller margins.. Unless you're dealing with niche products, the their party sellers pricing is generally too cutthroat.
As far as business plans go, it's pretty obvious and pretty solid. It'll be implemented as a dual monopoly-monopsomy setup: consumers go to it to buy most goods, get screwed. Suppliers sell to it, get screwed.
Amazon's goal is to be a bigger version of Visa, taking a tiny slice of a ridiculous large pie.
Anyone thinking that they are going to wind up as the Standard Oil of retail is going to be hugely disappointed. First they have plenty of quality competition that isn't going to just keel over and die. Second their tax advantages are gone long term. Third, as the internet erases frictions, Amazon is just another middleman begging to be cut out of the picture if he takes too big of a cut. Fourth Amazon has to deal with real antitrust in Europe and protectionism in Asia. Fifth even US antitrust wakes up and does something from time to time.
Have you ever read about the economics of monopoly prices? E.g. in Human Action by Ludwig von Mises? It's not actually that simple and doesn't always work well.
I'm not too familiar with the Austrian take on monopolies. Care to enlighten?
Mainstream economics does argue that monopolies enable excess profit, and I've never seen reason to question that part of it. But I'm genuinely curious and open to other models, even Austrian ones.
In short, not all demand curves have a monopoly price point at which you would make more money by restricting supply (e.g. it's possible to have a demand curve where demand would fall off a cliff if price went up slightly, even if supply went to near-zero. in this case, you cannot make monopoly profits). And even if there is a monopoly price which could provide monopoly profits, it can be hard to figure out what it is and you can lose money (or even go out of business) trying to find it. Therefore, not all monopolies can lead to monopoly profits.
> The special conditions and circumstances required for the emergence of monopoly prices and their catallactic features are:
> 1. There must prevail a monopoly of supply.
> 2. Either the monopolist is not in a position to discriminate among the buyers or he voluntarily abstains from such discrimination.[12]
> 3. The reaction of the buying public to the rise in prices beyond the potential competitive price, the fall in demand, is not such as to render the proceeds resulting from total sales at any price exceeding the competitive price smaller than total proceeds resulting from total sales at the competitive price.
> 4. It is a fundamental mistake to assume that there is a third category of prices which are neither monopoly prices nor competitive prices.
> 5. [some stuff about cartels]
> 6. The concept of competition does not include the requirement that there should be a multitude of competing units. [i think you will have to read further to understand this one]
> 7. If it is possible for the seller to increase his net proceeds by restricting sales and increasing the price of the units sold, there are usually several monopoly prices that satisfy this condition.
> 8. The monopolist does not know beforehand in what way the consumers will react to a rise in prices. He must resort to trial and error in his endeavors to find out whether the monopolized good can be sold to his advantage at any price exceeding the competitive price and, if this is so, which of various possible monopoly prices is the optimum monopoly price or one of the optimum monopoly prices. This is in practice much more difficult than the economist assumes when, in drawing demand curves, he ascribes perfect foresight to the monopolist. We must therefore list as a special condition required for the appearance of monopoly prices the monopolist's ability to discover such prices.
> 9. A special case is provided by the incomplete monopoly.
> 10. Duopoly and oligopoly are not special varieties of monopoly prices, but merely a variety of the methods applied for the establishment of a monopoly price.
> 11. The monopolized good by whose partial withholding from the market the monopoly prices are made to prevail can be either a good of the lowest order or a good of a higher order, a factor of production.
> 12. [discussion relating to governments intentionally encouraging monopoly]
And it goes on.
The biggest takeaway is that monopolies sometimes but not always enable higher profits by restricting supply. It's important not to assume all monopoly will enable significantly more profits than competitive market prices. Some analysis is required in any given case.
And the issue of whether and why monopoly prices are bad, and what if anything should be done about them, is considerably more complicated than "the government should prevent all monopolies" (typically with no mention of whether they are charging monopoly prices, or even could profitably do so tomorrow).
As someone who sold around a million dollars last year on Amazon through my company, I can add something to this. Amazon's margins on me are great. Amazon collects 20% of every sale we make through them at no effort. At the same time, marketplace revenue is their fastest growing revenue source and is already enormous. We also pay them more to fulfill a certain percent of these orders for us through FBA.
so would you switch your efforts to another marketplace if it charged 5% and could bring you $1M per year in sales? Do you feel that 20% of your money to Amazon is a fair cut? if not, what % would be fair?
I have used ChannelAdvisor. I found it really lacking. It was excellent for pushing out postings, but when your employee makes an error, we had to fix everything by hand. Also we were selling in Ebay Motors, which ChannelAdvisor did not handle as well as the normal Ebay. And then Channel Advisor took another 2% cut on top of Ebay fees, paypal fees.
Too much money for not enough benefit was the reason I stopped using it.
"A lot of folks, especially Apple supporters, like to characterize Amazon as irrational, even crazy, for its willingness to live with low margins. It must be frustrating to compete with a company like that."
This assumes that Apple is actually competing with amazon. Does BMW compete with say Ford.... maybe but really they are after different markets. Apple has said numerous times they are not interested in going after the low end market.
The iPad mini is quite obviously a response to cheaper, smaller Android tablets, the best selling of which is the Kindle. Apple is clearly interested in the customers on the fence between a Kindle and a more expensive but higher quality device.
I'm not so sure that it is that obvious that the iPad mini was in response to competition. My personal theory is more that they recognised that there was an unfulfilled need for an iPad that was smaller / lighter than the original. For example, many people find an iPad too heavy for long periods of reading, but an iPhone is too small. As this is one of the biggest use cases for tablets, it is not surprising that Apple wanted to make a product that is optimised for that use case.
Another way to look at it - if competition was the motivation for the iPad mini, it would have cost $50 less.
Why bother selling it for less if people buy it for more, too? Apple's customers don't really compare prices and features between different options. They won't even consider an Android tablet and why would they? They probably own three generations of iPhones and two generations of iPads already. They'll happily pay Apple's price.
So many unsubstantiated assertions in your reply...
I'm an "Apple customer" and I'm price sensitive, I've also considered many Android based tablets as well as WebOS based tablets. Now we all know that anectadata is of limited value, but compare to no data...
"Apple has said numerous times they are not interested in going after the low end market." - Yes, but that's exactly the premise that this author is now questioning. Is that the right strategy?
BMW competes directly with Ford in Europe. Prior to the sale of PAG (Aston Martin, Volvo, Jaguar, Land Rover) BMW also competed with Ford-owned brands in the United States.
I'm also certain more people cross shop Fords and Bimmers than one might initially assume.
Ford might be competition for BMW in Europe, but they certainly aren't in the US. The only Ford I could believe a BMW customer even considering is the Mustang. The base model 3-series coupe is significantly more expensive than all but the top three Mustangs available (GT Premium convertible, Shelby GT 500, GT 500 convertible). If one is in the market for a $40k coupe, they're not going to compare the BMW to the Ford, they'll compare the BMW to the Mercedes, Infinity, and Audi.
I enjoyed this article. I was a little confused though by the final conclusion. Amazon shouldn't do a nice, high end tablet as that's not its competitive strength while also being Apple's strength. So don't play on their turf - I get that. But then Apple should do a lower margin mass market iPad for example? The author appears to argue that Apple has done this with iPod's - I guess it would be great if he fleshed that out further because the general consensus is Apple doesn't care for/get the lower margin/high volume play. If they did they might have maintained an early PC lead.
How did they take over mp3 players? They made a high cost product everyone wet their lips with, and year later made cheaper versions everyone who was enviously waiting for could afford. They make an excellent play on consumer psychology.
> 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...
Not having to sweat a constant onslaught of new competitors is really underrated. You can allocate your best employees to explore new lines of business, you can count on a consistent flow of cash from your more mature product or service lines...
Isn't this contradictory? Having a low margin business by definition should mean that you have a smaller cash flow available to fund your R&D?
Also, somewhat unrelated, but I think one needs to draw a distinction between a low margin consumer staple style business (like cosmetics, food, or Amazon) and a low margin discretionary style business (luxury goods or consumer tech).
"Isn't this contradictory? Having a low margin business by definition should mean that you have a smaller cash flow available to fund your R&D?"
Not always. It depends on how consumers react to the price of your products. A drop in profit per unit (by lowering one's price) might yield a large enough increase in units sold such that the total profit is higher. This is especially important for retailers who can't price discriminate easily.
No, it's all relative. Let's say two developers each build and maintain a site and service. One to sell their own service and one to resell other people's products. If someone is selling $10,000 of their own service per month at 80% margins they have $8000 profit to reinvest in their business. If someone is reselling $100,000 of someone else's products and getting an 8% cut they have $8000 profit to reinvest in their business. Forget their topline, they both have an $8000 per month "profit" business. If they feel insecure about their place in the market they'll spend a large portion of that $8K defending their existing revenue. If they feel very secure about that $8K they'll invest it to do more things that grow the business.
Margin don't relate 1:1 to cash flow. You can have small margin and pretty big free cash-flow (Amazon seems to have that, a German example would be Aldi, a low cost retailer that used to be famous for his "pay suppliers 3 months after I sold the product" approach).
High margins and a low or even negative free cash-flow are possible, too. And my opinion is that more companies collapse due to cash flow issues than too high costs (given they don't sell below production costs).
It would make sense for Apple to lower its prices to capture and lock in a bigger market share, but only if they were able to meet the resulting demand.
But, if they are constrained by supply chain and manufacturing capacity, then maintaining the highest prices the market will bear makes the most sense.
The author's arguing that's a good short term view and a poor long term one (unless they are constraining the entire SC which does happen for very short periods of time in high tech around chips or screens etc) Those high prices (really margins/profits) will attract competitors.
Andy Jassy's keynote from this year's AWS conference (amazon's web service business) talks about running AWS as a high-volume, low margin business and why that's so different from high-margin businesses. The whole keynote is interesting, but here is the part that's pertinent to this discussion:
http://www.youtube.com/watch?v=8FJ5DBLSFe4&t=30m35s
This sums up the major differences between companies like Apple and Amazon in really good way.
I for myself thought about this a couple of days back. It was more like brain training in Supply Chain Management (the execution of the mentioned low and high margin strategies if you want). Now, Low vs. High margins looks more than just obvious.
What I came up with, and please feel free to give feed-back, as one big difference between Amazon and Apple is the product range. Amazon has orders of magnitude more products and commodities than Apple. What makes it eassier (not easy, mind you, just easier) for Apple to manage their supply chain. You can see this in their release schedule, everthing is planned according to that. Hard to do with thousands of product lines. In this area, Apple is really doing great in the planning part of supply chain management, from my outside perspective they are a benchmark here for everybody else. Plus, one could argue their supply chain strategy matches perfectl their business strategy.
Amazon on the other excels at the logistics part of supply chain management. As mentioned in the article, they have to in order to get their low margins and high customer satisfaction. Currently, I'd say Amazon is doing to logistics what Toyota did up to the lets say 80s and Wal-Mart did up to the early 2000s (no coincidence that Amazon hired Wal-Mart people back then).
What both companies have in comon is really good view of Point-of-Sales data. Big difference here to most other companies around.
How does all that match with high and low margins? In the place of Apple excellence in supply chain planning is used in combination with a narrow product range to allow for high margins and high inventory turn rates (again, a narrow product range is helping a lot here). Supplier management is critical point here, too.
In the place of Amazon logistic excellence is used to run an very efficient ditribution network. This efficiency allows them things like next-day delivery and their low margins. Think Toyota Production System and Lean and all the businesses that tried to copy that since the late ninties.
So, as long as both companies can keep their respective levels of operational performance up I don't think they are in trouble.
Back on the OP, the low margin-attack was what the whole Android industry did on Apple, Samsung in particular. But Samsung is different story all together.
Didn't they make a lot of money and then spend it on new fulfillment centers? Nothing wrong with investing capital into your business. If you just accumulate cash and sit on it, your company won't grow.
the article says because they get the customer's money right away, but don't pay the supplier for months, they have a big pile of cash. I suppose they could make money with that money before they have to pay their bills.
This is such a well known problem that the UK had to implement laws.
If you can get people to pay you quickly (in advance is best, on delivery is ok, 30 days after delivery is standard) and you can delay paying your suppliers (90 days after delivery is best, 60 days is ok, 30 days is standard) you can improve cash flow and there are a bunch of benefits to it.
I don't think it's legal in the UK anymore. It's very easy for a big company to squeeze little companies into accepting really lousy terms.
I don't understand Amazon investors. They own a piece of of a $100+ billion company that makes virtually no profit (relatively speaking) for a decade plus. To make money they'd have to increase prices drastically but that's Amazon's selling point (along with customer service,) their competition isn't going away any time soon.
> their competition isn't going away any time soon.
That's where the investors disagree with you. Amazon is trying to do to big box stores what big box stores did to mom and pop stores. I buy everything from $2 batteries to $5000 electronics on Amazon. Only reason I go to local stores is groceries or emergency goods (meds, last-minute-gifts). Nobody knows what will happen to Office Depot or Kohls in 20 years but unless Amazon royally screws something up, I am certain they will remain significant for decades to come.
So you think Amazon will drive everyone serious enough out of business and then be able to raise prices? Personally, I doubt it. They will not surrender that easily
I love Amazon by the way, and do a lot of my shopping there. But, IMO, its hard for investors at these levels to see a decent return.
This is a misconception. Amazon aren't making any profits because they are pumping all of their margins into new facilities and other infrastructure investments. If they stopped expanding and just squeezed profit out of their existing business, then they would be very profitable.
After Walmart destroyed the mom and pop store they didn't incrase prices, and Amazon probably won't either. Particularly since Amazon are an online retailer, and it is very easy for customers to shop around.
Amazon aren't making any profits because they are pumping all of their margins into new facilities and other infrastructure investments. If they stopped expanding and just squeezed profit out of their existing business, then they would be very profitable.
Not sure if they can ever stop, maybe slow down but they will still need to buy companies. And, Amazon needs to make $5+ Billion in profit with this valuation, something missing
After Walmart destroyed the mom and pop store they didn't incrase prices
Fundamentally there isn't much point for either because it's not the right customer base. This is what branding is about, if Apple acquires a whole bunch of customers that don't care about quality and then complain that their devices don't have half-baked features it doesn't do the brand any good. These customers will destroy the brand.
I don't want to have to walk into an Apple store and wonder which is the low margin device that will fall apart / fail to perform, if I wanted to ask those questions I'd go to Best Buy.
The low margin Apple market is craigslist, if you want a 3 year old Apple device that's where you can get it.
The most confusing thing about AMZN and APPL are their respective PEs. They are priced as if each are going to adopt the other's business model.