Selling The Amazon Kindle Fire and Google Nexus 7 Is As Silly As Selling Razor Blades To Men Who Love Beards

by John Kirk   |   October 25th, 2012

Gillette, Amazon, Google and Apple

– The Gillette business model is to give away the razor in anticipation of making profits from the sale of the blades.

– The Amazon business model is to give away the Kindle Fire for cost in anticipation of making profits from the sale of content and ads.

– The Google business model is to give away the Nexus 7 for cost in anticipation of making profits from the sale of ads and content.

– The Apple business model is to sell the iPad Mini for a profit…AND in anticipation of making additional profits from the sale of content and ads.

The razor blades business model

“(T)he razor and blades business model, is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as supplies (inkjet printers and ink cartridges, “Swiffers” and cleaning fluid, mobile phones and service contracts) or software (game consoles and games).

Though the concept and its proverbial example “Give ‘em the razor; sell ‘em the blades” are widely credited to King Camp Gillette, the inventor of the disposable safety razor and founder of Gillette Safety Razor Company, in fact Gillette did not originate this model.

The (razor and blades) marketing model may be threatened if the price of the high margin consumables in question falls due to competition. For the (razor and blades) market to be successful the company must have an effective monopoly on the corresponding goods.”

~ via Wikipedia

Three Flaws

There are (at least) three flaws in the Amazon Kindle Fire and the Google Nexus 7 business models:

1) No proof of sales;
2) No proof of profits;
3) No monopoly (proprietary) pricing available.

1) No proof of sales

The razor and blades business model works, in part, because when the razors are given away at cost or for free, they become ubiquitous, thus making it convenient for razor owning customers to purchase the company’s proprietary blades. There is no evidence to indicate that either the Amazon Kindle Fire or the Google Nexus 7 are selling well despite their subsidized sales prices.

It’s been estimated that the original Amazon Kindle Fire sold 4.7 million Kindle Fires over a 9 month span and that the Google Nexus 7 sold 3 million units last quarter. These numbers are estimates because neither Amazon nor Google are willing to release the actual sales numbers.

When you consider the fact that these are both subsidized products being sold at cost, those numbers are remarkably low.

2) No proof of profits

The razor and blades business model works, in part, because when the razors are given away at cost or for free, the profit is made from the blades. There is no evidence to indicate that either the Amazon Kindle Fire or the Google Nexus 7 are making substantial profits from the sale of content or ads. In fact, when you look at the company’s recent quarterly earnings reports, there is evidence suggesting that they are NOT making significant revenues or profits from tablet related content and ad sales.

3) No monopoly (proprietary) pricing available

The razor and blades business model works, in part, because the blades are proprietary and command the premium price neccessary to offset the lack of profit from the giveaway of the razors.

For the (razor and blades) market to be successful the company must have an effective monopoly on the corresponding goods.” ~ via Wikipedia

The Printer Example

Computer printer manufacturers have gone through extensive efforts to make sure that their printers are incompatible with lower cost after-market ink cartridges and refilled cartridges. This is because the printers are often sold at or below cost to generate sales of proprietary cartridges which will generate profits for the company over the life of the equipment.

The Game Console Example

(V)ideo game consoles have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks.

Atari had a…problem in the 1980s with Atari 2600 games. Atari was initially the only developer and publisher of games for the 2600; it sold the 2600 itself at cost and relied on the games for profit. When several programmers left to found Activision and began publishing cheaper games of comparable quality, Atari was left without a source of profit.

~ via Wikipedia

Neither the Amazon Kindle Fire nor the Google Nexus 7 have a monopoly on the content or the ads that they sell. They cannot command a premium price. In fact, if anyone can command a premium price on the sale of content, it is Apple because of their extensive distribution channels. While Apple is able to sell content in over 90 countries, the content sales channels for both Amazon and Google are extremely limited.

Cheaper is not necessarily better

There are rumors that Google may announce a $99 Nexus tablet next week. But in a subsidized model, cheaper is not necessarily better. In fact, it could be counter-productive.

The razor and blades business model works, in part, because when the blades are given away at cost or for free, they become ubiquitous, but there is no point in giving away the razors to men who love having beards. Similarly, there is no point in selling low-cost Amazon or Google tablets to customers who don’t buy their content or consume their advertising. Subsidized products attract bargain hunting customers and bargain hunters are as useless to Amazon and Google as bearded men are to Gillette.

The non-existent “Price Umbrella”

Apple is being criticized for selling the iPad Mini at $329 and leaving a “price umbrella” under which the likes of Amazon and Google tablets can grow and prosper.

There is no price umbrella. The Amazon Kindle Fire and the Google Nexus 7 are zero-margin products.

Let me say that again. Amazon and Google make zero profit from tablet sales.

No matter how much Apple lowers its sales price (and its margins) it won’t be taking any profits away from the Amazon Kindle Fire and the Google Nexus 7 because they already make no profits.

Now there is an argument to be made that lower Apple iPad Mini prices might reduce Amazon’s and Google’s tablet sales and therefore lower Amazon’s and Google’s tablet related content and ad sales. This presumes that lower iPad Mini prices would spur higher iPad Mini sales. If the iPad is supply constrained, (i.e,, Apple can’t make enough of them) this argument fails.

Further, both the Amazon and Google tablets are already selling poorly. And there is absolutely no evidence that Amazon or Google are making more than, or even as much as, Apple is in content and ad sales. Lower iPad Mini prices would have a negligible effect on Amazon’s and Google’s ethereal profits but it would have a significantly negative affect on the iPad Mini’s margins.

Giving razors to men with beards

“Never interrupt your enemy when he is making a mistake.” ~ Napoleon Bonaparte

Apple doesn’t need to lower its pricing to deliver “the tablet death blow” to its competitors. Apple’s competitors are doing a fine job of starving themselves of profits as it is.

When your competition is giving razors to men with beards and hoping to make their profits on the sale of blades, you don’t attack them – you ignore them.

John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?
  • http://www.slideshare.net/samirsshah Samir Shah

    Bravo!!! Your ability to tell it like it is make you unique. I have read your previous work also and I also have liked it.

    • FalKirk

      Thank you , Samir. You kind comment is greatly appreciated.

      • Tom W

        Your good essay is marred by the incorrect/backwards logic in this passage: “but there is no point in giving away the razors to men who love having beards.”

        Yes, that is EXACTLY who Gillette wanted to give razors to, because those men purchased the most blades (and generated the most profit).

        You meant to say that there is no point in giving away the razors to men who seldom shave. That corresponds to Android and Amazon tablets being given away (subsidized) to users who don’t buy a lot of things online — they seldom shave.

  • Ricky

    Think you meant to say “iPad Mini“, as opposed to “iPod Mini” in the third bullet off first paragraph.

    • http://twitter.com/qka qka

      Also, in numerous places, you used “blades” where I believe you meant to use “razors”, and in a few places, vice versa.

  • GonzoI

    To say that the Nexus is even intended as a profit platform demonstrates an odd amnesia of the Nexus lineage. The first Nexus was used as a demonstration model of what Google wanted Android to run on. They threw it out to the world, generated enough excitement about it, then stepped back out of the market with lackluster sales, only to have the other manufacturers step in and fill the market with profitable Android devices that started from the Nexus baseline. The tablet version of the Nexus is following the exact same pattern the phone did. It will be pulled from the market as soon as Google feels Android on tablets is competitive.

    As to the Fire, may Amazon burn in it. They have been successful marketing their devices to boost sales of their own products, but they’ve then cut their own sales by scaring off customers. Who wants to buy into a Kindle product and Amazon ebooks when on a whim Amazon can take all you’ve bought away from you?

    • FalKirk

      “The tablet version of the Nexus is following the exact same pattern the phone did. It will be pulled from the market as soon as Google feels Android on tablets is competitive.” – GonzoI

      That’s never going to happen, GonzoI. The Nexus 7 has eviscerated the 7 inch Android space. Saying that the Nexus 7 will be pulled as soon as Android tablets make a resurgence is like saying that a murderer is really a heart surgeon. The Nexus 7 isn’t a scalpel – it’s a dagger to the heart of any competing Android tablet.

      • rogerdanielpaul

        I think it is bit of a stretch to say the Nexus 7 is killing the 7″ Android Tablet market. Both Amazon and B&N’s tablets are still competitive options for that form factor.

        • FalKirk

          I was referring to the Google Android tablets. Amazon tablets and Barnes & Noble tablets are forked versions of Android that do not profit Google.

      • GonzoI

        Not sure where you’re coming from on this. The Android tablet market is in the same boat the Android phone market was before – interesting, but not competitive offerings that don’t fit what Google envisioned and floundering behind the Apple iProduct, then Google puts out a device branded “Nexus” that is wonderful and cheap. Do you really think Samsung and others aren’t going to come back with a wide variety of competing products just like they did with the phones?

        Particularly when Google itself isn’t even rebranding it to hide this obvious repeat strategy?

        • FalKirk

          “The Android tablet market is in the same boat the Android phone market was before…” – Gonzol

          Google missed the tablet market by not encouraging the optimization of Android tablet specific apps. They are just reversing that mistake now. With the lead the iPad has established and the introduction of the Windows 8 tablets, it may be too little too late.

          Google then compounded their mistake by introducing their own Nexus 7 – a subsidized product made by Google that survives on content and ad sales. No third party Android manufacturer can compete with that.

          Google didn’t recognize that tablets are a separate platform from phones and they let that platform wither. They have few tablet apps and even fewer developers who are willing to risk their time and resources creating tablet optimized Android apps. Starting a platform is about as hard a thing as there is. It’s almost impossible to do even when you’re trying. Google hasn’t been trying. And it’s a little late for them to start now.

    • KBR

      So Amazon had their first quarterly loss in 4 years. I bet some of that can be attributed to the selling Kindles at or below cost. Perhaps they should double down and hand out Kindles for free. :D

    • Canucker

      Isn’t Google about to announce the Nexus10? That doesn’t sound like pulling back. Moreover, I am sure other Android OEMs are really chewing at the bit to sell $199 Nexus7 loss-leading lookalikes. The Nexus phones did not scrape the bottom of the barrel they skimmed the top. The Nexus7 has set price expectations to a level no manufacturer is interested in following.

      • http://policydiary.com/ John S. Wilson

        Why would Android manufacturers who have no ecosystem in which to profit from content sales, push at cost tablets that compete with Nexus 7? You think they’ll sell the tablet at cost then send customers to Google Play for content? That doesn’t benefit manufacturer at all.

        • Canucker

          Yes, that was my point. The only player with any hope of recovering profits from a zero margin device is Google itself. Makes me wonder whether this is the real reason behind the Motorola acquisition – the long play to ensure Android and Chrome hardware is built should OEMs ditch the dive to the bottom. Of course, many PC OEMs made plenty of money on relatively thin margins but no one sold at cost.

  • http://twitter.com/Smokez4Dayz Black Irish

    this is an ad free zone, but your opinions all steer any educated person reading it that one should only purchase apple products…hmmm

    • benbajarin

      The beautiful thing about opinions is that it allows room for disagreement. The authors in this forum are as entitled to their opinion as our commenters. Some opinions are more informed than others based in real world information and holistic thought.

      We have had many great discussions in our columns back and forth on about the pros and cons of all products. The comments are just as valuable as the content. So if you disagree, which is fantastic, please share why.

    • John

      Not at all. This article is about the fortunes of tablet makers. If you are an investor in one of these companies, this is very pertinent information. But from the perspective of a customer buying a tablet, there is little reason to care about Apple or Google’s profit margins. Both the iOS and Android ecosystems are healthy enough to last for many years, so buy what you like.

    • mhikl

      Finally! Someone gets it.

  • Rich Brown

    The fact that Google is, in fact, making a nice profit on the Nexus 7 makes this whole article pointless:
    http://www.forbes.com/sites/greatspeculations/2012/07/13/google-and-asuss-tidy-profit-on-nexus-7-necessitates-an-ipad-mini/

    • benbajarin

      If all consumers wanted was cheap then the only things we would ever sell are the cheapest clothes, cars, food, etc. Bottom line is cheap does not meet everyones needs.

      I’ve seen hard data from our supply chain sources that counter the data from iSupply. I believe Asus is making a profit (Google is not from the hardware) but I do not believe it is near the margins that article points out.

      Mature markets are highly fragmented with price points all over the place to appeal to specific consumers for specific reasons. This new era of personal computing will be more about profit share than market share. It will be wiser for companies to pick segments of the market, and price to value for those segments. You won’t need to sell as much to still have a healthy and profitable business.

      Too many people fall into the trap that all consumers want the cheapest product out there. This is untrue of every consumer market. Of course those products exist but they do not appeal universally to the entire market. People value different things and are willing to pay for things they find valuable.

      This is what makes the reality of consumer choice a beautiful thing. The best product is the product that works best for you. Who cares what platform, os, hardware, price, as long as consumers are happy, that is all that matters.

      • Sigivald

        Yup. People want value.

        Sometimes that’s the cheapest product.

        Sometimes that’s a premium product.

        • http://www.tumblr.com/blog/his-divine-shadow His Shadow

          Exactly. I go to Walmart for diipers and Costco for Kleenex. But I get almost all my computing products from Apple now.

    • Defendor

      iSupply is guessing and they usually guess wrong. Their analysis of a base iPad showed Apple had about 50% margin, yet court documents showed Apples margin on low end was 23% on iPads. That kind of error easily puts Google back into non-profit range on tablets.

      Amazon is essentially selling the same HW as Google and they admitted they make no money on HW.

      • Rich Brown

        I suppose these guys are also guessing when they arrive at the same conclusion:
        http://www.androidpit.com/debunked-google-is-not-losing-money-on-the-nexus-7

        • Defendor

          That is just another blog pointing back to the same source: iSuppli.

        • Player_16

          A lot of things happened in 3 months.

      • Canucker

        The reason Google got into the game with the Nexus7 is that the OEMs were unwilling to cut prices to the bone and Amazon was eating their lunch at the low end. Amazon admits it makes no money in its hardware (not just the Fire). Google likely pays a premium to the Nexus7 OEM (ASUS) to keep the price low, much like Microsoft sends $250 million a quarter to Nokia to keep the peace (and feed the troops).

    • FalKirk

      “The fact that Google is making a nice profit on the Nexus 7…” – Rich Brown

      Hardly a “fact”, Rich. It’s a guesstimate by iSuppli. If the Nexus 7 is making a profit, why didn’t Google announce it and why was it a no-show in their most recent quarterly earnings?

      “…while you dismiss the number of Nexus 7′s sold as trivial, the fact that Apple attacked it by name at their event the other day tells me that they don’t feel the same way.” – Rich Brown

      I think the point of Apple’s comparison was to show the huge difference between a 7 inch and a 7.9 inch screen – an counter-intuitive argument that’s hard to otherwise grasp and visualize.

      Apple’s pricing speaks much more clearly to this subject. If they thought that the Nexus 7 was a threat, they would have priced their product lower.

      • Rich Brown

        This “guesstimate” is only one of many estimates of both the Kindle Fire and the Nexus 7 that shows that they probably make a profit. It’s hardly one isolated guess. As to why Google didn’t announce that they made a profit, most of these companies (Amazon included) do not release such numbers. You’re doing well if you get a “we’re doing nicely, thank you” out of them.

        “Apple’s pricing speaks much more clearly to this subject. If they thought that the Nexus 7 was a threat, they would have priced their product lower.”

        So you would have us to believe that Apple arrived at the idea of doing a 7 inch tablet completely on its own, and it had nothing to do with how well the Fire and Nexus were doing? About that bridge I’m selling….

        • FSRA

          I don’t know if Google or Amazon are doing well with their tablet sales, but I believe in 2 things:
          1 – If they were selling lots of tablets, I really think they would brag about it.
          2 – Apple is doing pretty well with profits to have the need to create a tablet just to stop the competition. I think it was more about filling a new slot with a smaller, lighter and portable tablet.

        • FalKirk

          “So you would have us to believe that Apple arrived at the idea of doing a 7 inch tablet completely on its own, and it had nothing to do with how well the Fire and Nexus were doing?” – Rich

          How are those tablets doing, Rich? All the available evidence says that they’re doing poorly. And the remaining evidence is in the hands of Amazon and Google. And they’re not releasing it.

          Now why do you suppose that is?

          • etg9

            Yes, Apple is losing market share in the tablet race but it’s not because other people are selling other tablets, it’s because…

            oh yea, that doesn’t make any sense. Of course it’s because Apple iPad sales have slowed or others are selling more tablets, which one is it?

            http://reviews.cnet.com/8301-31747_7-20081366-243/ipad-share-of-tablet-shipments-fell-in-second-quarter-says-report/

          • Andrew

            Wait a minute. You’re providing a link to an article that’s 15 months old. Of course Apple’s share has fallen; they went from being the only one in the game to having a slew of competitors, none of whom have probably more than 1/10th of Apple’s share of the market. And as has been said on this forum over and over again, it’s not about market share, it’s about profit share. Right now it seems that Apple remains the market share leader in tablets, as well as having the only profits.

          • etg9

            You’re right, sorry for the old story.Here is one from last quarter, the trend continues.
            http://www.latimes.com/business/technology/la-fi-tn-ipad-market-share-falls-20120731,0,7577986.story

            “If they were selling lots of tablets, I really think they would brag about it” – FSRA

            I think the Nexus 7 and Kindle are doing well enough for now, I agree Apple is making more profit now then anyone else in the tablet game but all of these companies agree that it’s much more about market share now. That will dictate profit for years to come. Apple failed to do that for PCs and Microsoft is still taking that to the bank. Will the same thing happen it tablets?

            Apple has a lot of cash in the bank but I wish they were doing better things for the consumers.

          • equanimous

            Microsoft was taking it to the bank precisely because they NEVER gave away their products for free. In fact, they satisfied BOTH of the conditions that FalKirk pointed out are needed to succeed (profits up front AND large market share ensuring lock in profits later). Google & Amazon have neither up front and the question is whether they will generate large enough market share and lock in to make it work in the end. Amazon’s case looks even harder than Google’s. Hard to believe that the margins in retail are anywhere close to Google’s ads (which is actually why Amazon smartly launched its own ads business).

          • equanimous

            @etg9 As an example of a situation you should be defending, facebook comes to mind. They have the highest chance of succeeding in the free game (even on mobile) – not a sure thing at all but at least they’ve got nearly 100% of the social network user base worldwide (and it is huge)

          • FalKirk

            Amazon and Google are giving away their tablets at cost. They should have far more market share to make their strategy work. And as I’ve pointed out in the article, market share means nothing if it does not generate profits. Can you show me any indication that Amazon and Google are making a significant profit from their tablets?

          • etg9

            Google works as they make profits on android indirectly from advertising in Google maps, gmail, and search. So is Google making a significant profit from advertising? yes.

            Is Play making them money, yes. is selling phones making them money like Apple, no. Is Apple making money on Maps for iPhone? no. That’s not their model. In the end the ecosystem with the majority of users will win.

            http://www.latimes.com/business/technology/la-fi-tn-apple-results-ipad-20121025,0,4027611.story

            Apple was far ahead of IBM and Microsoft in the PC market, I wouldn’t say they won that. Since iPads really killed off their laptop sales and now their iPad sales are down I’m not sure they are going to continue the record profits that people have come to expect from them. Overall they are a horrible company to be a consumer of and a great company to own stock in.

          • FalKirk

            “So is Google making a significant profit from advertising? yes.” – etg9

            People keep saying things like this but the earnings statements and Google’s silence on the subject say exactly the opposite.

          • etg9

            http://investor.google.com/pdf/2012Q3_google_earnings_slides.pdf

            is Google’s earnings statement. I’m not sure why you think it’s a secret that Google is personally not sharing with you. $7.7 Billion US from search isn’t saying they are making money on search? I’ll take $7.7 billion over 3 months if that’s nothing to you.

            “That’s not from mobile!!” You’ll decry. However, Q32010 shows 52% of the search earnings they took in this quarter and there aren’t that many more computers in the world (almost roughly the same) it must be some other device making up the difference. I say it’s mobile computing devices since those have exploded in numbers in the last 2 years, maybe it’s something else. “Goats” are what you’re going to say, yes, maybe that’s it.

            You heard it here first folks. Google is making their money from goats.

          • FalKirk

            Google breaks out the numbers from mobile services but doesn’t break them down. Last year they made 2.5 billion but admitted in testimony before Congress that two-thirds of that came from iOS devices. This year their numbers jumped to 8 million and they later clarified that most of this was from ad revenue but there was no corresponding increase in profits. There are known costs to acquiring ad revenue but since Google isn’t sharing them with us, we don’t know how much profit, if any, they are making from their mobile devices.

            You can’t just keep repeating that Google is making profits and expect us to take it on faith. Until Google shares their numbers and/or until those profits are reflected in their earnings statements, such profit assumptions are simply wishful thinking, nothing more.

          • Player_16

            Now you’re just being silly.

          • Narayanan

            You are right, there are more devices using Google search. They are called iPads and iPhones. Google themselves have admitted that they make more from iOS than Androids.

          • Beeblebrocs

            Etg said: “overall they are a horrible company to be a consumer of and a great company to own stock in”.

            This makes zero sense. Apple has the most mature mobile OS, a gorgeous app ecosystem, the best multi-device syncing, the best conceived GUI, hardware fit and finish unmatched outside of Rolex factories, no viruses on their devices, industrial design like no other, TCO that is unequalled in their industry, and is one of the strongest brands in any industry at anytime in history.

            And you say it’s “horrible” to be a consumer of this company’s goods?

            Me thinks you’re smoking the funny stuff.

            Oh, and By the way, I believe that Apple is also winning the desktop PC war as well.

  • Defendor

    Bezos, I think, is playing a long game. Amazon tablets are a captive audience. I don’t think he is trying to compete with Apple, he is just building a captive sales channel that he thinks/hopes will eventually pay off.

    Google is not doing what it did with Nexus Phones (set an example). This time I think the Nexus tablet move was one of desperation. But not about Apple either. Google was desperate to stop the Android Tablet Ecosystem, from being totally co-opted by Amazon.

    For profit Android tablets had failed utterly. Amazons small success at giveaway prices, quickly made it the dominant player in “Android” tablets. The problem is that it was a fork version without Google revenue generating services.

    This is Googles worst nightmare, Android used against them, and being more successful than the Google version. So Google did what no HW OEM would. Sell it’s own giveaway tablets to stem the tide.

    Essentially this is a private war and Apple was right to stay out of it.

    King of the non-profit tablets isn’t a crown that interests Apple.

    • def4

      I keep hearing about this supposed long game of Bezos.

      Amazon has been public for 15 years and has a P/E of 3000.
      When does it become clear to Amazon investors that in the long run we are all dead?

      • FalKirk

        I really like Jeff Bezos. But his play seems to be that Amazon should be all about growth, not profits, until they grow big enough to command higher prices. And that day is never going to come.

        • Henry_3_Dogg

          The fact that Amazon’s accounts are do opaque should cause real worry.

          If Amazon was really building profitable content sales to justify a small loss on tablets, then the accounts should contain enough detail to show this.

          Without this detail, same shareholders should bail.

  • Rich

    So you wouldn’t give razors to ZZ Top?

    And I was all set to build a business model on that…

    • FalKirk

      Damn! That’s a much better analogy. I wish I had used ZZ top instead of “men who love beards too much”.

    • http://twitter.com/qka qka

      I heard a story, don’t know if it’s true, that Gillette offer $1 million to each of the bearded guys in ZZ Top if they would shave off their beards with a Gillette razor. They said, “Nah, we;re too ugly.”

      Or as an acquaintance with some years says, “I remember when all the guys in ZZ Top were clean shaven.”

  • raja99

    Hi John. Can you please double-check your first sentences under sections 1) and 2) ? In the latter case, you wrote, “The razor and blades business model works, in part, because when the blades are given away at cost or for free, the profit is made from the blades.” Did you mean “profit is made from the razors” perhaps?

    Thanks for your postings, they’re always thought-provoking. As are those of your colleagues ;-)

    • FalKirk

      Thank you for the heads up, raja99. Another reader mentioned this and even though I re-proofed the article, I still missed the mix-up. There are over 27 instances of the word “razor” in this article and sometimes we just go snow blind!

      Thank you for your note. I hope I’ve fixed the reversed terms. If not, please let me know.

  • http://twitter.com/DanAutofans Dan

    pple site says Pre-order yours starting October 26 – my future headlines says Sold Out!!! In Two to Three Days . Sold millions – apple company buying their own iproducts to increase stock and revenues to make investors happy then resell them again . customers will be none the wiser apple is afraid of the nexus 7 why else would he compare the mini to it

    • Sigivald

      So you think… Apple… is buying its own products to “increase stock”?

      How do you imagine that works?

      • mhikl

        @Sigivald Step into Bizzaro world and it all makes sense, Sigivald. Some go to the house of mirrors to see their own reflections; Bizzaro word does it without having to leave one’s chair.

    • steve_wildstrom

      I know some people think companies can get away with anything, but what Dan is suggesting is flat out illegal (fraud) and would be caught by even the most incompetent audit. Auditors can get flummoxed by financial manipulation but they are really good at tracking inventory from porduction to final sale.

  • John

    The problem with this article is that it assumes that market share and positive user experiences don’t matter. They do! Since Amazon and Google entered the game so late, in order to have any chance at success, they needed to get their products in the hands of consumers and generate some positive buzz around the products. That’s exactly what they’ve done. Low profit margins are a necessary downside at this point in order to have any shot at long-term success.

    Of course, the other advantage of increasing market share without increasing profits is to encourage development of the eco-system. Apple always flaunts the fact that iOS has many more apps that are designed for tablets instead of being phone apps stretched to fit a tablet (just this week, they talked about it when introducing the Mini). As market share for Android tablets increases, developers will be forced to develop apps for their Android users to ensure their own profitability.

    In all, this is a long-term plan and may be the ONLY chance for Amazon/Google to ensure long-term success of their products. Focusing on profit would lead to fewer sales and less market share, ultimately leading to the demise of the products.

    • FalKirk

      “The problem with this article is that it assumes that market share and positive user experiences don’t matter.” – John

      Selling one’s product at cost is an awfully dear way to buy market share.

      It’s easy to gain market share if you give away your product at cost or below cost by subsidizing it. Turning that market share into profits is what matters.

      As I tried to point out in my article, all subsidized models depend on premium pricing garnered by proprietary products. The content that Amazon and Google sell is not proprietary. No subsidized model can be sustained without having a virtual monopoly on the secondary product sales.

    • Sam

      The problem with the developer argument is that Android is not a very profitable platform for them either, despite the large phone installed base. Apple is not only making the most profit for themselves, they are far and away making the most profit for their developers. The only folks I see challenging that anytime soon is Microsoft.

      • FalKirk

        Quite right.

        Google made their fortune on desktop search. They tried to replicate it on phones and all but ignored tablets. Unfortunately for Google, Ad revenue on phones does not work the way it does on the desktop and apps are absorbing more and more of our search functions and ad capabilities. Finally, the best place to advertise is becoming tablets and that’s where Google is weakest.

        • AugustEighty

          You really need to rethink your thesis. Let’s look at some things here. Google has: #1 mobile phone OS (soon tablets), #1 email platform (Gmail), #1 browser (Chrome), #1 media platform (Youtube), #1 navigation platform (maps / earth), #1 search engine (google), they are quickly usurping business tools (docs), is way ahead of the game on cloud computing (the future), has a scary monopoly on worldwide information, is starting to roll out Google Fiber, and is quickly becoming one of the largest app environments in the world. This is a recipe for what? An online operating system that caters to everything you need to do: internet, email, business, information, navigation, media, news, etc. Do you really think this has no long term value – and isn’t very well planned? At all? Do you really think in 5 years Google is still going to be entirely relying on ad revenue? If you do you should hand in your tech savvy card right now. The future is cloud computing, and Google is doing *everything* right. I mean really – hardware is completely irrelevant at this point – all manufacturers have great products – similiar specs, different logo. Reviews between S III, iPhone 5 and latest Lumia are literally coming down to 5% differences in processor speed, and whether one has a few more pixels than the other lol. The fact that Google is dominating everything online, and the future is online should be a giant blinking flag for someone that considers themselves a tech writer. But you’ve obviously got a religious like attachment to Mac, so this is probably falling on deaf ears. I’ll check out your articles in 36 months though. :)

          • FalKirk

            “Do you really think in 5 years Google is still going to be entirely relying on ad revenue?” – AugustEighty

            I never said or implied any such thing. You’re reading an awful lot into my comment that simply is not there.

            “Google has: #1 mobile phone OS (soon tablets)…” – AugustEighty

            Soon tablets? Are you kidding me? Google is being swept right out of the tablet market place. The press always reports “Android” market share without distinguishing those portions of Android which do and do not benefit Google. Over the past 12 months, the Amazon fork has chewed up the Google portion of the tablet market in the U.S. Third party Android tablets are failing fast and the Nexus 7 has had underwhelming (and unreported) sales numbers. Now Windows comes along with their tablets and Apple introduces the iPad Mini. Google isn’t going to have the #1 OS in tablets…they’re going to be lucky if they maintain double digit market share numbers and single digit profit share numbers.

  • http://www.facebook.com/CristiCo Cristian Cocos

    Google is not selling the Nexus7 to make a direct profit, nor is it selling it to make a profit from whatever media it may sell. The Nexus7 is sold in order to give the Android tablet market a jolt, hence establish Android as a worthwhile tablet OS in the minds of the consumers (and, possibly, iZombies).

    • FalKirk

      Gutting the Android third-party tablet market in order to give it a “jolt” is an extremely bizarre and poor strategy.

      • SSShu

        A point I totally missed thus far. In essence… did GOOG just eviscerated the whole ‘premium’ android tablet market?

        • FalKirk

          Yes. The iPad was the dominant tablet. Android manufactures found that they couldn’t compete head-to-head with the 10 inch tablet so they wisely targeted the 7 inch tablet sector. They didn’t fare well there either because Google didn’t encourage optimized tablet apps and didn’t maintain a content and app store capable of competing with iOS.

          Then Google introduced the Nexus 7. It’s a zero-margin product that relies on content and ad sales to make profits. No third party manufacturer has access to those content of ad profits so they have zero chance of successfully competing with the Nexus 7.

          That leaves the 10 in sector, but the problem there is a) Apple; b) Microsoft’s new tablets; and c) Google has destroyed the tablet platform. There are no tablet optimized apps and there are developers willing to create them for a failed platform.

    • JDL

      So let me get this straight, your saying that Googles views the brain dead as a key market for the Nexus7? That probably explains why it is selling so poorly.

  • BeavertonSteve

    Microsoft lost $3.7 billion on the original xbox. As a late arriver trying to compete with a dominant product they were ridiculed for even trying to compete with Sony. Yet Microsoft kept giving away the razor and eventually turned things around.

    • FalKirk

      My understanding is that Microsoft actually went 5 billion in the hole before they started to make a profit on X-box. No independent company could have survived that. You can question a lot about Microsoft, but you can’t question their patience and their perseverance.

      However, I hardly think you can hold the Microsoft X-box up as a business model to follow. Not only is it the exception to the rule, but its an exception that no sane company should strive to emulate.

      • BeavertonSteve

        I’ll give you that one. There are few compaines that could afford to hang on that long although Amazon or Google might be one of the better equipped compaines to do so. I’m sure Amazon has studied the correlation between Kindle Fire owners and their Prime subscriptions pretty thoroughly. If enough customers are paying the $80 after their Fire purchases Amazon will probably keep cranking out devices and taking losses.

        • FalKirk

          “If enough customers are paying the $80 after their Fire purchases Amazon will probably keep cranking out devices and taking losses.”

          It’s very hard to do the math because no one is giving us the numbers. Amazon is supposed to have margins hovering around 4%. Let’s say they have 10% margins instead. Apple will probably make about $130 to $150 per iPad Mini sale. Amazon would have to sell $1,300 to $1,500 in merchandise to match that number. It would be $2,6000 to $3,000 if the margins are at 5%. Do you think the Kindle Fire is drawing those kind of sales? Amazon’s recent earning calls would suggest just the opposite.

      • tyr

        But like Microsoft did in the case of game consoles, Amazon and Google believe they are dealing with an existential threat: a powerful competitor who could potentially lock them out of their market.

        • FalKirk

          What good does it do Amazon and Google to buy their way into the market by subsidizing the hardware if they gain no benefit from being in the market?

          It’s like paying a huge finder’s fee to get a job for a ritzy company that only pays minimum wage. What’s the point? Go find another market that pays better.

          • tyr

            No it’s more like taking a pay cut to make sure you keep your job. It’s not about moving into new markets, I think they feel they need to be in this market to protect their money maker. Like I said Microsoft didn’t need to be in the console market, there was no direct benefit, but they felt that if they didn’t act consoles would eventually threaten the Windows/Office hegemony (back when people thought set-top boxes were going to be TheNextBigThing.) The theoritical benefit is reducing Apple’s leverage over Amazon and Google by making sure that their services aren’t too dependant on customers accessing them through iOS devices. Of course these efforts have failed so far, as can be seen in the huge imbalance in iOS vs Android devices in web stats.

          • FalKirk

            First, tyr, let me say that I like the way you think. I’m going to argue with you here, but I have a feeling that we agree on this a lot more than we disagree.

            “Microsoft didn’t need to be in the console market, there was no direct benefit, but they felt that if they didn’t act consoles would eventually threaten the Windows/Office hegemony…” – tyr

            For about 10 years (or more) Microsoft acted like a small child who couldn’t stand it if someone had a toy that they didn’t have. They went into consoles because they were looking for ways to diversify and because they thought they could bully their way in and snatch the profits.

            ” I think they feel they need to be in this market to protect their money maker…” – tyr

            I think your right but I think their strategy is wrong. The way you put it reminded me of the argument for tariffs. “Some other country is undercutting our steel production? Then we have to prop up our steel factories with government subsidies”!

            Tariffs are a bad idea and subsidizing a business that can’t stand on it’s own two profit making legs is a bad idea too.

    • http://www.facebook.com/dan.felixpierce Dan Pierce

      Amazon doesn’t have a desktop OS and office suite monopoly to subsidize their attempt to gain market share.

      • BeavertonSteve

        They’re no MSFT, but despite a rough third quarter they are still projecting nearly $23 billion in fourth quarter revenue so they can afford to do some subsidizing. Unlike the Microsoft/Sony comparison I don’t even think they’d need to “win” just squeeze out enough market share to stay relevant and keep selling Prime subscriptions.

        • Petie

          Revenue is not profit, They need to make money to subsadise anything. No profits will see their insane share price collapse and a change of leadership.

          • BeavertonSteve

            I wan’t implying that their revenue is profit, but if you look at where that $23 billion of revenue is going a massive amount is being used to subsidize the Kindle Fire. So yes, they can currently afford it.

          • FalKirk

            “…a massive amount is being used to subsidize the Kindle Fire.” – BeavertonSteve

            It makes no sense to subsidize a product that isn’t generating profits.

          • FalKirk

            “Revenue is not profit.” – Petie

            I was going to write the exact same words.

        • http://policydiary.com/ John S. Wilson

          They’re losing money. Happened this past quarter and the quarter before it. Worse: they’re projecting a possible loss next quarter as well.

    • JDL

      Microsoft have made operational profits on the xbox in some quarters, they have not yet come close to making back their investmeant. The xbox has been a disaster for Microsoft and has failed in it’s objective which was to put Microsoft at the centre of the living room. So no they havn’t turned things round, they just allowed themselves to be distracted.

  • Mayson

    Peter Drucker’s maxim comes to mind: “Profits are the costs of the future.”

    No profits, no future.

  • Peter Brouwer

    I think you’ve reached the wrong conclusion… yes maybe Apple squeezes more money from their customers — but doesn’t that mean they’ve cornered the spend thrift market, the people that don’t care if they’re paying more for the same thing???

    • FalKirk

      Targeting customers who are willing to pay for hardware, content and consume ads is exactly what every company tablet company is striving to achieve. No one wants to target customers who are not willing to pay for hardware, content or advertising.

    • TheEternalEmperor

      Having customers is “squeezing”? That’s an awesome definition.

  • rogerdanielpaul

    Your metaphors really just fall apart the more you pursue it. Gillette was selling one single item. Razors. Printers were just trying to reclaim it mainly through ink. Game consoles only have games. Amazon is selling everything on Amazon.com, Amazon Prime (Video service included), Ebooks, and Amazon gets a kick back for every app bought through the app store, AND they are including advertising on their devices. Not to mention they also have cheaper plan than Apple for getting kindles into the hands of every K-12 student.

    You might be right with Google. They just don’t have the content (outside of apps of course) to do it like Amazon is going it.

    I personally think Apple will do good with the mini because its customers will appreciate the device and be willing to pay the premium. I am not one of those people. I didn’t buy a tablet until I got a Kindle Fire (1st Gen) for a hundred dollars used from a guy on craigslist 9 months ago. I then rooted it and flashed jelly Bean once I played with a nexus 7.

    Since when is Wikipedia a credible source? The citations in wikipedia? Yes, but just Wiki?

    • FalKirk

      “Amazon is selling everything on Amazon.com…” – rogerdanielpaul

      This is an excellent point. Amazon is not just selling tablet content, they are striving to use the tablet as leverage to sell every item in their store. However, there is no proof that this is working. In fact, the most recent evidence available – today’s $274 million loss – indicates that this strategy is not working.

      • Procase

        First Amazon net loss in 9 years. Besides this was more due to LivingSocial and rapidly increasing operating expenses. Sales were still up by 27%.

        -http://www.bloomberg.com/news/2012-10-25/amazon-posts-loss-as-livingsocial-stake-loses-value.html

        • Hamster

          Higher sales while making a loss is not a good plan, beside which Amazon would have still lossed money regardless of LivingSocial, that just increased it’s loss. Amazons margins has been shrinking for a few years now.

          • Procase

            I should have been clearer. You are correct their margin’s are declining, but that is mainly due to increasing distribution costs. Which is why it makes even more sense for them to push electronic inventory.

      • rj

        The Kindle Fire HD has been shipping for just over a month. The 8.9 inch model hasn’t even shipped yet. Amazon is barely in the “razor” phase of the strategy, let alone the “blades”.

        • FalKirk

          The original Kindle Fire shipped for 9 months and sold between 4.7 and 5 million units.

          The new Kindle Fire models have, as you say, either not or barely reached the market. We’ll have to wait and see. But the evidence provided by over the last 4 quarters is not promising.

  • http://twitter.com/umbrarchist umbrarchist

    So if the Google business model is dumb then buying the Apple miniPad is even dumber.

    • Sigivald

      Let me translate that into what I understand it to mean: “If [selling products at a loss an hoping to make back the money on apps and ads] is dumb then [individually buying some product] is dumber”.

      See how that doesn’t make any sense because it’s comparing completely disparate things?

      If you mean Apple’s dumb for making it, well… we’ll see. I think it’ll sell like hotcakes, myself, and Apple doesn’t sell at a loss.

      That sounds like the kind of “dumb” that makes one a business generate $33B in profit in the first three quarters of the year. Which in business terms is a kind of ‘dumb’ people would murder for.

      If you really mean consumers will be dumb for buying it, please relate that to “the Google business model”, because the connection? She is unobvious.

      • http://twitter.com/umbrarchist umbrarchist

        Buying the Nexus is a bargain for the consumer though the strategy may be dumb for Google though that is not exactly proven yet. Though Apple makes a bigger profit if the consumer is dumb enough to buy it over the Nexus. Why shouldn’t the consumer go for the Google bargain instead?

        We have yet to see how well the miniPad sells.

        • Player_16

          You like that word ‘dumb’, huh? Putting labels on things (like people) and judging their choice of product. It’s a indication of intelligence or their choice on what a person buys, whether it’s a Nexus or iPad. They weighed in and that’s it. The decision is made thru intelligence.

          “Why shouldn’t the consumer go for the Google bargain instead?” Maybe they don’t see Google as a bargain but opted for Apple as a better bargain instead. Price doesn’t alway rule: individual intelligence does. There’s nothing ‘dumb’ about that.

          • http://twitter.com/umbrarchist umbrarchist

            There is the Apple being too wide to fit in pockets because the Nexus 7 barely fits. There is the higher resolution of the Nexus and Fire HD and there are the USB ports which are somewhat more standard.

            But then they are all DUMB because they do not have microSD slots.

            http://www.youtube.com/watch?v=jqBsMaDMTAU

            But the Apple is so wide because their dumb software can’t handle different proportions of screens because Apple has so much control of their hardware they didn’t need to create very flexible software. So now they try to convince us that their disadvantage is an advantage. DUMB!

        • FalKirk

          “Buying the Nexus is a bargain for the consumer…” – umbrarchist

          The Nexus 7 is a fine product that give value to many. But even more people think that they get even more value from the iPad. The iPad has satisfaction ratings in the high ninties. The Nexus 7? Not so much.

          Nothing is a bargain if it doesn’t fulfill one’s needs. For those who like wha the Nexus 7 give them, it’s a bargain. For those who want more, it’s a waste of money.

          “…though the strategy may be dumb for Google though that is not exactly proven yet.” – umbrarchist

          Actually it kind of has been proven. Apple has superb profits. Google refuses to announce Nexus 7 sales numbers, margins, revenues or profits. That should tell you all you need to know.

          • http://twitter.com/umbrarchist umbrarchist

            That Apple buyers are suckers and it is great for Apple stock holders? Not news. Some people want other people to continue to be dumb to make a lot of money off them. What is surprising about that?

            I was at least expecting higher resolution and for $300. And now there is a 32 gig Nexus. But actually a 1.5 GHz dual-core with a microSD slot for $150 makes the most sense. Maybe the Onda V711 or V712. Android tablets will probably take over most of the planet. Android had a development problem for years because of so much “non-standard” hardware. So now there is a reference to conform to and that will alter hardware and software evolution from this point.

          • Player_16

            “Android tablets will probably take over most of the planet.” (LOL)
            For that to happen, it will only be Google Nexus’s in the hands of the devoted (like RIM) to carry that load (and Fire HD) given away for next to nothing. (That sounds familiar!) “So now there is a reference to conform to and that will alter hardware and software evolution from this point.”

            To clue you in, OEM’s must pay MS between $7-12 for every device that carries Android OS that’s sold [simplified]. Many OEM’s are going to tire the unknowing, constant update of v2.3 also. So what’s the point; might as well ‘pay’ MS for Windows RT for about the same price -at lease they’ll know intermittent update/upgrades will come at a knowingly, regular pace (and to the customer, from the same location.)

            Motorola is just hanging on with their phones. (Xoom is dead.) HTC’s are running Windows RT. Even #2 Samsung is slowly bailing on Android -and that’s saying a lot! Any company that’s running 2 OS’s is doing themselves a disservice. It may be more choices, but tons of overhead. One OS is going to win out with both the manufacture and the costumer.

          • http://twitter.com/umbrarchist umbrarchist

            The Google Nexus will be nearly irrelevant. It will be No name Chinese and Indian tablets.

          • Player_16

            First you praise the Nexus, now you call it irrelevant. Because Android is free, you change tact so now you promote generic e-waste products. Just stop it will you!

          • http://twitter.com/umbrarchist umbrarchist

            Obviously you don’t know the difference between praise and objectivity. Just because I say A is better than B because of XYZ reasons does not mean I think it is superior to everything else. I don’t give a damn about Google or Apple. Neither one has a microSD slot which I think is bad. But some sources say the miniPad only has 512 meg of RAM.

            I bought a Nexus 7 with 8 gig because 16 gig is not enough anyway and I was not paying $50 for 8 gig of storage. The fact that they now have a 32 gig just demonstrates that a microSD slot would have made sense to begin with.

            But they are all manipulating the technology for the money so all of it is less than what is actually capable of being produced. Company loyalty is unprofessional. Brand loyalty is for kids. People who get emotional about this crap expect everybody else to.

    • Relentlessfocus

      Nothing like a well reasoned argument!

  • http://www.facebook.com/iambeltr0n Mark Beltran

    The one thing I will say is that production prices tend to drop as parts get less expensive over time. I believe there will be a point where Nexus 7 will be sold at a slight profit. In that sense, it is smart to get a good install base right now. As the Nexus 7 grows in popularity, more people may buy the tablet, at a later point in which Google would actually make money. So it may seem like a bad move in the present, I believe it will be a profitable venture if they keep their momentum.

    • Canucker

      I’m sure RIM thought that at one point too….. PlayBook is looking awfully lonely, at $150 and no love.

    • JDL

      Your mistake is to assume that everyone else will fail to act, this is not the console market where the same product can be sold for 6-9 years.

  • Bogart

    iSheep here…

  • Procase

    Interesting opinions overall – with elements of truth and an
    unfortunate hint of bias, but missing the “bigger picture”.

    Firstly Amazon has been successful with Kindle devices. They
    have sold a lot of these devices; it has boosted sales of their product and
    most importantly resulted in increased profits over the last few years (2009-2012).
    The have recently made loses, but this
    has more to do with other avenues of their business being less successful. They
    can sell the razor at cost as its consumers are definitely buying its blades.

    Google makes the largest part of their revenue through users
    clicking on ads, specifically through its search engine – this will continue for
    the foreseeable future. The creation of Android was more in response to the
    progression of users accessing web content via mobile devices. In effect more
    as a defensive strategy to protect against a scenario where mobile computing is
    monopolised by closed-off platform companies, i.e. Apple and Microsoft.

    The purpose of selling the Nexus at an insignificant margin is
    to ensure that the Android platform remains competitive. Taking market share
    from Apple is of less importance.

    In short Google needed to enter the sphere of mobile
    computing for its own content to stay relevant but not to drive its revenue
    (not yet anyhow).

    Whether or not this is currently working is an entirely
    different argument. The author’s argument was against Google subsidizing the
    Nexus to directly drive revenue, something which Google is in fact not really
    trying to do at all.

    • Procase

      See the Nexus line as more of an ad-campaign. Contrary to prevalent comparissons, Apple and Google are very different companies

    • JDL

      Amazons profits and margins have been falling over the last few years as sales have increased. As for Google, they purchased Android in 2005, saying it was defensive is simple spin.

      • Procase

        1) Amazon’s high cost of selling digital services and media drag it’s bottom-line down. What it needs to do is to streamline its digital distribution channels, not axe its kindle line.

        2) Defensive (business strategy) as in they were not planning to become a primary hardware and software manufacturing company. They were planning ahead for a future where users would transition from desktop to smart mobile devices – something that only really took off in 2007.

        Android gives them a foothold in the mobile computing arena, a certain amount of control that has allowed them to remain relevant as more and more users access content via mobile devices. Without it, companies like Apple and Microsoft could have effectively cut Google off from its user base and erroded its market share (in terms of ad-revenue).

    • FalKirk

      “Amazon has been successful with Kindle devices. They have sold a lot of these devices; it has boosted sales of their product and most importantly resulted in increased profits over the last few years” – Procase

      There is no evidence to support this position. Please point me to one jot of information that shows that Kindle Fire sales have increased Amazon’s profits.

      • Procase

        It’s very difficult to analyse the Fire in isolation as only overall figures are given, not specific ones.

        If you look at the basic kindle line (ex fire), then net income (NI) (2007-2010) is as follows: $476m, $645m, $902m, $1152m – not possible to directly attribute this growth to the kindle, in my opinion an inference can be made.

        From 2011 onwards NI nosedives due to increasing costs in other areas not directly attributable to the Fire. Net sales is still increasing and gross profit margin (GPM) remains relatively unchanged, however infrastructure costs involved in providing digital services and media increases significantly.

        The cost of producing the Fire would be included in cost of sales and
        since GPM remains relatively unchanged, the Fire isn’t losing Amazon
        money. Net sales is also up (how much the Fire is a part of this, is
        anyones’ guess).

        In short: you’re partly right – the Fire is currently a burden on the NI, but one can rationalize that Amazon is incurring costs in expanding its digital products and services line (away from just electronic books).

        Here’s the problem: in the same manner that I can’t prove that the Kindle Fire is helping Amazon’s cause, you cannot prove that it is directly hurting them.

        “In fact, when you look at the company’s recent quarterly earnings
        reports, there is evidence suggesting that they are NOT making
        significant revenues or profits from tablet related content and ad
        sales.” The burden of proof lies upon you my friend. You can prove that Amazon recently made a loss in Q3,12 but can you categorically prove that this is directly linked to the Kindle Fire?

        Side note: most analysts expect their NI to rebound in 2013 – http://investing.businessweek.com/research/stocks/earnings/earnings.asp?ticker=AMZN

        -sources: http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual

        • FalKirk

          “The burden of proof lies upon you my friend.” – Procase

          Actually, it doesn’t. You’re the one who asserted that “Amazon has been successful with Kindle devices”. If you can’t support that statement, withdrawal it.

          “in the same manner that I can’t prove that the Kindle Fire is helping Amazon’s cause, you cannot prove that it is directly hurting them”.

          Not my thesis, but I’ll take a crack at it anyway. When subsidized kindle sales dropped, gross margins for Amazon went UP.

          http://seekingalpha.com/article/557151-kindle-sales-plunge-made-amazon-com-s-gross-margin-look-better

          • Procase

            “in the same manner that I can’t prove that the Kindle Fire is helping Amazon’s cause…” Although I didn’t explicitly state it, I did in fact withdraw my earlier statement on account of not being able to provide concrete evidence.

            Your assertion, and please correct me if I’m wrong, is that Amazon’s loss-leader strategy of selling the Fire at cost is flawed. This being due to your opinion that the Fire doesn’t lead to increased sales and profits for Amazon.

            Now if the article you provided holds any truth, then we will for the moment assume that sales of Amazon’s kindle line have dried up (which have a GPM 0f 0%). Yet despite this net sales improved and the company’s GPM even improved slightly.

            Now either Amazon suddenly selling a whole lot more paperbacks or maybe, and I’m not saying this is fact, they are selling more digital media…

            The decline of Amazon’s kindle device sales isn’t proof that this model isn’t sustainable; it only indicates that Amazon hasn’t responded to increased competition and that it’s overall product experience isn’t of high enough quality. If the quality of Gillette’s razor blades fell, its business too would suffer.

          • FalKirk

            “Now if the article you provided holds any truth, then we will for the moment assume that sales of Amazon’s kindle line have dried up” – Procase

            The article in question was written in May and was referring the the drop off of Kindle sales from the last quarter of 2011 to the first quarter of 2012.

            You make many good points. Please share your intellect with us in the comments to future articles.

          • Procase

            Thank you for the interesting debate and for your truly thought-provoking opinion piece.

            This website was a great find!

    • tyr

      “Amazon has been successful with Kindle devices. They
      have sold a lot of these devices; it has boosted sales of their product and
      most importantly resulted in increased profits over the last few years (2009-2012).”

      True, their problem is that the “classic” e-ink Kindle market is being replaced by the more versatile tablet and their forrays into that market have been so far produced very little.

  • http://twitter.com/Man_0_words Mike Loy

    John,

    Your perspective is truly insightful. Unlike some of the reader “opinions”.

    Nicely done!

    • mhikl

      We try our best and with the assistance of good analysts on board we can do better.

  • http://twitter.com/djbressler David Bressler

    Don’t forget there is also no economy of scale in production of the “razor blades” that would give an advantage to Google or Amazon when it comes to “producing content”.

    For example, it’s not cost effective (or as profitable) to make 100,000 razor blades. So, in order to ramp quickly where the benefits of economies of scale kick in (maybe millions of blades?) it’s helpful to kickstart adoption by giving away the razors. Since there production of digital content doesn’t have a variable cost element to each unit produced (or not in the same way as producing a physical product does), the “give away the razor and sell the blade” is doesn’t seem to me to be the appropriate economic model to copy.

  • Crazyhorse

    Seems a very astute analysis to me and the most sense I’ve seen written about this issue, but I do agree with other comments that the only rational explanation for Google & Amazon’s behaviour is to tie in current customers at a loss with the hope of future profits. Their apparent desperation to do this now just reflects their belief of the importance of this market in the future. I can only assume that they have some plan to avoid sinking billions into their platform like MS did with Xbox

    • Tom W

      It seems Google & Amazon are fond of plunging into new business lines without a business plan, confident in their own ability to devise a strategy along the way … learning by doing. That explains their follow-the-leader approach in touch screens, apps, the app store, content stores, etc. They are more innovative than Apple because they continue to search for a winning (profitable) strategy.

      Recently, Apple seems to be moving in the direction of creating advantages that are not easily copied — such as their custom processors, Siri, Maps, and ultra-thin iDevices now rolling off assembly lines. In the near future, we can expect ultra-secure, user-friendly iDevices incorporating high-quality fingerprint recognition.

      Ultimately all of these things will be copied, though … by which time Apple will have moved on. Apple continues to be the first-mover in the mobile computing revolution.

  • BC2009

    Such a great read John. You nailed it. Nexus 7 makes it impossible for Android OEMs to enter the 7-inch tablet space because how will they make money versus the Nexus 7? Only way is to have another business to subsidize your tablet (like Amazon and Barnes and Noble do).

    Microsoft’s pricing on Surface indicates that Microsoft is looking to play the same game as Apple in the tablet industry, but are simply arriving a bit late.

    The small/at-cost tablet market is very interesting to impulse buyers who are very price-conscious. “Hey look honey I got you one of those new tablet things that are so popular”. But this is why over 90% of tablet web traffic is from iPad — people don’t use these other tablets because they suck. Didn’t Jeff Bezos say that he does not want Amazon to make money on a product you do not use. Well it seems that people are not using it and after today’s $274M reported loss, it sounds like Amazon is not making money on it either.

    Even Amazon’s Prime subscription is more about “captive audience” then it is about making money. Prime buys you tons of stuff with Amazon including free 2-day shipping and access to Amazon Video On-Demand. But it also makes you think twice about purchasing from somewhere other than Amazon because who doesn’t like free 2-day shipping when you are already locked in? However, regarding Amazon, they are going to have to capture 90% of world-wide retail (not just online retail) to ever live up to their stock valuation.

    • FalKirk

      “The small/at-cost tablet market is very interesting to impulse buyers who are very price-conscious. “Hey look honey I got you one of those new tablet things that are so popular”. But this is why over 90% of tablet web traffic is from iPad…”

      Well said. The Amazon and Google models are, ironically, turned on their head. Apple is selling content and apps with their premium tablets but the tablets that rely on content and ads in order to survive are attracting exactly the wrong type of customer – the (bearded) non-buying kind of customer.

      • TheEternalEmperor

        Yup. I have some friends who purchased a Nexus because it was cheap. They have no interest in any software but free. They just got an Android smartphone…because it was cheap.

        Saw a commercial, Jos A Banks, a haberdashery is giving away Android phones with the purchase of a *suit*.

        id, the makers of Doom etc, lost money trying to go after Linux users. The cheap and the poor make the worse customers.

        • SSShu

          Exactly. Thats what i keep on saying to people. You get apple products not to save money – but to have a better experience. If youre strapped on cash and are a bit of a miser – youll probably miss out on a lot of fun stuffs.

          • augusteighty

            There was an article a while back equating brand loyalty to the same part of the brain as religion. Sounds like all you guys are ripe for a case study. Feeling some buyers remorse I see. Having invested all those 1000′s of dollars in apps and hardware that were completely over priced (considering their markup and manufacturing source) and now the competition is showing you what it’s all really worth. So the argument for not using iOS is that “those people are cheap trailer trash”. Haha. Denial is a sad state of mind to wallow in.

          • SSShu

            Its more towards caveat emptor. If youre not prepared to cough up the higher premium, apple’s product line/strategy is a very bad fit for you. You dont buy fancy cars if you cant support maintenance fees. Nothing on android phones because they can aim to be a premium product if they want to – but i know from experience that iphones tend to cost a lot more to operate – and that they should know that as well before jumping into the ecosystem. Otherwise i would happily recommend a cheaper brand of smartphones for those who dont care less, on a budget, or are looking for something extra. in short – i know the iDevices are nice – but they just dont fit everyone’s needs especially if budget is an issue.

          • http://www.facebook.com/johnnyrodgersmorris John Morris

            lol you can almost feel the pretentiousness dripping between each sentence these ppl write

    • rj

      “However, regarding Amazon, they are going to have to capture 90% of world-wide retail (not just online retail) to ever live up to their stock valuation.”

      I don’t understand this. WMT has a market cap of $253B (about 2.5x AMZN), with a P/E of 15.86.

  • miffedone

    You seem to think all business models should be equal, but they’re not. Google launched Android not to be a profit center, but to make sure Apple didn’t own a monopoly position in ‘mobile’, and decide one day to switch search engines (as they just did with maps), thus devastating Google’s core business. Corporations often buy competitors and close them down; obviously they don’t intend a short-term profit. This is a defensive business strategy.

    Amazon, by contrast, is running the Kindle as a break-even (not even a loss-leader.) Every Kindle they sell costs them nothing and puts them closer to customers who are likely to purchase from Amazon, whose app is displayed prominently on the device. I dismiss the objection that Kindle users “are cheap.” 1) You don’t know that, and 2) so what? People who go into the supermarket for cheap milk don’t usually walk out with nothing else.

    Loss leaders are common; some have already been mentioned: razor blades, ink cartridges and video games, but did you know Chevy produced the Corvette at a loss just to get people into showrooms? Supermarkets do it with perishable foods, to get people into the store. How is that different? Record companies used to produce ‘sampler’ albums below cost to garner exposure. Megabus sells one seat on every bus for $1. It’s to get noticed and get in the game. Starting from behind, both Amazon and Google need to ‘get noticed’ and get a user base in place to attract developers and give users a sense that their purchase won’t end up as a paperweight. Both need not to be at the mercy of Apple.

    • FalKirk

      “This is a defensive business strategy (by Google).” – miffedone

      And what has it achieved? No tablet profits, little tablet presence and a virtual Apple tablet monopoly both in market share and profit share. If this was intended as a defensive business strategy, then the strategy or the execution was flawed.

      Loss leaders are common.” – miffedone

      For a loss leader to work, profit must be made on the sale of something else. Take a hard look at Amazon’s earning statements over the past four quarters and show me where they are making profits due to their tablet strategy.

    • http://twitter.com/cimota Matt Johnston

      Google didn’t launch Android to ensure Apple didn’t have a monopoly position. That’s a fabrication from a senior Google exec. And it was used to rally the anti-Apple troops who didn’t even notice they were being lied to.

      At the launch of Android, Apple had a market share measured in tenths of a percent.

      Apple will do fine in their non-monopoly position eking their massive profits from relatively small market shares. Such hardship.

    • mhikl

      Yup, it ain’t nice to call people cheap. In these times people are re-learning some lessons of the past, frugality and thrift. As important, however, is the lesson of value. I’ve read that in China, many will save to purchase an Apple product over the less expensive copy. This may be done for show by some but for most I suspect it is for quality and endurance. In the long run, a quality product may be more economical.

  • http://livingthetravelchannel.blogspot.com/ DaddyBird

    Very, very apt points! Thank you for bring them up!

  • kevin

    For Amazon, the Kindle Fire is like the retail Apple Store. It’s the personal, spontaneous portal to all of Amazon’s products, including physical products, not just content and ads. This is evident from how they tie Amazon Prime up with Instant Video; a scheme that aims to create further lock-in. In any case, retail profitability depends on turning inventory, and the Kindle’s simplicity can help by creating impulse buying.

    Like Apple invests extra dollars in building special brand stores, such as Fifth Avenue New York, in order to establish itself long-term as the consumer electronics brand (vs. let’s say Samsung), Amazon is investing in the Kindle in order to establish itself long-term as the online retail shopping brand (vs. let’s say Walmart).

    I’m not saying that Amazon will succeed, but I think it will take more time to see if it works.

    • FalKirk

      “I think it will take more time to see if it works.” – Kevin

      Good thoughts, Kevin.

      Part of Amazon’s problem is that they only sell content in a few geographical areas. While Apple is free to compete around the world, Amazon can only afford to sell their tablet in the markets that sell their content. This puts Amazon at a terrible disadvantage when it comes to hardware scale and platform ecosystem.

      Again, one of the big problems, as I see it, is that Amazon is giving the tablet away like a printer and then selling the ink at a premium. But there is no premium pricing with Amazon. Their margins are near 4%. The subsidized model only works when the secondary product is being sold at a premium.

      • SSShu

        Kevin: thats IF customers buy the amazon kindle fire as a gateway to the amazon ecosystem. what if they bought the tablet as is? as a means to consume media, watch movies, play games, etc2 – and they got a Kindle Fire because its cheap and its a brand that they are familiar with. And they are left with a tablet that does things half as well as the other tablets in the market? Reasonably specced for its price point however it is underpowered. While they are bombarded with ads that say what they can do on their galaxy tabs or ipads or even nexuses.
        Again – i am not saying they will fail or that your point is invalid. What i am saying is… does the customers – non-techies so to speak – know that the Kindle Fire is more of/targeted as a gateway device than a tablet?
        This is also discounting the fact that if they are targeting(or unwittingly targeted) the price sensitive buyers – how likely is it for them to throw more money at it?

        • kevin

          As long as Amazon isn’t losing money on the Fire or getting distracted from its main focus of online retail by building a tablet, then it doesn’t really matter if some customers don’t use it as an Amazon portal/gateway device.
          – Most Fires are likely sold to people who are already positive towards Amazon so Amazon probably believes people won’t get a negative feeling about the Amazon brand even if it goes unused (since it was cheap relative to other choices).
          – Most people who shop Amazon are price sensitive, so Fire fits right in.

          But if they do turn it on, there is so much upside. It makes buying at Amazon so easy – instant-on, instantly connected to Amazon account. It will send targeted ads and sales reminders. (And it will give Amazon a treasure trove of info, and cut Google out.)

          Basically, for Amazon to grow, like other retailers, it needs to maintain its small positive margin and increase sales volume. It needs its current customers to buy a broader range of stuff and buy much more often. (Of course, it also needs more people to turn to online shopping.) The Fire will entice its current customers to do just that, and if they don’t, it doesn’t hurt them.

      • kevin

        Amazon is not competing against Apple in selling tablets so hardware scale and platform ecosystem doesn’t matter to Amazon. Just like Apple isn’t competing against Amazon as a retailer with its Apple Stores. Amazon is competing against other retailers, like WalMart and Target and eBay and supermarkets, etc.
        Given that Amazon is currently limited to few geographical areas, and given that their business model scales, one would argue that there is still much room for growth. (Just like we claim that Apple still has room for growth in its markets.)
        If Amazon can achieve same day delivery (without increasing prices), it would have a huge competitive advantage against other retailers. It would feel “monopolistic” and it could be monetized (another 1% in margin?). Same-day delivery, though, depends on huge volumes in a small geographical area, which can be seen in Amazon’s focus on deep penetration into geographical areas instead of broad across the world.

  • http://twitter.com/cimota Matt Johnston

    Apple has always maintained that the content side of their business has been “break even”.

    Now, as Apple enjoys healthy profits on their other products, it might be safe to assume break even means “such a small profit margin we don’t even count it” which doesn’t mean there isn’t a model there. But us it a model for Google or Amazon?

    Googles results show they’ve had to grow their business hugely in order to score lower profits. Amazon just lost $274M, presumably that’s $5 for every Kindle they’re going to sell this quarter.

    Apple OTOH misses stupid analyst estimates by consistently breaking previous sales and profit records. You have to wonder why analysts and journalists are calling for Apple to emulate two rivals in difficulties.

  • Grwisher

    Nice article, but do you know why safety razors became popular?
    “During World War I, the U.S. Government issued Gillette safety razors to the entire armed forces. By the end of the war, some 3.5 million razors and 32 million blades were put into military hands, thereby converting an entire nation to the Gillette safety razor.”
    From: http://inventors.about.com/library/inventors/blrazor.htm

    But why? Because the soldiers could not wear gas masks effectively without shaving. Now, do you want to know who introduced chewing gum into the United States?

  • http://www.isophist.com/ Emilio Orione

    The iPad has never been a premium product. From the beginning the price has been low and no competitor has been able to sell a comparable tablet at a lower price.

    Apple tax, as claimed by apple’s critics, died with ipad, macbook air, imac 27″, no one as been able to compete on price with those products. Ultrabooks’ specification has been lowered to allow OEMs to sell at a lower price to compete with the air with inferior products at a lower price.

    Apple does want the higher sides of markets, but with competitive price for those types of products.

    But with the ipad mini things were different.

    First of all, why the mini?

    We can see from latest data that the ipad 2 is still selling well lowering the ASP of the ipad line. As Dedieu says in Asymco, the success of the older model is a clear sign that the new model is overserving the market.

    Customers does not value the enhancements of the new model enough to pay the difference of price.

    The iPad is not selling like crazy, but still must have been a sign apple’s managers have taken into account deciding that they had to create a lower segment for ipad selling a less capable tablet at a lower price.

    The new ipad is too ahead of competitors and perhaps too ahead of user’s needs, so the mini.

    Second, why the 329 price? Could they sell at 299 or 249?

    I don’t agree is a matter of margin, at least eliminating the 249 that is about the cost of the mini that is between 230-250 given the 30% margin on 329 typical for apple (they have to cost more than competitor’s tablets because they have bigger display and more sdram and aluminium on board).

    Why not a 20% margin at 299?

    It does not depend on too low margin reasoning, apple created the ipad 499 price to exclude competitor from the fight on price. They have the best supply chain and they can have the lowest prices, no one compete at 499 with the ipad.

    They could sell the mini at 299 and exclude the fight on price even for the mini if they wanted to.

    They are building an ecosystem and they have learned from windows that install base count. Margin is not profit, you have to sell enough tablets to reach break even with your margin, that is to balance all the fixed costs needed to design the thing, ofter that point you start to make profit, the final profits come from the total amount of tablets sold.

    Your estimate of this total amount gives you the idea of what margin you should have in each sale. So why 30% and not 20%?

    My answer is this: they know that they are supply constrained and that the total amount of ipad mini to sale will be limited.
    Secondo they know that a new version will come in mid 2013 because they have to raise the bar on continuos changes, so from now to april the total amount is limited and calculable and so the margin has to be enough to meet their standard.
    Next iteration margin could change with the actual model lowered in price a the new mini that maintains this price point.

    • mhikl

      @emilio_orione:disqus Good points, Emilio. I suspect Apple weighs carefully the savings of what it leaves out of a product. It might also be an Apple stratagem to let the cheap devices be, as it may be the frustrating encounter with Android that inevitably leads some to Apple. Rather than wasting the energy to compete against a wounded beast, leave it to struggle to its inevitable end.

    • FalKirk

      Emilio, you have too many interesting thoughts to respond to them all in a comment. I’ve been thinking of writing an article on iPads and I’ve cut and pasted your comments into my notes. I don’t want to make any promises because stuff happens and article have a way of getting pushed into the future and then into oblivion. :)

      I’ll make just one quick point (which doesn’t begin to do your comment justice). I’m not sure if the iPad 3 “over served” the market, although I totally understand what Dediu mean.

      I actually think that the iPad 3 was a rare miss for Apple – it “underserved” the market. Yes, it got a retina display, but it was bigger, heavier, slower and hotter. The new chip they just added to the 4th generation model will help.

      I can all but guarantee you that there WILL be another iPad event in the Spring. First, Apple wants to make the iPad attractive for the all important education mark. Second, I think they want to make the 5th generation iPad all that it can be: thinner, lighter, faster, retina. We’ll see.

      • Player_16

        iPod – 3g; with the 4 buttons above the touch wheel.

      • http://www.isophist.com/ Emilio Orione

        Thanks for your reply.
        Maybe you are right and new iPad underserves the market, but that’s another way of saying users didn’t valued enough the iPad 3 versus the iPad 2 because sales have done well, it’s the share between 3 and 2 that is perhaps unexpected.
        With poor sales underserved may be the reason with good sales I prefer the overserved view.

  • http://twitter.com/limster Steve Lim

    Also the complementary ecosystem (Apps, NOT books or movies) is better in quality from Apple, than it is for Google/Amazon.

    The point sourced from Wikipedia, stresses that there must be a monopoly on the complementary products (No 3rd party ink cartridges).

    Although the complementary products are segregated, there is no significant difference in price, but a commanding difference in quality, security and choice that anyone (that is not blinded by ideology) can grasp.

  • http://twitter.com/FlopTech FlopTech Engineering

    @ Defendor re: “This is Googles worst nightmare, Android used against them, and being more successful than the Google version. So Google did what no HW OEM would. Sell it’s own giveaway tablets to stem the tide.”

    Perfectly stated. We’d add that Amazon has forked Android 2.3 into a proprietary, closed, Amazon-only fragment. They’ve moved a huge slice of the Android tablet user pie (albeit a rather small pie) out of Google’s reach, in terms of OS updates. Honeycomb, Ice Cream Sandwich, Fruitcake, whatever, all irrelevant.

  • http://www.facebook.com/jeremy.sung.56 Jeremy Sung

    I comment with the sincerest feelings I can have but… I would be honored if you could respond or consider my concerns:

    I understand that techpinions is a technology analyst website with a lot of freedom of speech. Originally I highly valued the perspectives this
    site has given but may I ask for a rebuttal of your recent thesis statements for your arguments?

    I feel that a lot of these speculations are becoming repetitive almost in a brainwashing fashion. Apple is strong, but techpinions, and you, seems to be analyzing why the winner is winning, and how he will win more after Apple has already won… rather than giving good analysis. Specifically:

    1) Apple is ingenious for high profit margins,
    2) creating an applications environment that has a highly positive user experience,
    3) and screen size oriented adoption (iPad specific apps)”

    - high profit margins are a result of going a high-risk high-reward
    model, when they first released their products. You cannot do this
    without a hefty amount of risk or capital (probably from iPod success
    6-7 years ago)

    - the sweet application environment has appeared only in the last 2-3 years, it was a wildly rapid growth

    - the screen size ingenuity, and user experience based on iPhone app
    =! iPad app is really a good observation but… now comments on the iPad
    mini not following that rule?

    Mainly I feel that the counter-arguments are being shutdown with the
    same subjective thesis statements of previous posts. Rather than having
    articles that are independent, they all fall back to the great
    successes of Apple and the dreadful failures of everyone else. What if
    for a company not as successful as Apple, Google and Amazon NEED to sell
    razorblades under-cost to get a market saturation IN ORDER TO create an
    environment for apps and user experience people are willing to pay for.

    If they try to follow the Apple success factors like you said… in comments for “Windows 8: It’s Later For Microsoft Than You Think”

    Wouldn’t they be just trying to climb a mountain that “the king” keeps
    making steeper?

    Maybe device saturation in the market IS success for Google. The initial statement in “Inch Tablets Employ An Odd Definition of “Success””seems to describe success as profits only. That is the ultimate goal of a business but maybe this is the only way to
    compete with the monster that is Apple. They cannot just copy iTunes/iOS/iPad concepts to win.!

    What if I were to put out the thesis argument that the iPad Mini is signs that Apple is feeling threatened, and it is actually their worse decision yet. In times of financial difficulty, do people really have the ability to pay the premiums that Apple wants?

  • Defendor

    Asus has released some Nexus 7 sales numbers:

    http://blogs.wsj.com/digits/2012/10/30/asustek-nexus-7-sales-approaching-1-million-a-month/

    Basically they started out around 500K/month and have climbed to nearly a million in the latest month.

  • Jack

    They’re not “selling poorly”. Quit smoking the Apple crack pipe.

  • NK89

    It’s not about short-term profits. It’s about helping consumers and moving the tablet market forward. Google does that. If you refuse to pricegouge (like Apple does), consumers with acknowledge your integrity, and they will continue to do business with you. You don’t have to be evil to make money.

  • me

    Well, this article is more than a little biased. It certainly makes the author look even less knowledgeable and less informed now. Stupid is as stupid does.

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