For the 12 years that I have been studying the technology industry, within my role as an industry and market analyst, I have tried to understand the strategic elements of this industry that often go overlooked. This is probably why I have spent so much time thinking about the strategic role hardware plays in Amazon’s business model.
We have written quite a bit here at Tech.pinions about how Amazon’s business model is potentially disruptive, but more importantly a foreshadow of a model we may see more of in the future. Namely, how hardware as an extension of a service may represent the ideal way to consume said service.
While on stage at Thursday’s Kindle launch, Jeff Bezos continually emphasized that Amazon at its core is a services company. In this regard Google and Amazon are very similar. They are both fundamentally services companies. They are also similar and unique, in that they both approach software and hardware with a services first mentality. What I mean by that is that they start thinking strategically with their services, then to software, then to hardware. Other companies in the industry take a hardware first approach. Some take a software first approach. Apple being vertical in all areas of personal computing puts equal emphasis on hardware, software, and services, and in this regard are unique as well.
For Amazon, starting with a services first mentality, allows them to do things others simply cannot do. They build hardware not to make money but to be the best platform for their services. This allows them to create compelling hardware but offer it at a lower cost than a similar company making identical hardware but needing to make money off the hardware itself. This scenario is the only one where I feel price as a competitive advantage is valid. Generally speaking, a hardware only company whose goal is to be the first to the bottom of the price pyramid, is going to be the first to go out of business.
Amazon has the fundamental business of being a services company to back up and justify a hardware as a service strategy. It is not a strategy that will work for everyone. And even though I find this strategy compelling, it is not the one I like the most.
The strategy Amazon is using that I do like the most is that they are solely focused on a certain type of customer–the Amazon customer. With every generation of Kindle product, Amazon has constantly made things better for their customers. This type of strategy generates loyalty and trust; Something Amazon has with their customer base. Not only is Amazon focusing on their customer, they are also constantly learning about their customer. Customers needs may change, develop, mature, etc., and constantly learning and observing how to develop better solutions for their customers is a very smart approach and one Amazon is doing well.
This is what stands out to me most when I look at Amazon’s product portfolio. Each product is designed to focus on a set of problems and offer solutions to those problems, which are important to a specific set of customers. This customer centric strategy is one that I feel will clearly resonate with Amazon’s customer base.
Because of this strategy, I feel that it is easy for Amazon’s customers to perceive value. They will look at the Kindle offerings and somewhere in there find things that they value and consider investing. And because of Amazon’s hardware as a service mentality, the price barrier to entry is lower.
It is clear that companies that are taking an ecosystem approach to their products and solutions are in strong positions for the future. Consumers are beginning to invest in ecosystems whether they know it or not. Ecosystems are sticky and Apple and Amazon have two of the strongest ecosystems in my opinion.
I feel Amazon has one of the stronger strategies to compete with Apple, who is the clear market leader in tablets. Amazon is in this for the long run. They understand the tablet market is a marathon not a sprint. They understand it is a very big market which can sustain more than one player. But by focusing on their customers needs I think they have the right strategy for the long haul.
Absolutely agree with your last paragraph, Ben.
I think there are two basic philosophies a business can follow: placing the customer first and placing profits first. Placing the customer first seems clearly the right approach because the customer pays the salary of every person in the company; therefore the customer – not the investor – is the one you need to satisfy. A business may be able to survive without investors, but no business can survive without customers.
Jeff Bezos has said repeatedly that the customer is the highest priority at Amazon, and the rapid and apparently limitless growth of the retailer confirms the wisdom of this. At some point they will surpass Walmart, if they haven’t already.
Another poster said it better than I can: What Amazon is really shooting for is 100 percent share of consumer wallet.
The strategy, as a concept sounds great. But where are they making their money? I hope they’ve eschewed the notion that the Fire is sold at a loss. And if the recent DOJ ruling allows them to sell ebooks at a loss, where is the profit? I suppose if their shareholders are happy with a theoretic, altruistic strategy, then sure. But I would think at some point they need to make money. Or just transform into a 501c3 and become a non-profit.
I get Google. Services, software, and hardware are “features”. Their product is advertising (or as some would say, their product is “people”).
I get Apple. Services is a feature for their hardware/software products.
I don’t get Amazon. If their product is not hardware, not software, and services is a way to access products, what is the product they are using to make money?
Joe
Well, I have several thoughts. First of all they may not even fully know how or how much money they will make off this strategy. It is clear that they are learning as the process goes. They are watching very closely how people are using these devices. I believe their basis comes from their learning that people buy now 6 times as many books as before they owned a Kindle e-reader. So perhaps the same trends will happen with the fire where consumers spend X amount more with Amazon and Amazon services.
Google for example gets around $8 dollars a year per Android device. So perhaps they are looking to come up with an X amount per year using Amazon’s services.
Plus the tech news sites did confirm that the new Fire’s would have some light advertising on them as well. So their is a revenue stream there as well and we will have to see how annoying it is.
My key take away from listening to Bezos talk at the event is that they are very focused on learning as much as possible about their customers and from that I feel they will figure out the right revenue path.
We’ll see, I guess. as long as it doesn’t turn into this:
http://www.hulu.com/watch/4253
“How do we make money [making change]. The answer is simple, volume.”
Joe
One other(albeit small) factor to consider is that the early adopters of the Nexus 7–like myself–aren’t the people that Google will make 8 dollars a year off of. I know they’ve made far more than that on me, and most likely recouped their loss. It sort of creates an effect where you end up subsidizing the cost of your tablet with the early adopters and fanboys.
Any company with a P/E above 300 deserved to be admired especially when their profit margin is 4%.
Ben, you wrote, “I feel Amazon has one of the stronger strategies to compete with Apple, who is the clear market leader in tablets.”
I couldn’t agree more. In fact, after the announcement of the price of the Kindle Fire HD 16 GB for $199 I thought I heard a noise coming from Cupertino that is not heard often- the anticipated price of the expected iPad Mini dropping!
Ben wrote, “I feel Amazon has one of the stronger strategies to compete with Apple, who is the clear market leader in tablets.”
Disagree. Amazon is not a strong competitor to Apple. They will sell to customers who will endure ads, lower quality, substandard eco system, etc. in order to get a cheaper price. Those are not the customers that Apple targets.
pawhite524 wrote, “I thought I heard a noise coming from Cupertino that is not heard often- the anticipated price of the expected iPad Mini dropping!”
Wrong as well. Apple does not compete on price. They never have and never will. However, you did hear a sound because I heard it as well. But it just wasn’t coming from Cupertino. To be specific, it came from 1600 Amphitheatre Parkway in Mountain View, Santa Clara County, California.
How is it you have God’s ear that you can pronounce people “Wrong” for expressing an opinion. You must be receiving divine guidance when you make absolute statements such as “Apple does not compete on price. They never have and never will.”
I am fairly sure you and I may agree, as you look down on me from on high, Apple does not get involved in the race to the bottom pricing seen in the tech industry. All I ask is that you consider the words of Tim Cook who described Apple’s strategy of “umbrella pricing” (if I have the term correct) where Apple products will cover multiple price points. Examples include the iPod line, the iPhone line, and all computer lines. In fact, only the iPad line has a shortage of product with only the iPad 2 and new iPad.
This is where my tongue-in-cheek comment about anticipated pricing of an expected ipad Mini came in. I imagined, since I know get to hear God directly as you do, a number of pricing strategies for the hoped for iPad mini have been discussed at Apple, Inc. The Nexus 7 16 GB at $249 gave a line in the sand for Apple to consider. I think most people would pay $269 to $299 for an equivalent Apple product if the Nexus 7 was the only competition. But then Amazon prices their Kindle Fire 16 GB at $199!
My original post merely suggested those at Apple who were looking at a business model of the high $200s for the iPad mini may be now thinking of the $250 to $260 range, hence my “sound of an anticipated price dropping” comment.
One last thing, since you have established my inferiority to you and your divine connection, please explain your “However, you did hear a sound because I heard it as well. But it just wasn’t coming from Cupertino. To be specific, it came from 1600 Amphitheatre Parkway in Mountain View, Santa Clara County, California.” comment as it was, obviously, over my head.
pawwhite524 wrote: “To be specific, it came from 1600 Amphitheatre Parkway in Mountain View, Santa Clara County, California.” comment as it was, obviously, over my head.”
That is the address of Google’s headquarters.
IMHO, Google has more to be worried about regarding Amazon’s low prices than Apple does.
I wrote: “Wrong as well. Apple does not compete on price. They never have and never will. I apologize. I should have written: “IMHO, Apple does not compete on price. IMHO, they never have and never will.”
IMHO, Apple has the largest tablet market share by far. IMHO, Apple has the best tablet, eco system, apps, etc. And, IMHO, with the rumored announcement of the smaller tablet in the wings, they will have all of the bases covered. IMHO, Amazon will sell to customers who will endure ads, lower quality, substandard eco system, etc. in order to get a cheaper price. IMHO, those are not the customers that Apple targets. Therefore, IMHO, they have little reason, with their market share and quality of product, to make price concessions at this time.
pawhite524 wrote (regarding “umbrella pricing”): “Would not this be a method to compete on price?”
IMHO, definitely, but “umbrella pricing” doesn’t mean making price concessions. IMHO, It doesn’t mean that Apple is necessarily going to adjust their price on the new smaller iPad as you seem to indicate in your comment. In addition, IMHO, if the new smaller iPad’s announcement is as close as others indicate, Apple’s margins have already been calculated and pricing is probably pretty firm.
pawhite524 wrote: “If you propose Ben and I send our opinions to you for your approval prior to posting please provide the “how.”
Next time you pray.
IMHO, this is as close to God as it gets (Walt Mossberg):
http://allthingsd.com/20120911/kindle-fire-hd-is-better-but-it-isnt-the-best-color-tablet/
iPad comparison:
“The Fire HD isn’t as polished, fluid or versatile as the iPad. It offers only a fraction of the third-party apps available on either the iPad or the Nexus 7 (and other standard Android tablets). I found that after prolonged use, the Fire HD showed signs of latency—apps and content displayed delays in launching. This latency disappeared after a reboot.The Fire HD also assaults users with ads occupying the entire screen every time they start or resume using it. You have to pay Amazon another $15, using an obscure setting on a Web page, to escape these ads. And there are pitches to buy more content on many other screens, even those displaying your already-purchased content.”
Another comparison:”The Fire HD lacks some features the costlier iPad offers. Among these are a rear camera, and built-in dictation, instant messaging and maps, and the ability to beam video or music to a TV using a device like the Apple TV. It lacks artificial-intelligence features like Apple’s Siri, or Google Now, a feature of the Nexus 7.”
Last sentence:
“Overall, I see the 7-inch Fire HD as a good value for those primarily interested in easily tapping Amazon’s large collection of content.”
IMHO, and again, it is not really a competitor to Apple’s iPad as it doesn’t address Apple’s target market. At least Amazon did away with the mandatory ad support.
A fly in the ointment for Amazon may be the narrow approach it takes to what their hardware will allow to reside on it. From what I gather, EPUB, as one example, does not work on the hardware so that precludes previous free libraries from Gutenberg fitting with Amazon hardware. The other question I have is jail breaking. Can Amazon software be broken and its hardware used for purposes from which Amazon does not profit? It may be that Amazon then gains hardware traction which, not profiting the company margins, gives a false image of its real market values. How useful to Amazon’s bottom line is the hardware without Amazon profiting through software sales? And can some sort of jail breaking override the advertising from which Amazon is counting on earning some share of its profits?
Isn’t it like selling a car that does not use gasoline, but does run on Amoline. The new car is cheap but with modification now uses ubiquitous gasoline—and there goes the Amazon profit on selling Amoline? Also, though the hardware is sold at cost, how are the development fees covered? Android OS may be free, but modification to the Android OS, research, designing and testing it and the hardware all cost something, I would venturer.
Also, Amazon is dependant upon people actually reading books, fiction and nonfiction. How is reading now and how will reading as a leisure do over time? How does non-fiction sell electronically compared with hard books?
Note to Joe. Sadly, Hulu cannot be watched from Canada.
And there is irony in that we have a closed Android system that will be pretty hard for hardcore Apple haters to use in their arguments against Apple’s closed system approach. Now that has to stick in some one’s craw.
In the meantime, Apple is making heaps of money with its strategy, it has a bank account the envy of nations so it has time on its side which would allow it to think, plan and modify its dance. I would be surprised if any alleys its competitors might venture, Apple hasn’t already devised plans at which to compete. It isn’t as if this is a sudden new strategy by Amazon. It is refinement and few if any can refine and re-refine better than Apple.
I suspect Apple will be choosing the lower price from its accounting discussions. Apple shocked the world with the pricing of the original iPad by half what was speculated. And it made a profit and sent the competition back to their drawing boards. It’s a dance Apple can use to its advantage for this is one market Apple isn’t going to surrender without battle. Apple’s bank account is one mighty powerful rainy day war chest.