Next up in the tech world to post earnings this week is Amazon. Last year, the company jumped into tablet computers with a bang. The Kindle sold exceptionally well. At the same time, Amazon started pushing into competitors’ territory, but more on that later.
Amazon is in a unique position among the tech and social giants like Google, Apple, Facebook, and Twitter. The company utilizes a traditional business model behind its growth and continued development. We buy things; they ship them to us through a massive network of warehouses and shipping centers. Amazon doesn’t rely on ads (like Google does) or brand experience (like Apple does). Regardless, don’t let the news about Amazon’s third-quarter make you think things aren’t looking good.
Third-Quarter Loss for Amazon
Rex Crum at MarketWatch reported late yesterday that Amazon “lost $274 million, or 60 cents a share on revenue of $13.81 billion.” The same period last year experienced growth. The company took a big hit due to investment in LivingSocial, a competitor to GroupOn. However, total revenues are still up over last year.
Another reason for the loss in the third quarter is Amazon’s rapid expansion. The company is currently spending a lot of money on constructing new warehouses and distribution centers all over the country. Of course, this is expensive. But Amazon knows that if it can expand its foothold in the market even more, the main source of revenue, the traditional business side of things, can sustain it to enable competition with Google and Apple.
Amazon Wants a Piece of Everyone’s Pie
There’s another important fact underlying Amazon’s losses for the third quarter. The infrastructure spending is a sign that the company is taking steps to ensure its future dominance in the world of online shopping. But the fact that it is selling Kindles at cost, or below cost, means they are aggressively taking on other markets.
As Augustino Fontevecchia writes for Forbes, “Bezos is going all in.” What does that mean exactly? It’s essentially Amazon CEO Bezos’ business plan to do whatever it takes to gain a foothold in the tech world markets. Amazon Prime, a streaming/on-demand media service has been continually improving versus competitors like Netflix. They’ve been running a successful app store for their Kindle and other devices. Amazon’s cloud and data storage capabilities are enormous and constantly getting better. But most importantly, their tablets are making headway against Apple.
Taking on Apple
Fontevecchia quotes Bezos as stating, “Sell devices near breakeven and you can pack a lot of sophisticated hardware into a very low price point.” That’s exactly what Amazon is doing with their Kindle product line, and it’s working. The Kindle is the number one selling product on Amazon, for the entire world. While they don’t make ridiculous profits like Apple, they are bringing people into their brand ecosystem. Kindle owners will likely use Amazon services in the future, and ultimately spend more money.
Another writer for Forbes, Pascal-Emmanuel Gobry, goes as far to suggest Jeff Bezos is the new Steve Jobs. He notes two incredibly important points about Amazon’s battle with Apple. First, the iPad’s lower sales compared to previous years “suggests that the Kindle Fire is eating into iPad sales in a significant way.” Second, “the Kindle Fire is a success because of the ways it doesn’t imitate the iPad.”
A Fascinating Comparison and an Interesting Strategy
If you think about it, Amazon is running a tremendously successful company completely different from Apple. Amazon relies on an old-school business model while operating in new-age markets. They believe in selling products with very little profit, or even at a loss, while Apple’s profit margin is comparatively extreme.
I think it’s a fascinating picture that’s developing between Amazon and its competitors. From a business standpoint, it’s also interesting to showcase how different strategies can work. It all depends on the company and the situation. I’m excited to see how Amazon continues to grow and challenge its competitors. Who doesn’t enjoy a good fight anyway?
Do you think Amazon will be successful in challenging Apple and the other big tech companies or will they have to spend too much to win?
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