Forget about the hardware, Apple and Amazon have totally different business models

September 11, 2012
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Amazon pricing

Last week Amazon announced several new devices, the most important being the company’s new Kindle Fire tablets. They’re all powered by Android, and we could spend the next hundred or so words running you through their respective spec sheets, but that would be a waste of time.

Comparing Amazon’s tablets to Apple’s tablets ignores something that’s fundamental to the way these two companies do business. Apple has ridiculously high margins. When they sell you a $500 device, roughly a third of that goes straight into their pocket. When Amazon sells you a tablet, they sell it to you for roughly the same price it took them to build the thing. Their hope is that you’ll use their device to buy stuff through their store. Whether it be digital media or physical goods, Amazon doesn’t care, they just want to become your preferred retailer.

Where have we seen this business model before? The videogame industry. Sony, Nintendo, Microsoft, Sega, they’ll sell you their consoles either at cost or they’ll even lose money on the hardware, but it doesn’t matter since they make that money back by charging publishing houses for the rights to sell their games to customers. It’s a business model that has worked for several decades, and there’s no reason to believe that it won’t continue to be successful going forward.

Is Amazon a threat to Apple? Yes and no. Apple tries their best to sell you something that you can actually use as your main computing device. Meanwhile Amazon is selling what can best be described as the 21st century equivalent of a shopping catalog. Those of us who grew up before the internet remember getting thick magazines in the mail, filled with glossy pages of things to buy. All those magazines had a toll free number on the bottom so you could buy whatever it is that caught your eye. Amazon, thanks to technology, has that all too tempting one click to purchase button.

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