Research, Technology, Tools, Usability, World of Tomorrow

Can Amazon and Apple Peacefully Coexist? Probably, But As for Google…

Amazon’s recent announcement of the Kindle Fire shows a business model strikingly different from the one Apple has established for the iPad. Both companies, however, have put forth plans to disintermediate Google, which may have a profound impact on the online landscape.

For those not living in a cave, Amazon announced new Kindle hardware in late September, highlighted by their initial foray into the tablet market, the Kindle Fire. Amazon has come up with a compelling product, and should be lauded as the first tablet manufacturer to come up with a good answer to the question, “Why should I buy this instead of an iPad?”

. . . it’s much cheaper, Amazon offers a digital content ecosystem that rivals Apple’s (fewer apps, more books), and millions of people already use and enjoy Kindle hardware. The e-ink Kindles are to the Kindle Fire what the music-playing iPods were to the iPhone, and what the iPhone was to the iPad — traction in the mass market based on trust and loyalty. Amazon built an alternative to the iPad, rather than a direct competitor.

The notion raised in that last sentence, the question of whether the Fire is direct competition for the iPad or something else entirely has sparked a great deal of debate. Rob Wheeler makes the case that while it may not initially appear as a threat, the Fire is likely a low end disruption in the tablet market:

At some point, the iPad’s performance will overshoot what the vast majority of consumers need or want a tablet to do. Meanwhile, the Kindle Fire will improve as well — coming to be able to perform ever more of the functions that an iPad can perform at a significantly lower price point. And then, Apple’s customers will start switching. At that point, it will be too late for Apple to respond and the tablet market leader will no longer be Apple. It will be Amazon.

Horace Dediu offers a strong counterpoint, basing his argument on the business model Amazon employs for the Kindle, essentially a question of where it gets its profits.

The Kindle Fire is projected to be a subsidized device, that is, Amazon is selling it for less than it costs to make. The concept here is much like that for game consoles (Xbox, Playstation, Wii), where the hardware is sold at a loss and profit is made through the sale of content for the device. But the margins on the content sold for the Fire are razor thin:

Amazon probably won’t make any money on the Kindle ecosystem today, or next year, or even for a few more years. But it’s still a brilliant long-term investment.

Contrast this with Apple who have always been a hardware company, profiting from the sale of devices. For Apple, content is merely a means of selling more hardware. The iPad is estimated to bring in a 50% profit margin, while Apple’s booming app, song, and video stores basically break even.

This creates a very different development path for the two devices. As Dediu points out, subsidized devices generally have a much longer product cycle, as they need to exist long enough to sell enough content to pay for themselves. This also limits the investments one can make in technological improvements:

The subsidized device is starved of investment while the profitable service is nurtured. We see evidence of short cuts in investment in the off-the-shelf nature of Kindle products: from a second-hand (unsanctioned) OS to a second-hand (ex-RIM) hardware. Meanwhile, Amazon spends heavily on capex for the infrastructure that delivers the profitable content.

It does provide a fascinating study in business model contrasts. Other than a brief foray into clones, Apple has stuck with their philosophy of producing high-end, high-quality hardware with high margins. Amazon is instead taking on a fusion of the game console market (devices sold below cost with profits to come from content sales) and the PC market (razor thin margins collected in mass quantities). One company takes in almost all its profits at the point of sale; the other has them trickle in over time after the device is sold.

The lessons of the last decade have hopefully taught us that both models can do well at the same time, that the zero-sum game so beloved by the tech press is a myth. It’s unclear why so many pundits are convinced that every single technology market must resemble that of the PC operating system circa the mid 1990’s. There are certainly some markets where network effects dominate, and focusing on one key player is likely (Facebook, eBay). But not every device or market must follow that track.  As Steve Jobs famously said, “We have to let go of the notion that for Apple to win, Microsoft has to lose.”

Apple’s high margins allow them to remain profitable even when their devices make up only a small percentage of a market, as has long been the case for the Mac and continues to be the case for the iPhone despite Android’s higher marketshare.

Amazon has the advantage of selling the hardware and strictly locking the customer into Amazon-sold content.  More importantly, their content business does not solely rely on their own devices — every iPad (or Android tablet or Windows tablet) is yet another customer for Amazon’s content. Even if their own tablets fail, they can still win.

Rather than seeing Amazon’s recent announcements as an attack on Apple’s hold on the tablet market, the two devices may peacefully coexist. The real challenge offered by Amazon, and by Apple’s latest iPhone announcement, is to Google.

The companies each fired a broadside at Google’s search empire — Amazon via their Silk browser and Apple through their Siri “digital assistant”.

Silk is designed to speed the user experience of downloading web pages. Essentially, Amazon has interposed themselves between the user and the web. Amazon’s high bandwidth connection and enormous cloud storage space will get websites to users faster than a user could on his own.

This matters to Google because users are no longer directly interacting with Google. A Silk user will perform a Google search which will be sent to Amazon, Amazon will then query Google and download the results, and Amazon will then send those results to the user. Google will only see one composite user: Amazon. All that valuable data about individuals,their interest and purchases is now hidden from Google.

Note that it’s unclear exactly what Amazon will be tracking, but exploiting such an obvious asset seems inevitable. There’s also the potential for Amazon to block display ads on the web pages they send to users, or better yet, replace them with ads of their own.

Meanwhile, rather than coming between Google and the user, Apple seems intent on changing the search game altogether:

Siri isn’t a search engine, although it shares some of the same goals. Siri is, in essence, a new user interface, whose objective is to perform tasks, not merely deliver results. . . . Whereas a search engine crawls sites to collect data to present to searchers, Siri plugs in a wider range of services and only falls back on a generic search engine as the resource of last resort. . . . Siri is task oriented, whereas search is information oriented. Siri is the user interface, where search is the data feed.

Siri disrupts search by circumventing it — instead of going to Google to find a restaurant, Siri takes you directly to Yelp or some other service specifically designed for that purpose. Search engines rely on enormous levels of traffic in order to display enormous quantities of ads. With Siri, search engine traffic is reduced and there’s no place to display those ads.

Apple sees search much the way it sees content, as just another way to sell more hardware:

Microsoft’s model was: you’d buy a device, then pay for licenses for Microsoft software. Google’s disruption was: hey, you don’t need to pay for Microsoft software if you’re willing to put up with our non-blinking mostly-text ads. Apple’s model is: you don’t even need to see those ads, just buy your devices from us.

It’s certainly premature to declare the end of the Google era. The tech giants we think of as long disrupted seem to have better staying power than we’re willing to admit. A company like Yahoo! seems a long way back in the rear view mirror, yet it’s still the third most visited site on the internet and the company still makes hundreds of millions of dollars in profit each quarter (or think of IBM’s resurgence or Microsoft’s continued amazing levels of profitability). Desktop search isn’t going anywhere but to Google in the short term, and the company is certainly capable of either reinventing itself in the future or just rolling along as a profitable entity, if not a dominant one.

This is the first time though that we’re seeing new paradigms emerge that directly challenge Google’s dominance in search. And both Amazon’s private internet and Apple’s use of search as just another way to sell hardware are built around mobile usage.

While mobile requests currently drive a mere 6.8% of total search traffic, it should be noted that two-thirds of mobile search traffic comes to Google from iPods/iPhones/iPads. If “mobile” is indeed the way of the future, then a walled-off search experience, or, even worse, an ad-less methodology, present strong challenges to the status quo.

About David Crotty

I am a Senior Editor with Oxford University Press' journal publishing program. Prior to that I served as an Executive Editor at Cold Spring Harbor Laboratory Press, and was also the commissioning editor for their book publishing program. Many years ago, I was a research scientist, receiving my Ph.D. in Genetics & Development from Columbia University, and doing postdoctoral research in neural development at Caltech.

Discussion

3 thoughts on “Can Amazon and Apple Peacefully Coexist? Probably, But As for Google…

  1. Enjoyed the read, nice findings it would be nice to see someone else other than Apple at the top of the market

    Posted by Mr Happy | Nov 2, 2011, 5:42 am
  2. I’d rather have Apple at the top of the market than either Amazon or Google, both of which have dealt with publishers in high-handed fashion at times. I have been an Apple fan since the beginning and expect that loyalty to continue. I buy from Amazon only as a last resort and battle with Google pver copyright issues.

    Posted by Sandy Thatcher | Nov 7, 2011, 6:49 pm
    • Given that Amazon is in the business of selling content, they are much more likely to be seen as a direct competitor as they strive to cut out anyone between themselves and the content creator (while not offering the same sorts of value-add as a publisher). Apple and Google both see content as a means to an end, for Apple it’s selling devices, for Google it’s selling advertising. Google seems more threatening in that their modus operandi has been to try to drive the price of everything other than their ads down to zero in order to get more traffic to show more ads. Apple has been somewhat less threatening in that they’ve set up an ecosystem that (at least for the moment) still allows content to be sold and the rewards (mostly) reaped by those trying to sell it.

      Posted by David Crotty | Nov 7, 2011, 9:10 pm

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