Bezos is On Fire

December 3, 2011 by · 2 Comments
Filed under: Business, Technology 

Well, the race is on.  Finally a product that can challenge the iPad’s # 1 spot: The Kindle Fire.  But is it really?  Analyst predict the Kindle Fire to be the #2 selling tablet in the market.  But it is not a tablet – said Bezos – it is a portal to the cloud.  The main difference between the iPad and the Kindle Fire is the business model.  Yes, my loyal reader (singular) let me explain:

Apple’s business is simple.  Make a kick ass product for $x and sell it for $x+y.  They make money by making cheap things (yes, I said cheap things referring to Apple) and selling them for more.  iTunes is only a way to keep you from buying something else.  Amazon’s business model is making a good product (sorry Jeff, the iPad has you beat) for $x and selling it for $x or even a little less.  They will make money selling you content, you know, books, apps, movies, music, etc. I know what you’re thinking: “so does Apple, have you heard of iTunes?”  hmmm, let’s see.

Apple reported Fiscal 2011 revenue of roughly $108B and a net income of $26B.  This was made of $21B in Mac sales, $7B in iPod sales, a mind boggling $47B in iPhones, $20B in Ipads, $2.3B in peripherals, and a meager (for Apple standards) $6B in iTunes.  On the other hand, Amazon who reported its third quarter a week later has sold $30B in the first 9 months, almost $12 of them in what they call “media”.  In percentage, 6% of Apple’s revenue is iTunes, whereas 40% of Amazon’s is media.  Although the numbers are not directly comparable and Amazon doesn’t distinguish digital from physical media (CDs, DVDs, Books), it is clear that Amazon’s business is heavily weighted in media, whereas Apple’s is mainly hardware, at least for now.

Another way to look at it is that Amazon’s “store front” is the Kindle in all its forms, more comparable to Apple’s stores that to the iPad itself.  Charging $200 for the Kindle Fire is like charging cover to enter an Apple store (kind of what Costco does).  So it is logical to expect that Amazon will not make money on the store front alone since it is really designed to attract customers to by its media products.

Now this is just the beginning of a new Tech rivalry, kind of when Android launched caused Apple to unfriend Google.  iCloud is a direct competitor to Amazon’s media store and Kindle Fire is kind of a competitor to the iPad.  The movie gets more intriguing with all the rumors of Amazon launching free smartphones, again as portals and Apple doubling down on iCloud in iOS5 and beyond.  How will it unfold? don’t miss 2012 – 2015, where 2 of the most revered tech companies go at it cloud to cloud.

But, my dear reader, if you accidentally stumbled upon this blog for investment advice, be forewarned that you’re not getting it.  Apple (AAPL) has$82B in cash and is trading at 14 times earnings. Amazon (AMZN) has $6.5B in cash and trades at around 103 times earnings.  You tell me where would you rather put your money?  Of course, don’t forget one of tech’s fave companies: Google (GOOG) with $42B in cash trading @ roughly 21 times earnings who is about to close the acquisition of Motorola Mobility (MMI) with one of the most impressive IP portfolios in the industry and the capability to develop state of the art hardware and kind of the “inventors” of the cloud.  In other words I’ll wait it out.   I would sell a share and a half of Apple to buy an iPad and a share of Amazon to buy a Kindle Fire and use my free Google account to access both.

The media battle, in this blogger’s humble opinion will be won outside the cloud; on a desk negotiating with media companies that are old fashion and do not understand or particularly care about technology. Better content will win and getting the right terms for the producers is what will be the key.  All 3 have done it and have done it well.  It might just come down to who executes best …

Enjoy.

 

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