Seeking Alpha
Growth at reasonable price, REITs, portfolio strategy, dividend investing
Profile| Send Message|
( followers)  

On the eve of the much anticipated Apple (NASDAQ:AAPL) launch of the iPhone 5, many observers are wondering whether Apple will continue to dazzle and amaze the masses with their ability to anticipate their desires, or if Amazon (NASDAQ:AMZN) will begin to chip away at Apple's market share and sparkle.

At first glance, it seems Amazon is following in Apple's footsteps, but are they, or are they really creating their own path that for the time-being, is coming to a head against Apple? Like cars on two highways that temporarily merge together before one of them eventually veers off in another direction?

Is Amazon the new Apple?

Last week's presentation sure looked Apple-like and with Steve Jobs gone, it way be the opportunity that Jeff Bezos was looking for. Bezos has a great presence on stage, and like any dynamic speaker, there is a hypnotic effect that motivates the audience to do exactly as the presenter wants. Steve Jobs had it too. And if you have ever read the Tipping Point, those that attend some of these events for both Amazon and Apple are all three of the personality types that Malcolm Gladwell describes in his book: The Connector, with their numerous ties to a variety of individuals; the Mavens, the early adopters for cars, computers, and Kindles; and the Salesmen, (Steve Jobs (who is no longer around)and Jeff Bezos), who sell ideas, products, etc., through the persuasiveness of their personalities and their ability to articulate an appealing vision. All three of these personality types were sitting in the audience and they will go out into the world and spread the news of the Kindle. Will it reach the 'Tipping Point'. Did we see the beginning of this phenomenon last week?

Business Models

If we look closer at each of these companies, however, we see that while they are competing, their business models are different.

Apple makes it's money selling products, not content. Apple launches new products on a regular basis, targeting customers who buy the latest and greatest as soon as it is introduced. The rest of Apple's customers may wait for a second upgrade (myself included) before buying another one, but the fact is that Apple customers will keep upgrading as long as the product keeps getting better. And Apple products have huge margins. The media store only exists to support these devices.

Amazon, on the other hand, sells content, and can sell their tablet much cheaper, reportedly at a loss. Where they make up for the lower-priced device is in the sheer volume of sales they generate from content sales. And it's not that the content has high margins, but rather, very tight margins multiplied many times over! This has been a long-time strategy of Amazon and is the reason many big-box retailers are also facing challenges from Amazon. The Kindle device in this case is basically used as a point of sale to it's huge library of products.

The Amazon customer is also different from the Apple customer. They may buy their first Kindle because they didn't want to pay the high price of the iPad, and they are even less likely to be anxious to buy any new versions in the near future. It is more likely that they will wait until their Kindle stops working efficiently or breaks before they go out and buy another one. But they will buy tons of content in the meantime. Amazon is counting on it. And this will be Apple's biggest challenge.

But it's not like there is a price war going on. A price war is different from a business model competition. A price war oftentimes leads to commoditization of a product or service so that the only difference between two competing products is price. And the switching costs are usually minimal. But a business model may be targeting different uses and/or different users and while one may win out over another, there is more likelihood that they can coexist.

The question then is, is there room for both of these specific business models to coexist? And my answer is a resounding maybe! The users who want the best tablet will probably end up buying the Apple iPad. While users who want to consume lots of content will probably buy the cheaper Kindle and lots of content. According to Amazon, since the Kindle launch, customers who have bought a Kindle have bought 5 times more books than they did before the Kindle, and they are trying to increase this figure even more.

Changing of the Guard?

So the question of whether Amazon is going to dethrone Apple may not necessarily be the right one. We must first answer the question of whether they can coexist? If not, then did we see last week the beginning of the rise of Amazon to dethrone Apple? I don't think so, at least not yet.

For starters, the iPad, iPhone, and anything else that starts with a lowercase i is usually the best device of it's type. While the competition may be striving to close the gap, it seems that Apple continues to innovate faster and exponentially better than their competitors. While this reign may end, I don't see it yet. According to IDC, Apple has 68% of the tablet market while Amazon has only 5%. That is a big gap.

Perhaps Amazon's launch of an array of Kindles, called the Kindle Family, will have a negative effect on iPhone 5 sales and future iPad sales? (Notice the question mark) I have read numerous articles asking this same question? First of all, I don't think the Kindle can make phone calls, at least not yet. And as for future sales of iPads? I don't think so either.

I think customers who buy iPads will continue to buy iPads, and that the Kindle will actually create a larger market of tablet users than we currently have, some of which will buy iPads in the future. The Kindle is cheaper and easier to use than the iPad so I think more of the customers looking for those two features will buy the Kindle as an introduction to tablet use. These customers probably never owned an iPad before nor have they ever read an e-book. Once introduced to a tablet, a percentage of those customers will eventually want to try out the best tablet on the market because they will probably want to use additional features, etc. So long as Apple continues to make the best tablet, these customers will eventually buy an iPad. Customers that I think would have foregone this purchase had it not been for their slow introduction to tablets through the Kindle.

I take back what I said earlier about the possibility of these two business models coexisting. I actually think they can and in fact, I believe they may actually complement each other in the long-run.

I am excited about this product launch tomorrow. In fact, I think Apple will sell 50 million iPhones before the end of the year and their stock price will continue to climb. Stay tuned. The show is about to begin.

Source: Will Amazon Dethrone Apple?