While Apple is a wildly profitable money printing machine that hoards its cash and returns billions to shareholders, Amazon makes no official profit. As Benedict Evans points out, this is just a sleight of hand for Amazon has numerous profitable businesses, it is just that it reinvests every penny back into the business (or, more correctly, all its various new subbusinesses) and has skyrocketing capital expenditures to go with its skyrocketing revenues.
Which is right? Ought Apple to be reinvesting its phenomenal wealth? Ought Amazon to be returning money to shareholders? I argue that, broadly speaking, both are taking the optimal strategy and the difference is a function of different key products.
Both companies are premised on an idea which after it was implemented is obviously and vastly superior to what came before it. The smartphone/tablet market is enormous, and everyone recognizes the value that smartphones create over the previous era of cell phones and how integral they are to so many of ours lives these days. For Amazon, the ability to have enormous selection with low prices, all done from the comfort of your home (or smartphone!) is vastly superior for tonnes of things than going through a brick and mortor store. They are both fabulous ideas, and as the big first movers to drive the innovation of these two great ideas, Apple and Amazon get richly rewarded for it.
When you are clever and lucky enough to be the first mover on those once in a decade big ideas, the goal is to capitalize as much as possible. Apple clearly has done this is spades. It has completely dominated taking most of the profits (with Samsung, nobody else makes anything meaningful) from this industry and while it still probably has room to go has saturated the developed world probably something close to as much as it reasonably can with its business model. And it has done this all charging very high margins and being able to print billions and billions of profits.
For Amazon, however, the market is rather different. If you consider online retail, it undoubtedly crushes everyone. If you consider retail generally, however, Amazon takes maybe 1% (after ignoring gas, food, building supplies, etc). Apple can't realistically expect a 20x revenue growth, unless there are many iPhone level innovations out there none of us can think of that only Apple can. But is it so unreasonable to imagine a not too distant future where people rarely shop in physical stores and, say, 20% of US retail is through Amazon?
Amazon has so much more room for potential growth than Apple does that they are justified in doing everything they can to grow. This means pouring all of that money from the profitable portions of Amazon into the new and growing portions of Amazon to try and get that growth. There simply isn't a need to waste long term potential by pushing for on paper profits right now.
On a related note, one of the sillier criticisms of Apple is that it is somehow lacking in innovation because it hasn't come up with a new ipod/iphone/ipad category creating device that completely transforms the entire industry or creates a new one from thin air. Possibly the iWatch will be added to the list, time will tell. The problem is that such massive, industry changing innovations are incredibly rare and one can't just will them into existence, regardless of how much of an innovative genius you are. The 2007 iPhone was certainly a remarkable piece of innovation and now the smartphone market is measured in the billions and all the phones are something like that original iPhone. But how many markets that sized are actually sitting there ripe to be innovated given current technological capabilities? I can't think of any, and I doubt any that criticizes Apple for lack of innovation can do so either.
Which is right? Ought Apple to be reinvesting its phenomenal wealth? Ought Amazon to be returning money to shareholders? I argue that, broadly speaking, both are taking the optimal strategy and the difference is a function of different key products.
Both companies are premised on an idea which after it was implemented is obviously and vastly superior to what came before it. The smartphone/tablet market is enormous, and everyone recognizes the value that smartphones create over the previous era of cell phones and how integral they are to so many of ours lives these days. For Amazon, the ability to have enormous selection with low prices, all done from the comfort of your home (or smartphone!) is vastly superior for tonnes of things than going through a brick and mortor store. They are both fabulous ideas, and as the big first movers to drive the innovation of these two great ideas, Apple and Amazon get richly rewarded for it.
When you are clever and lucky enough to be the first mover on those once in a decade big ideas, the goal is to capitalize as much as possible. Apple clearly has done this is spades. It has completely dominated taking most of the profits (with Samsung, nobody else makes anything meaningful) from this industry and while it still probably has room to go has saturated the developed world probably something close to as much as it reasonably can with its business model. And it has done this all charging very high margins and being able to print billions and billions of profits.
For Amazon, however, the market is rather different. If you consider online retail, it undoubtedly crushes everyone. If you consider retail generally, however, Amazon takes maybe 1% (after ignoring gas, food, building supplies, etc). Apple can't realistically expect a 20x revenue growth, unless there are many iPhone level innovations out there none of us can think of that only Apple can. But is it so unreasonable to imagine a not too distant future where people rarely shop in physical stores and, say, 20% of US retail is through Amazon?
Amazon has so much more room for potential growth than Apple does that they are justified in doing everything they can to grow. This means pouring all of that money from the profitable portions of Amazon into the new and growing portions of Amazon to try and get that growth. There simply isn't a need to waste long term potential by pushing for on paper profits right now.
On a related note, one of the sillier criticisms of Apple is that it is somehow lacking in innovation because it hasn't come up with a new ipod/iphone/ipad category creating device that completely transforms the entire industry or creates a new one from thin air. Possibly the iWatch will be added to the list, time will tell. The problem is that such massive, industry changing innovations are incredibly rare and one can't just will them into existence, regardless of how much of an innovative genius you are. The 2007 iPhone was certainly a remarkable piece of innovation and now the smartphone market is measured in the billions and all the phones are something like that original iPhone. But how many markets that sized are actually sitting there ripe to be innovated given current technological capabilities? I can't think of any, and I doubt any that criticizes Apple for lack of innovation can do so either.
This post first appeared on Progressive Proselytizing | Political Analysis, please read the originial post: here
