Dropsafe

by Alec Muffett

Amazon, Apple, and the beauty of low margins — Remains of the Day #mustread

This:

The day Amazon launched its video store, the top DVD store on the web at the time, I think it was DVD Empire, lowered its prices across the board, raising its average discount from 30% off to 50% off DVDs.

This forced our hand immediately. Selling DVDs at 50% off would mean selling those titles at a loss. We had planned to match their 30% discount, and now we were being out-priced by the market leader on our first day of operation, and just before the heart of the holiday sales season to boot (it was November, 1998).

We convened a quick emergency huddle, but it didn’t take long to come to a decision. We’d match the 50% off. We had to. Our leading opponent had challenged us to a game of who can hold your breath longer. We were confident in our lung capacity. They only sold DVDs whereas we had the security of a giant books and music business buttressing our revenues.

After a few weeks, DVD Empire blinked. They had to. Sometime later, I can’t remember how long it was, DVD Empire rebranded, tried expanding to sell adult DVDs, then went out of business. There were other DVD-only retailers online at the time, but none from that period survived. I doubt any online retailer selling only DVDs still exists.

And this:

An incumbent with high margins, especially in technology, is like a deer that wears a bullseye on its flank. Assuming a company doesn’t have a monopoly, its high margin structure screams for a competitor to come in and compete on price, if nothing else, and it also hints at potential complacency. If the company is public, how willing will they be to lower their own margins and take a beating on their public valuation?

Because technology, both hardware and software, tends to operate on an annual update cycle, every year you have to worry about a competitor leapfrogging you in that cycle. One mistake and you can see a huge shift in customers to a competitor.

Think Apple.  Think Google. Compare and contrast.

From: Amazon, Apple, and the beauty of low margins — Remains of the Day.

Via: kottke

Hat-tip: Bart

⊞

Comments

One response to “Amazon, Apple, and the beauty of low margins — Remains of the Day #mustread”

  1. Michael Jennings

    It’s interesting to what extent that article would remain true if you took the word “Amazon” and replaced it with “Tesco” wherever you encounter the word. Most of the strategies described in this article (for instance, being able to receive payment when you sell an item, and pay for it from your suppliers 60 days later, so getting your suppliers to provide your working capital, to choose just one example) are done by the most efficient bricks and mortar retailers too. From this article, Amazon comes across as a retailer soon and an internet company second.

    I think the vulnerability of Amazon’s margin strategy is the lack of free cash flow that is ultimately being generated by it. Amazon has had to raise all the capital for its growth from the financial markets. If for some reason the shareholders decide to withhold this going forward (which is just a fancy way of saying “the stock price goes down”) then Amazon’s freedom to move is constrained. Apple is able to fund any expansion or research it wants from its internal cash flow, and has more room to move in a pinch, I think. Of course, Apple’s management is still vulnerable to things its shareholders might do in an annual general meeting – the company has no individual shareholders with significant stakes, mainly because Steve Jobs never seemed interested in becoming one. However, it does not need them to give the company more money.

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