Apple vs. Amazon: Why Amazon Will Win the Real Battle for the Future

Posted by Rob Enderle

Apple and Amazon shouldn’t be competitors, as one is a retailer and the other a hardware manufacturer. In fact, they should be partners - with Amazon selling Apple products.   

But times change and so do companies. Now Amazon is making one of the strongest iPad competitors - the Kindle HDX - and the online retailer has a better music and movie service than even iTunes. Meanwhile, Apple has stores, which coupled with the App store (the strongest in the segment), basically puts them in the retail business.  

Both companies hit pretty hard on Black Friday and Cyber Monday and this will likely eventually be a case where if Amazon wins all the marbles most will come from Apple and vice versa. However, I think in Amazon has the advantage, at least in the long term. Let me explain. 

The Battlefield

The war between these vendors exists on three battlefields: services, client hardware and total retail sales. To win decisively, and by definition a decisive win means the other company is crippled or killed in the process, this isn’t a multiple choice war. Meaning, the winning vendor has to win all three battles or, win two and have a third party clinch the third. A decisive advantage in any one of these areas would assure the company’s survival.   

Hardware

Apple has a clear advantage in hardware. Cupertino has more of it and still maintains an effective market leadership in the smartphone and tablet space. And yes, they also lead in MP3 players, but I doubt anyone cares anymore. Amazon has made a credible showing with their Kindle tablets, but has yet to launch PC like products or a smartphone, although one is rumored to be coming. If this were just a hardware battle, we could end it here. However, not only isn’t this the most important leg of a three-legged stool it is also the least strategic - because it has the least ability to lock in the customer.  

Services

This is pitting iTunes and Apple's other rudimentary cloud services against Amazon’s AWS and their equal or stronger offerings. Lagging only in their app store, Amazon has provided what is a more robust set of cloud offerings than Apple, especially when you consider AWS, Amazon’s Web Services, against which Apple has no comparable offering. More importantly, these services are increasingly linked and Amazon has been doing, for some time, a better job of marketing additional purchases to their customers than Apple. Apple is no slouch, but in Web services they lag Amazon nearly as badly as Amazon lags them in hardware.

Retail

This is where Amazon does and should shine. While Apple’s stores have profit in line with jewelry stores Amazon is the strongest on-line retailer in the world and is likely more worried about eBay here than they are about Apple. If eBay weren’t so expensive and auction focused you might anticipate Apple buying them to close this competitive gap. Or, at least partner with them, but that doesn’t appear to be in the cards. Every Kindle sold is a doorway right back into Amazon and an amazingly large number of Apple users shop on Amazon as well, while Kindle users don’t/can’t use iTunes or Apple’s other on-line services well or at all on their Kindles.   

Wrapping Up:  The Final Leg-Profit

This gives Amazon two battles they are winning against Apple’s one but I think there is a fourth leg and that is profit. Here you’d think I’d favor Apple because they make more of it, while Amazon is effectively breaking even. But this is because Jeff Bezos plows every ounce of profit back into the business while Apple tends to accumulate it and use it for occasional purchases, stock buybacks and dividends. They have to maintain this profit or get punished by the market for missing expectations while Amazon doesn’t have this problem. Or put another way, if Amazon breaks even their stock will do just fine, were Apple to drop to break even their board would likely fire Tim Cooke.  Apple dues have a massive war chest but most of it is in Europe and can be moved to the US without incurring massive taxes (which seems to be an incredibly stupid US policy by the way) so they aren’t as liquid as they should be, at least on in the US where they are most dominant.    

So while Apple has a massive lead in hardware they lag in services and retail, and are less agile because they have to maintain their high profit margins to keep investors happy. This suggests that, unless something changes, Amazon eventually displaces Apple. Having said that, every time before I’ve seen this happen, at least under Jobs, Apple changed to remove this threat or the competitor (Microsoft) stumbled. Apple was one of the luckiest companies in the world, I guess we’ll see over the next few years whether they still are. We should know by the end of the decade, for the next few years we’ll be watching one hell of a fight.