Under Steve Jobs, Apple Inc. (AAPL:NASDAQ) rose
to become the most valuable publicly traded company in the world. With a
market cap of $350 billion as of this writing, Apple vies regularly
with Exxon Mobil for the title.
But how long will Apple rein as king of the tech world?
At moment, AAPL is worth more than Amazon.com (AMZN:NASDAQ) and Google (GOOG:NASDAQ) combined
(based on market cap). Apple also has a far lower P/E
(price-to-earnings ratio) than its rivals, which tilts the comparison
that much further in Apple's favor.
Ultimately, though, a contrast in business
models could make all the difference. Who will be on top five years from
now? The different strategies employed make each company a contender.
High Margin vs. Low Margin
In a recent Wired interview, Amazon.com founder Jeff Bezos said the following:
There are two ways to build a successful company. One is to work very, very hard to convince customers to pay high margins. The other is to work very, very hard to be able to afford to offer customers low margins. They both work. We're firmly in the second camp.
To see the high-margin, low-margin difference, picture Tiffany versus Wal-Mart. Or Apple versus Amazon.
The genius of the Apple business model, as
Bezos characterizes it, is in building high margins into high-quality
premium products. Make beautiful products, charge a lot of money for
them and convince customers there is no substitute.
In mastering that formula, Apple has
basically become a hardware company, booking a substantial profit
(hundreds of dollars) on every iPhone, iPad and MacBook notebook it
sells.
Apple is also a master of logistics,
manufacturing and distribution -- the strong points of new CEO Tim Cook.
This mastery increases margins on everything Apple makes.
Analysts have even raved about Apple's
ability to "create the future" by selecting new materials for a
product... spending billions of dollars to lock up all available supply
(along with iron-clad manufacturing contracts)... and thus locking
competitors out of the upgrade cycle for years. Not only does Apple push
design and technology in ways that no one else can, it blocks the path
of copycats (and executes with great precision).
Apple's ability to deliver is legendary.
But in the long run, the dependence on high profit margins is a
potential Achilles' heel. The free market grinds down margins like
erosion wears down stone (a lot faster in some cases). Apple's
competitors, though behind, are working very hard to catch up.
This means that Apple is fighting a
constant uphill battle. The more competitive the landscape becomes --
for smartphones, computer tablets or what have you -- the harder it will
be to maintain outsized profits on each unit sold. Apple also competes
against itself, as new breakthroughs become harder to come by and
consumers stick with their existing products.
Amazon.com, in contrast, has a different strategy...
By pursuing low profit margins from the
very start, Amazon has always been more like a high-tech Wal-Mart. With a
low-margin strategy, scale is the name of the game. The bigger you get,
the easier it becomes to challenge other high-margin producers -- and
to dominate your own market space through size and execution. A
low-margin strategy grows stronger over time, as scale increases and
others find it harder to compete (or simply not worth the hassle).
Alternative Streams
Amazon and Google are also competing with Apple through powerful innovation streams.
For example: Wholly apart from selling
books, movies and music online, Amazon Web Services has become the
dominant cloud computing platform. As one observer told Wired: When it comes to Web hosting, Amazon is "the Coke of the field -- and there is no Pepsi." Companies from NASA to Netflix to The New York Times make use of Amazon Web Services.
How did that happen? Nearly a decade ago,
Amazon realized two things: First, that it needed a powerful Web
infrastructure to handle internal needs; and second, if Amazon needed
this infrastructure, then plenty of other businesses did too. So why not
sell access to it, and make use of unused Web server space?
In addition to being a low-margin company
-- a business that's made to scale -- Amazon views itself as more of a
media platform company than a hardware company like Apple. Whereas the
goal of selling iPads is, naturally, to make money on every iPad sold,
the goal of selling Kindle Fires (Amazon's tablet offering) is giving
the buyer access to a powerful media stream.
Google, another long-term Apple challenger, is taking a yet another approach...
Aside from its focus on core search engine
products, Google has developed a top-secret lab called "Google X," where
the company pursues technological breakthrough-type products -- long
shots with the potential for a huge payoff.
There are 100 projects underway in Google
X, from robot surrogates to driverless cars to refrigerators that know
when to order groceries. "Google is so secretive about the effort," the NYT reports, "that many employees do not know the lab exists."
The idea has roots in the Xerox PARC
laboratory. (PARC stands for "Palo Alto Research Center.") PARC famously
developed one of the first computer mice and graphical icon based
computer systems... only to completely give away the store to Apple and
Microsoft. (Google will not make that mistake.)
And so, not only does Google still dominate
in Web search, the company also has the potential to earn tens of
billions through business lines no one may have expected.
Innovation Upside in a Low Rate World
There is a lot of room for surprise here.
The current landscape could shift dramatically before all is said and
done. The big three -- Apple, Google and Amazon -- could be upset by the
not-yet-public fourth member of the pack, Facebook. Or one of the
players could stumble badly.
Right now, though, investors seem to love
the "winner take all" dynamics of marketplace dominance, combined with
exciting innovation possibilities in a low interest rate world.
No one rules out the possibility of Apple
conquering another product category -- television for example -- and
Google and Amazon are the rare phenomenon of large companies that can
truly innovate, and possibly experience rapid rates of growth.
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