[minouye]

If you're not familiar with the "long-term" thinking of Bezos, this anecdote from Brad Stone's recent book on Amazon is particularly interesting:

Bezos wanted AWS to be a utility with discount rates, even if that meant losing money in the short term. Willem van Biljon, who worked with Chris Pinkham on EC2 and stayed for a few months after Pinkham quit in 2006, proposed pricing EC2 instances at fifteen cents an hour, a rate that he believed would allow the company to break even on the service. In an S Team meeting before EC2 launched, Bezos unilaterally revised that to ten cents. “You realize you could lose money on that for a long time,” van Biljon told him. “Great,” Bezos said.

Bezos believed his company had a natural advantage in its cost structure and ability to survive in the thin atmosphere of low-margin businesses. Companies like IBM, Microsoft, and Google, he suspected, would hesitate to get into such markets because it would depress their overall profit margins. Bill Miller, the chief investment officer at Legg Mason Capital Management and a major Amazon shareholder, asked Bezos at the time about the profitability prospects for AWS. Bezos predicted they would be good over the long term but said that he didn’t want to repeat “Steve Jobs’s mistake” of pricing the iPhone in a way that was so fantastically profitable that the smartphone market became a magnet for competition.

[snowwrestler]

This exposes the flaw in the article's argument. The author argues that Amazon can simply choose to stop or slow down their investment for growth. But a lot of that "investment" is actually customer subsidies like lower prices or free shipping. As soon as Amazon ceases those, they will face stronger competition from established profitable businesses like Walmart.

[gotrecruit]

i'm a big fan of Bezos, honestly, but to say that pricing your products in such a way as to make >$100 billion in cash is a "mistake"... that's just crazy talk.

[vidarh]

In the short term. Bezos point is that by pricing everything this way, proposing to compete with Amazon is crazy talk for most people: Their margins are razor thin, so you need to be able to beat them consistently on cost to have a chance of surviving, and beating them on cost will requires economies of scale that are impossible for a lot of people.

Apple on the other hand, is marketing high end products with ridiculous margins, which leaves a lot of market niches on the table, and leaves a lot of room to make money even with a cost base that is massively higher than Apples. That's made people line up to get a piece of the cake.

How many people start companies intending to compete with Amazon? Meanwhile, new smart phone companies sprout up on a near daily basis, and there's a whole industry in providing designs, SOCs, cases and components for people who just want to slap one together and put their (or someone elses...) logo on a phone.

[clarky07]

That's fine, but apple makes more profit every quarter than amazon has ever made I think. They have made several hundred billion dollars over the last few years. Who knows if amazon ever gets to flip the switch. Maybe they do, but even then apple will have a several hundred billion dollar head start.

Perhaps both strategies will end up working, but you can't say apples strategy is a failure. It is clearly not, even if they never sell another phone.

[gfodor]

Don't forget, if the market crashes and AMZN stock gets a 50% haircut, that big pile of cash AAPL has been shoveling their profits onto on can get mighty scary to everyone very quickly.

[daemin]

The problem with the cash pile, and also with other companies' large cash piles, is that a lot of the cash, maybe even the majority, is held overseas. Hence there will be an almighty tax bill if it is brought back to the USA.

[hershel]

Today there's plenty of competition in the cloud space. But amazon had a pretty long run without serious competition and had managed to create pretty strong ecosystem, and probably lockup on its platform.

[vidarh]

There's plenty of competition in the cloud space in part because, apart from being new, the cloud space is different from their physical product sales in that there are any number of possible business models in that space which makes Amazon extremely expensive for a lot of possible customers.

I'd say you are wrong that they had a long run without serious competition. They had serious competition from day one: Other hosting businesses ranging from colo providers to managed hosting providers. They made a splash by carving out a new niche. Some people have done well entering that niche (so far), though many of them were well capitalized existing players taking advantage of their position (existing hosting providers adding cloud features to take advantage of existing as-yet unsold/unrented stock to make it cheap to enter this market for example). But the number of new entrants in this market since Amazon is still vanishingly small compared to the number of people salivating over the smartphone market.

But Amazons strategy still puts them in a situation where going head to head with Amazon in this space now puts you in the situation where if you can't compete on features, they will keep chipping away at your ability to extract a high margin.

At the same time they've gradually carved out a larger and larger niche: Additional products, and ways to improve pricing such as having people pay for reserved instances.

This is similar to the physical object space - there were lots of people that could compete with them early on, when Amazon was still mostly selling books, and selling small enough amounts of books that they could not push the distributors around.

But even then Amazons model is devastating to competitors: If your cost base is lower than Amazons, but your investors have come to expect a 5% return every year, yet Amazon gets away with staying around 0% without getting any flak, you are screwed unless you seriously believe that you can continue to keep your costs sufficiently below Amazon to be able to compete on price and retain your margins.

One by one Amazon competitors have fallen because it is incredibly hard to reduce bloat once it has become part of the way you operate, and incredibly hard to wean yourself off higher margins. When they then go up against an organization whose credo is based on cutting cost everywhere it is possible, and then extracting almost nothing in return for it, a lot of people will be in deep trouble.

I don't think Amazon will ever be as devastating in the hosting space as elsewhere, as there are too many ways to differentiate in the hosting space. But they certainly can keep chipping away at the core, and if I was working in hosting, I'd be spending a lot of my time figuring out 1) how to cut costs, 2) what product categories Amazon are unlikely to want to be in soon and/or which doesn't fit with well with Amazon's model (for example anything where customers wants to pay for a lot of reassuring face time and handholding)

[stavros]

Meanwhile, the iPhone has slowly but steadily been losing mindshare to its amazing competition.

[encoderer]

So a company essentially invents a segment, so de facto owns 100% mindshare, and the fact that competition shows up over the next several years is somehow..... what? A sign Apple did something wrong?

And if only Apple had the sense not to make any money off the iPhone, they'd hold all the "mindshare"?

As an investor in both companies (though I recently sold my AMZN position), I'm quite pleased with Apple's decision to value revenue over "mindshare." The iPhone business was and is bigger in itself than many entire Fortune 500 companies.

[snowwrestler]

"Share" is a stupid way to look at rapidly growing markets. Apple is not losing anything with their iPhone business.

[benihana]

And no one at Apple seems to notice this loss of 'mindshare' because they're too busy figuring out what to do with all the money people are giving them for the iPhone.

[StavrosK]

You seem to be thinking you're refuting my "loss of mindshare" argument, but you are actually refuting the "iPhone sales are dropping" argument, which nobody here seems to have made.

[philtar]

We'll have to wait and see.

Amazon is on its way to fulfilling all my needs and wants. Why wouldn't I give it all my money?

[amitagrawal]

That's probably one of the reasons why Amazon has been undercutting almost everyone time & time again. With their razon thin margins they have nowhere to go but up. Even when they don't go down as much as the markets think they would their stock goes up.

Other retailers & technology companies don't have that luxury. They can't lose money at the cost of margin contraction or market share expansion. Heck, they can't lose money at all the way Amazon has been doing since its inception!

It's high time Bezos repeated the "Steve Jobs's mistake". Not that Amazon shareholders want them to.