Apple, Amazon, and the weaponization of profit

Apple, Amazon, and the weaponization of profit

Apple makes more money than any other company save those with oligopoly control of limited fossil fuel resources, yet they're perpetually punished by Wall Street and called doomed by financial-not-really-analysts. Amazon has seldom made a dime on paper and yet they're the darling of Wall Street and can do no wrong with market makers. Yet both are among the most successful companies in recent history. Why the difference? Benedict Evens on Twitter:

Amazon manages net income to zero the way Tim Cook manages inventory to zero

MG Siegler on TechCrunch:

The goal is actually to not make a huge profit too early, and Bezos manages it perfectly. You want to avoid showing your cards too early as you continue to lay the groundwork for an ever-larger business. Occasionally, you’ll have to show those cards and win a hand to prove that you can. But the rest of the time you call and fold, as you await the monster to take the entire pot.

John Gruber on Daring Fireball:

The key to Bezos’s genius, though, is in how he’s set the expectations from Amazon’s investors. They’re seemingly all on board with this strategy, and, in return, this permission to run at break-even has made Amazon impossible for need-to-turn-a-profit businesses to compete with. That’s what makes Amazon “the anti-Apple”, as MG writes. Apple is a formidable competitor because it’s so massively profitable; Amazon is a formidable competitor because it has permission — even encouragement — from its investors to run the operation at break-even.

On the surface it appears to be nothing more nor less than a riff on the old "perception is reality". Amazon has brilliantly set expectations to the point where they can, so far, operate with impunity when it comes to their stake holders. The potential for profit is so much more compelling than profit alone, that everyone is willing to mortgage today in hopes of tomorrow.

Apple, meanwhile, has failed to - or doesn't care to - set expectations from stake holders so they're punished for success, and the money they generate in the present is meaningless to a market whose eyes are always fixed on the future.

In other words, Amazon is giving up profit to offer great prices, Apple is making profit by offering great products. And the financial world appreciates the former far more than the latter.

It's tough to compete with Apple on product experience, but other companies are doing it. It's even tougher to compete with Amazon on price, and it doesn't seem like they're slowing down. If Apple vs. the DOJ is any indication, breaking Amazon's hold on prices won't be easy either.

Source: Twitter, TechCrunch, Daring Fireball

Rene Ritchie

Editor-in-Chief of iMore, co-host of Iterate, Debug, Review, Vector, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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Apple, Amazon, and the weaponization of profit

28 Comments

"Amazon has never made a dime on paper" - err. Last Fiscal year was the only year prior to 2006 that Amazon lost money, and that was due to one quarter of write-offs. You may want to read up on a company before you write about them (this trend by Apple bloggers is very annoying). At the very least, stop contributing to the cycle of ignorance.

Yeah, I meant "barely a dime", fixed. You're not arguing the core thesis, though, are you, that Amazon sacrifices profitability to invest back into their business?

Also, I'm no more an "Apple blogger" than you're an "anti-Apple commenter". If you think the theory is wrong, don't name call, show your work.

Otherwise you're worse than what you're complaining about.

"barely a dime" - In it's lifetime Amazon has amassed over 4b in profit (how on earth do you think Bezos can afford to do all those great things?). I guess that is subjective, but it is a bit unusual that you consider billions to be such a small number. Again, it would help if you did some basic research.

"You're not arguing the core thesis, though, are you, that Amazon sacrifices profitability to invest back into their business?". Perhaps. Look at last quarter, why do you think Amazon lost money? Was it investing back into their business? Nope, they claim it was due to unfavorable exchange rates. hmm. what else was different about last quarter? The largest difference (-50% or -650m) was for "Sales and maturities of marketable securities and other investments". Amazon has increased the the acquisition of assets (Seattle offices cost them 1.4b alone) and that does fit your argument, but the numbers show much more complexity than a simple blanket statement can provide.

"Also, I'm no more an "Apple blogger" than you're an "anti-Apple commenter"" - considering I never even mentioned Apple makes your comment a bit odd and telling. If you are not an Apple blogger, what do you blog on then?

4b in lifetime profit is extremely tiny considering they have a 137 billion market cap. They have lots of revenue, which they immediately spend on things to grow the business. Apple had ~7 billion in profit over the last 3 months, so yes, 4 billion is "barely a dime".

You definitely did mention Apple - "You may want to read up on a company before you write about them (this trend by Apple bloggers is very annoying). "

What is your point.
They are a reseller no different then WalMart.

APPLE designs, produces, markets, sells all it's own product.

What is someone peeved because the talk garbage and never bought Apple?
I bet you voted for Obama too!?

Whiners with buyers remorse are annoying.

I'm sorry did I step on your toes.
Funny Apple basher can run amuck, but put them in their place and oooohh, stick to the subject.

Do you ever read what the anit-Apple knuckle draggers post here?

Probably not.

Have I bashed Apple? Where and when? Bashing Apple or not, you veered off subject into divine political rightfulness. Yawn.

Amazon has "made" over 5 billion in selling (or using this product to pay employees or fund purchases) AMZN. Think about that for a bit. Amazon has used its highly over-inflated share price to fund most of it expansion. When the share price drops (and it will at some point) like a stone off a cliff, Amazon will have lost its primary ability to purchase companies, reward employees and fund expansion.

Sigh, my hopes of a troll free day with honest criticism and no one rudely attacking the writers have died once again... My condolences Rene.

Yet another bitter "why do you love Amazon more than Apple" piece, in the wake of the DOJ ruling, this time featuring Siegler and Gruber, two of the most unbiased writers out there. Gruber even quotes Siegler for the double score. Poor Apple, the world is so unfair...

What's bitter about this piece? Amazon has done a better job when it comes to the markets than Apple. And dismissing everything Siegler or Gruber writers is your prerogative, but is probably a mistake.

Everyone is biased - including you - it's those who pretend otherwise that need to be avoided.

Bitter: Apple perpetually punished by Wall Street (untrue BTW);
Bitter: Amazon darling, can do no wrong

Of course we are all biased, that's why we comment on your pieces. The problem is when the bias introduces too much distortion. Apple was a Wall Street darling for almost 10 continuous years and you call it "perpetually punished".

I don't dismiss their pieces, but I always know before hand that, wharever the subject, if its an opinion piece it will be pro-Apple, like both were on payroll, only they're not.

Do you even know that Siegler is part of Google Ventures? And have you read any of Rene's pieces over the life of this web site, even going back to tipb? And gruber simply speaks his mind. A LOT of his stuff is very much critical of Apple. Just because you don't like Apple doesn't mean the facts can be ignored.

Rene, this is a fine piece! I hadn't thought about this ridiculous situation in this way before. I'm astounded at the thought processes behind the financial markets. So many people are so completely irrational; it's amazing human civilization has progressed past the stone age.

Rene, the market price is based on supply and demand and free market economics state that the price is determined by supply and demand based on all knowledge being out there in the market. Based on what you are stating, the market is saying Amazon has much more potential based solely on it's P/E ratio. That is all nothing more, nothing less and this could all change tomorrow.

Another biased article: "any other company save those with oligopoly control of limited fossil fuel resources" Samsung mobile division is more profitable than Apple and they dont control any fossil fuel.

Amazon is popular because it provides goods and services at cheaper prices and lower profit margins. Not every company needs multi-billion profits every quarter.

Apple had its fair share of Bull-run in the past when they were the darling of the wall street, now its time to get back on ground.

Multi billion profits? Heck if Amazon makes multi million profits its a shock. And I hate when people use the excuse that Amazon is just plowing profits back in to the business. Excuse me but there are lots and lots of companies with huge R&D budgets that also are profitable. I find it quite odd that Amazon seems to be the only company out there where not being profitable is a-OK with Wall Street. Wall Street seems to be banking on profits to come in the future even though there is zero evidence of it (how many years now have we been told profits are coming?). Yet with Apple they seem to have zero faith that Apple will be able to do anything in the future to increase revenues and profits. Amazon is given the benefit of the doubt that future profits will come, yet Apple isn't afforded the same benefit of the doubt when it comes to new products. Double standard much?

Who cares if they are given benefit of doubt or not, its not as if we are Apple employees or Apple shareholders.

Something else incredibly annoying is this meme that Bezos is playing chess while everyone else is playing checkers. All basically in defense of Amazon not reporting profits, or reporting a small profit when they want to. Wow so all these other Fortune 500 CEOs would be so much smarter, would be playing chess too, if they just made sure not to show quarterly profits? That's the dumbest thing ever.

This is my personal opinion, but I think the biggest reason investors are losing faith in Apple has more to do with their potential risk in losing value in a saturated market w/o introducing groundbreaking new products. I mean look at the data, except for the US smartphone market, which arguably has matured, Apple continues to cede numbers to their competitors. Granted Apple is more profitable by far, but how long will / can that last. I think investors look at Amazon as the next GE. If one of their businesses struggles, so what, they have their grocery or Kindle or fine art business that may drive revenue. Is it fair to ask Apple to introduce a groundbreaking product every year, probably not, but what else can / does an investor have to rely on to ensure long term growth.

Disclaimer: I own Apple stock.

Just like with politics, business has it's golden children and those that work hard, prove themselves and still the get the crap beaten out of them daily.

Apple has continued to prove it self while also going through the spectacle of growing before everyones very eyes.

And as for Amazon, they sell Apple products.

I have used them in my portfolio and do to this day.

My broker laughed at me a few years back when I bought shares. I laughed directly back in his face when he said he should have bought some.

It is all due to the battle with microsoft. Will they ever shake that stigma?

Nope.

Too many pissed investors. HA HA HA to all you ney sayer that laughed at my investment and patronage for a great company with GREAT products.

Rene first you are comparing market reporting to market valuation. Amazon has a market cap -- or perceived total value of $135B. Apple is at $423. That means investors value Apple's worth at over 3 times Amazon's worth.

Second the notion that Apple doesn't or didn't set expectations is absolutely ridiculous. Apple was on a roll, setting profit and sales records, with incredible and seemingly sustainable growth. As such, investors ascribed the perceived value to it of over $630B. Apple has NOT maintained that growth. As such, investors have since ascribed a different value.

Where your article is somewhat accurate is in the determination of value. Yes, investors derive value differently for different companies. Apple is predominantly a products company, in a category where margins are going to be squeezed and competition is getting fiercer. Amazon is a retailer and services company. Yes they have some of their own products, but as another commenter said, Amazon is probably more similar to Walmart than Apple. Kind of like comparing Apples to ... well you know.

Your anger is plainly misplaced and your writing misguided. Yes, some value was removed from poorly reported information, but then again Apple gains from the massive media attention around product releases. Barely any other new product launch gets that kind of attention. But most of the inflated value was erased because Apple couldn't maintain it's growth path. Whether it's unfair that the market cap came down because of this inconsistent growth or because it was unfairly overvalued when most people should have known their growth would have to slow, who knows.