Is Apple in the wrong business?

05 Feb 2013

Derek Thompson from wrote last week about the widely contrasting Wall Street reactions to widely contrasting results from Apple and Amazon. On the surface they make little sense.

Apple reported a 17% increase in revenue, which rose to $54.5 billion while its net profit of $13.1 billion in fiscal Q1 was flat from a year earlier. It beat the consensus earnings estimate of $13.55 per share, booking $13.81 per share. The next day it's stock took a beating and fell 12%. This is a company that sold 10 million more iPhones and 7 million additional iPads than a year ago.

Meanwhile, Amazon's earnings plunged to $97 million in Q4 from $177 million a year ago (a 45% drop). Sales did increase 22% in the period and profit margins were up to 3.2% (yes, that right, 3.2% not 32% -- Apple's gross margin was 38.6%). And its stock in after-hours trading gained 10%.

And this isn't just a recent phenomena -- it evidently has been a trend for a decade.

So what is going on?

Thompson explains:

Apple's core business is something that practically everybody wants to do (and can do): making phones and tablets. Amazon's core business is something that practically nobody wants to do (or can do): build a massive online database and offline infrastructure to transport boxes from warehouses to hundreds of millions of doorsteps. Seen in that light, Amazon's low-margin game isn't a weakness. It's arguably a strength.

High-margin businesses, of course, are more likely to attract competitors -- as everybody and their brother is targeting the smartphone market, not the low-end feature phone sector, which until recently was dominated by Nokia for more than a decade. Apple, like all the top players in the consumer electronics sector, is constantly under pressure to innovate and bring down the cost of manufacturing by outsourcing to the cheapest region (which brings its own risks) to keep those margins high.

With Informa Telecoms & Media predicting that 50% of all smartphones shipped in 2017 will be priced below $150, the business of shipping low-margin boxes looks pretty attractive. It certainly looks far more sustainable.

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