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Late August, 2010 Apple was trading at $240.28 and two months later it is created a new high of $318.00 but settled for $307.47 by the end of this week. That is a 28% jump in just two months, so what was the reason for this run-up, yeah you guessed it right iPad and iPhone 4, antenna gate or no antenna gate, Apple knows what to make and can create customer demand. Approximately 3.3 million iPad’s and 14 million iPhones were sold.
Similarly, Amazon was trading at $123.79, and two months later it is created a new high of $169.13. That is a 36.6% jump in just two months and the reason is Kindle and Amazon Prime.
Apple Amazon Stock Performance (Source: Yahoofinance.com)
So what is so unique about these two companies?
- Company – Both Apple and Amazon are tied to their founders and are mirror image of their founders Steve Jobs and Jeff Bezos. Both are generating lot of free cash flow and are growing exponentially and have strong brand presence.
- Customers – Both Apple and Amazon customers are more tech savvy than the general public. They know what each brand brings and are loyal to the brand.
- Competition – Even though people are not thinking of Amazon and Apple as competitors, they are going to be going head on in the near future. But for now the focus is on the traditional competitors.
Apple has started grabbing market share in the PC market from Microsoft and has a huge lead over Google in the mobile phone industry and killed Microsoft in personal entertainment devices (music and video players). iPad is becoming a huge hit and Apple is skimming the market.
Amazon on the other hand has killed all the startup’s that were trying to follow it’s lead into ecommerce. It has a virtual monopoly in online sales as a retailer. Traditional stores (Babies ‘R’ Us, Rockport, Wilson’s Leather, Radioshack and others) forming joint ventures like ShopRunner to compete against Amazon Prime is too little too late. Amazon has diversified into lot of different areas from cloud computing to delivering groceries. It has a strong market presence.
- Context – Both companies are at forefront of the market and are extremely successful at this point. They are primed to be competing in the e-book market, which is having huge growth as people are shifting from paper books to e-books.
- Innovation – Both companies are known innovators, while Apple is innovative in the gadget and computer design, Amazon has revolutionized the way we do commerce and is doing lot of vertical and horizontal integration and making customer service and satisfaction top priority.
Amazon Kindle 6" (Source: Amazon.com)
Amazon introduced Kindle in November 2007 and was the first e-reader to hit the market. The second competing e-reader was launched by Barnes & Nobel in November 2009, after the second generation of Kindle was released (February 2009).
For two years Amazon skimmed the market and Kindle became cash cow for the company. Amazon dropped the price of Kindle 2 and undercut Nook price. In the last three months, the price war escalated in part because of other players coming into the market and because of iPad. Kindle 3 under cut Nook by a $10 and I believe Amazon is selling Kindle at a loss from production costs, not to mention marketing and SGA costs. Amazon is going for market penetration and is willing to take short term pain for long run gain and customer satisfaction. It sees that Kindle store will provide the long term gain if they tie customers to Kindle.
Kindle is an e-reader and that was the decision made by Jeff Bezos, not to make it a tablet. He believes that there is a significant market for the e-readers, the technology used e-ink is similar to reading on a piece of paper, with no glares and can be read in bright sunlight. Kindle 3 battery life is about a month and with new capabilities like lending e-books, PDF support, it does not lack in technology for e-readers. The biggest advantage Kindle has over Apple is the head start in number of e-books offered on Kindle book store. To further compete, Amazon entered a deal with Best Buy to start selling Kindle in stores, which was targeted not only at Barnes and Noble but also at iPad.
Apple iPad (Source: Apple.com)
iPad on the other hand is a tablet, an over sized iPhone without the phone capability. It is not a huge technological leap but more of a customer perception leap. It is not ready to replace the laptop, but its so lid sales number in Q3 quarter shows that the tablets are here to stay. Like Amazon, Apple has a huge leap over competition in tablet with competition scrambling to put together a tablet and get into the market. Microsoft has shown in early 2010 a tablet but for all the talk they got one tablet out with HP in October 2010 and is only targeted to businesses. Apple is currently skimming the market.
Apple came late to the book agreement and has few books to offer allowing Amazon to reach a much wider audience and once people start buying books on Kindle store, the moving costs will keep the customers from leaving. Total customer life cycle value is higher than the initial purchase and Apple has left a door open for competitors to sneak in. It has ignored to involve Barnes and Noble to provide a counter to Amazon and instead trying to build its own book store which is way behind Amazon in the number of targets.
Kindle and iPad - Margin and Cost
Amazon stated that Kindle sales for Q3 and ongoing Q4 sales are much higher than last year same quarter sales and are the best selling Kindles. This indicates that there will not be price reduction before the holiday shopping but expect Kindle base model price below $100 sometime early next year. Apple will continue to skim market for the near future, until some rival tablets are introduced in the market by it’s competitors. I see both devices becoming an important strategic brand for their companies in the future.
Google has been on fire in its growth and saw its search engine market share increase from 50% in 2003 to 90% currently. It is a monopoly in the online search market and has kept its lead by continuously tweaking its search algorithms (as many as 400 times annually). It has become a verb and is a wonderful success story. Unfortunately, it has slowed on innovation and the only expertise it has is in search engine, which still constitutes majority of its revenues. A look at the few forays that tanked in the last few years:
- Google Wave which was opened in high fanfare last year has been shelved.
- Social media entries have been unsuccessful; Orkut has lost to Facebook in the last couple of years.
- Google docs has not dented MS Office (80% currently in enterprise market) market share much. Google provided programmers as early as 2005 to improve Open Office which competes more directly with MS Office but has not made inroads into corporate environment.
Source - Stat Counter
Source - Stat Counter
While Google Chrome has captured 7% market share, it seems a long way from realizing its dream of OS Chrome and whether users will embrace it. Realizing its limitations and also its debacle at social networking, Google has started investing in companies that help drive traffic at Facebook. Google invested in Zynga, the game developer whose games like Farmville, Mafia Wars and others have created a huge following at Facebook. Zynga is also the top buyer of ad space at Facebook. Zynga and Facebook announced a deal on May 18, 2010, which provides uneasy relationship between the two. Excerpt from the press release: “Facebook and Zynga announced today that they have entered into a five-year strategic relationship that increases their shared commitment to social gaming on Facebook and expands use of Facebook Credits in Zynga’s games. …….”
Five years is a very long time in social media in which things are starting to move much faster. Myspace lost its number one position in social networking to Facebook in a span of less than three years. Facebook users jumped from 100 million users in August 2008 to 500 million in two years span. Do we even know if Farmville or social media games will be even considered by users in two years? The fads in online social networking are evolving very fast.
Source - Facebook
Facebook is leveraging its users to generate not only advertising dollars but also at brand promotion. The best thing going for Facebook is its growth and it is not limited to US. Facebook’s 70% (350 million) of the users are international. Every passing day I see more of my friends and cousins from India joining Facebook and sending me friend requests. The growth has helped position Facebook in a unique position. It can court brands for more target advertisement, a marketer’s dream, and can also go international with the multinational brand targeting. Google on the other hand can get information from tracking cookies, but has been debating on how much information to use and address any privacy concerns.
Facebook recently started Question and Answers, which is designed to promote online searches in Facebook and away from Google. Most of the content generated by Facebook is not available to Google search.
Facebook has more than 150 million mobile device activated users, which becomes more strategic when used with cellphone tower locations for targeted advertising. Google has been using the similar location based target advertising on mobile searches on Android phones, but so far has resisted advertising directly on the Android.
Google is currently being investigated by a number of US states for its search rankings. While Facebook has its own debacles of privacy concerns, it is in my opinion better poised for greater growth than Google. While social networking will be going through changes, the battle lines are surely being drawn and will be fun to watch in the coming next year.
PS: Facebook shares have been trading at $76 and market valuation of $33b.
About a month ago Economist carried an article stating that the Facebook should be considered a nation in itself. Facebook has about 500 million users (third behind China and India, if you consider users similar to population). It started with the story of the new Prime Minister of England David Cameron calling Marc Zuckerberg (founder of facebook) to get tips about how it felt to be responsible and answerable to millions of people (users), the majority of whom he is never going to meet.
Is it really true that Facebook is similar to a country? While I debated this with a friend, it got me thinking – are we at a virtual country? I argued that your facebook page is like your home façade and you can keep something public while other things private. And then there is the big brother (Facebook administration as the government in real world), which watches over us. If we engage in spam or other detrimental activities, it will move to curtail them, much like the governments of the world. We are in an age where there is a thin red line between the virtual world and reality, and eventually the intermingling of the two worlds is bound to happen. I have friends who post statuses of what they are eating or why they are running late in the real work into the virtual world.
Source: wikipedia.com, facebook.com
Is that virtual or real world?
Jagan Singh's Blog 