In the age of disposable razors, selling razors at cost to make money on the blades no longer applies. Yet, that’s exactly what Amazon, Google, and company do with Kindles and Nexus tablets. How long can they continue that money-losing effort?
Amazon’s CEO Jeff Bezos is on record saying the company sells the Kindle Fire HD and the new Kindle Paperwrite at cost. Their profit will come as users buy content for the devices.
Google’s business model for their Nexus 7 tablet isn’t much different. The idea is to get the device into as many hands as possible so users will buy content, from which both Amazon and Google make a little profit.
Apple’s business model with iPhone and iPad appears in stark contrast to Amazon and Google.
Apple grows revenue and profit the old fashioned way. They earn it. Apple makes money on each hardware device. And, Apple makes money on content, too. Especially music and apps.
Frankly, Amazon and Google don’t have a choice but to sell hardware at cost and hope to make up the loss from users who buy music, movies, TV shows, et al for their inexpensive devices.
Both Amazon and Google have a different usage focus, too (which appears to be similar in result to the difference in usage between Apple iPhone and iPad users and Android OS device owners).
Android OS users don’t use their phones and tablets the same way as iPhone and iPad users. The latter browse the web and use more apps than the former.
Both Kindle Fire HD and Nexus 7 are focused on media browsing, media purchases, and media consumption, while iPhone and iPad users are focused on a broader usage experience (all the above and much more; especially with apps).
Somewhere at Amazon and Google there’s a product manager with a large, complex spreadsheet that shows how much their respective companies can make in revenue, and hopefully, profit, by using the razor and blade model.
So far, it looks as if Apple is winning this war. Not only does Apple sell far more hardware than Amazon or Google (and Apple hardware has notoriously high profit margins, and Apple actually announces their numbers to the public), but Apple also makes growing revenue and profits from media consumption and apps.
Amazon as a company is barely profitable at all. Google’s money is made on search engine advertising and not on hardware or media sales. Both want to be major players in a market dominated by Apple, which has an entirely different business model.
I can’t blame Amazon and Google for thinking different, but I question how successful they’ve been to date, and how long either company can continue to lose money in this vain attempt to compete with Apple.