Why Amazon.com Will Keep Losing to Apple

Amazon.com (Nasdaq: AMZN  ) will never unseat Apple (Nasdaq: AAPL  ) as the chief supplier of downloadable video content, at least not so long as alternatives to the Kindle Fire lack access to Amazon Instant Video.

That's right: If you have anything other than a Kindle Fire, you can't play video purchased from Amazon's store on your Android tab. Well, you can, but only in the browser on a screen that adjusts awkwardly because it's not optimized for video playback. There's no custom app that supplies access to your items.

Why don't investors see this as a problem? Sure, the Fire appears to be the top choice among a mostly lackluster list of Android tablets. Yet according to what little data we have, the Fire still badly trails the iPad when it comes to sales: 4 million Fire tabs sold in the holiday quarter versus 3 million new iPads sold during its opening weekend.

Lack of demand isn't the big issue here. There's plenty of demand for the Fire. Trouble is, Amazon is a retailer with a strategy that promotes hardware sales -- money-losing hardware sales at that -- over content distribution. Stupid. And worse, it's a 180-degree reversal from what CEO and founder Jeff Bezos proposed three years ago:

The [Kindle] device team has the job of making the most remarkable purpose-built reading device in the world. We are going to give the device team competition. We will make Kindle books, at the same $9.99 price points, available on the iPhone, and other mobile devices and other computing devices.

In short: Amazon was to become the Netflix (Nasdaq: NFLX  ) of the e-book world, making its money by being the best at providing great books to readers regardless of which devices they used. Distribution would become a competitive weapon.

Smart plan. As of last May, Amazon was selling more e-books than printed editions. E-book sales rose 175% in the holiday quarter alone. A good portion of those sales surely went to those who own something other than a Kindle device. Readers like me, in other words.

Despite being a longtime Mac user, I've mostly ignored Apple's iBookstore, choosing instead to buy Walter Isaacson's biography of Steve Jobs from the Kindle store. Why isn't this same distribution model available for video? Why can't I purchase episodes of The Walking Dead at Amazon and watch them on my Samsung Galaxy Tab? Wouldn't Amazon make more money this way?

Don't get me wrong; I'm not suggesting that Amazon stop selling e-readers. The Kindle has been remarkable in its ability to drive content sales. What I'm saying is that the e-book sales strategy that has worked so brilliantly can work for video, too, if given the chance.

Think I'm wrong? Go ahead and tell me so using the comments box underneath. Or if you'd rather learn about other ways to profit from the triumph of tablets, download this new Motley Fool special report: "The Next Trillion Dollar Revolution." The research is free, but only for a limited time. Get your copy now.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple and Netflix at the time of publication. Check out Tim's Web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services have recommended buying shares of Apple, Netflix, and Amazon.com and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (9) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2012, at 9:18 PM, ConstableOdo wrote:

    How about calling the article "Why Amazon's P/E will continue to expand while Apple's P/E will continue to shrink." It seems a few months ago Amazon had a P/E of a little over 100 and now it has a P/E of over 150. Amazon stock seems to be gaining in value while Apple's value sees to be losing value. I'd sure like to know why Wall Street thinks Amazon is a better value than Apple despite Amazon recently having a couple of not-so-great quarters.

  • Report this Comment On April 01, 2012, at 9:31 PM, EGTalbot wrote:

    Are you wrong? Probably not entirely. But things have changed in a massive way since Bezos uttered those words. First, Apple and the publishers forced he switch to agency pricing. This is a substantial change in how Amazon competes. The whisper is that the Big 5 and Apple are near a settlement that will switch things back to the wholesale model, but the past two years or so, agency pricing has been the reality.

    Second, Apple started enforcing the "your app cannot allow your users to buy content without us taking a 30% cut" clause. This is unsustainable for Amazon, so they changed things, and I strongly suspect that the number of kindle books consumed on iDevices has gone down as a percentage of kindle sales.

    Now, neither of the above are specifically a reason why Amazon wouldn't make their video available for any Android device. But it's easy to suspect that both of the above caused Amazon to take a hard look at whether that strategy you cite was really sustainable. They may have decided that they now want to hook people on the kindle fire. Whether that's a better strategy is hard to say, but I think it was a conscious decision for the reasons I mention above.

  • Report this Comment On April 02, 2012, at 12:30 AM, gslusher wrote:

    "How about calling the article "Why Amazon's P/E will continue to expand while Apple's P/E will continue to shrink." It seems a few months ago Amazon had a P/E of a little over 100 and now it has a P/E of over 150."

    That's VERY misleading. One major reason that Amazon's P/E has increased is that their earnings DECREASED, while Apple's earnings have increased. Let's look at the stock price, itself. You mentioned "a few months ago." AMZN has done well in the last 3 months, increasing 13.1%. AAPL has increased 45.7%--about 3.5 times as much. In one year, AMZN is up 12.4%, while AAPL is up 74%, 6 times as much.

    In the latest quarter reported, Amazon's earnings were $0.38/share, vs $0.91/share the previous year. In contrast, Apple's earnings for the same period were $13.87 per share, up 116% year-over-year.

  • Report this Comment On April 02, 2012, at 4:26 AM, funspirit wrote:

    I think that part of Netflix's success is the fact that it is available in so many devices. how quickly Apple (or Google) can take away Amazon sales remains to be seen, as amazon is ubiquitous in book sales of all types, but clearly amazon would be better off if their products worked seamlessly across all platforms, and I am SURE that's where they are going. Bezos doesn't leave much to chance.

    Amazon might just buy Netflix by the way. netflix is under a lot of pressure from amazon and others, and the fact that Amazon video doesn't work seamlessly across all platforms is an added reason why ... hmmm ...

    Here's a column about competiton for Netflix btw- well written :)

    http://www.richmakesyourich.com/2012/03/can-netflix-swim-pas...

  • Report this Comment On April 02, 2012, at 6:10 AM, Extremecrabber wrote:

    Amazon's video format, even with the Kindle Fire, is garbage. I prefer Netflix on my iPhone, iPad, laptop, desktop, Samsung TV or my Wii console any day. And then there's Xfinity on-demand to top it off.

    Who needs Amazon's garbage video delivery? I bought my daughter a Kindle Fire. Shook my head at the way video looked from Amazon, even on the Fire!!! What are they thinking???

    I do still buy tons of Kindle books for my first gen kindle and am able to read them on my other devices. Love how it synchs. Amazon beat Apple to the cloud. And Amazon makes great innovations in programming their site.

    They are both companies that others will not be able to compete with, anytime soon.

  • Report this Comment On April 02, 2012, at 9:58 AM, EGTalbot wrote:

    I'll add one additional point - whatever Bezos may have said about running on all devices was at best only partially true. Amazon has stubbornly resisted going to the industry standard epub format for books, which all the other major players support. If they did, you could read an Amazon book on those other devices without an Amazon app (subject in many cases to the proprietary DRM issue that no one can settle on, but that's a separate problem)

    They had a chance to do it again last fall when they went to their new standards, and instead announced another semi-proprietary format, just like mobi and like their android implementation.

    So really, their approach to video is not as big a departure as one might think.

  • Report this Comment On April 02, 2012, at 11:17 AM, BMFPitt wrote:

    It really is inexplicable that Amazon Instant Video isn't available on all tablets. But for me (and most people, I would imagine) watching movies on a tablet isn't a big deal. I watch The Walking Dead, among other things, on Amazon through my $60 Roku box attached to my TV.

  • Report this Comment On April 02, 2012, at 12:59 PM, forthewin wrote:

    I don't disagree, but why would Amazon bother providing another way to purchase video on an iPad? That to me seems like a race to the bottom. Plus Amazon has some very compelling streaming video options, which I believe Amazon is betting is the better model (as opposed to downloads) in the longrun. Here, I think Amazon has Apple beat because of its massive server infrastructure that is already setup for its web services offering that is necessary for large-scale deployment of streaming video. Also, Amazon offers streaming video for free to Prime customers. While this may cost Amazon in the near-term (which is why you see margins shrinking and P/E climbing), pretty soon you can buy most items on Amazon with a single click, get it for free in two days, get free books for Kindle AND free streaming video. Now I think Apple may have some competition.

    I do agree that Apple's hardware offering is more compelling. That's obvious. What's not so obvious is that hardware alone will win this battle in the long-run.

  • Report this Comment On April 03, 2012, at 1:19 PM, dlchase24 wrote:

    I don't think the author is wrong per se, I just don't think Amazon has focused on video delivery to mobile devices yet.

    As you mention, you can get Amazon Video on multiple devices. The most accessible being your computer. I personally use it on my Roku box and there are other devices as well. These are all devices regularly used for watching video.

    The primary purpose of a tablet, however, is not to watch video. Yes it is nice when you're on a plane, or maybe to keep the kids entertained on a road trip, but if you're just sitting around your house and you have an option of watching an Amazon Video on your TV or your tablet, are you really going to chose the tablet? I have a Kindle Fire, but I'd much rather queue up my Roku or XBMC Amazon plugin and play it on my TV with surround sound stereo.

    I don't mind not rushing into releasing an app for other tablets (really you'd be focused on iPad), because I'm not sure the demand is as great as the author believes.

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