Apple (AAPL +3.26%) has clearly defined its strategy with the "not so cheap" pricing of the iPhone 5C, the company is prioritizing brand image and profit margins over market share. That’s not necessarily a bad thing for the company in the long term, but it will have negative implications in terms of growth rates, at least until Apple brings a new product to the market.
In case you’re feeling disappointed by Apple’s strategy, these three tech companies are going on the opposite direction and aggressively betting on growth versus profit margins.
The Apple way
The iPhone is too expensive for many consumers, especially in Emerging Markets, and Apple has been losing market share to Samsung and other competitors over the previous quarters.
Investors have been eagerly waiting for the new lower-priced iPhone 5C to see if the company was finally going to start playing the pricing war, but judging by the falling stock price after the announcement, it seems many were disappointed by the "not so cheap" price starting at $549 without a contract or $99 with a two-year deal.
Apple is staying in the high end of the pricing spectrum, and customers looking for cheaper smartphones will find many attractive Android alternatives to choose over the iPhone. This most likely means that competitors will continue outgrowing Apple in emerging markets, where most of the industry growth is coming from.
Apple will continue building high-end products for customers who are willing to pay extra for the differentiated brand image and user experience. Profit margins will remain high for industry standards and the company is protecting its brand power in the long term.
On the other hand, investors looking for accelerating growth rates from Apple will need to wait for new product categories, because the iPhone 5C is no game changer.
Amazon the disruptor
When it comes to the margins vs. market share debate, Apple and Amazon (AMZN +1.25%) could hardly be more different. The online retailer strives to keep prices as low as possible in order to grow sales and gain market share versus the competition, Amazon is disrupting multiple retail segments at the same time, even if that means operating with ultra-thin profit margins.
The company is investing heavily in areas like building its warehouses, digital content, and cloud computing services; this is another factor weighing on short term profitability, but provides huge long-term opportunities for the company.
Jeff Bezos wrote in his first letter to shareholders in 1997:
We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
And he has been clearly living up to that promise through the years.
Google is building the future
Google (GOOG +0.20%) is not facing the same kind of margin pressure as Amazon, the online search giant has operating margins in the area of 23% thanks to its leadership position in online advertising. But Google is still one of the most innovative companies in the world, and its management team is not afraid of making long-term investments with a strategic focus even if they don’t have economic feasibility in the short term.
Projects like Android, YouTube, and Chrome seemed like a waste of time and money before they were recognized as remarkable strategic moves by the company. Current products and services under development like Google Fiber, augmented reality glasses, or the self-driving car are quite uncertain from a financial point of view, but they have some truly disruptive long term potential.
Online advertising is the cash cow generating big and growing profits for the company, but there’s no shortage of innovation and long-term vision at Google.
Netflix is playing a long term game
Netflix (NFLX 1.74%) is another company putting long term growth opportunities above short-term profit margins, and original content is a big part of that strategy. The company doesn't disclose production costs, but industry analysts estimate that series like House of Cards and Orange Is the New Black may cost something in the area of $50 million to $60 million per season.
Charging $7.99 per month, it would be almost impossible to generate enough new subscribers with each original production to cover those costs in the short term, but that's not what Netflix is concerned about.
The company wants to build a large and valuable library of content, compelling enough to make the modest membership fee look increasingly attractive in comparison with the value of the service it’s offering.
Netflix is not focused on maximizing profit now; the company is focused on gaining subscribers and providing a convincing proposition to its customers. Online streaming is a business with enormous potential for growth, and Netflix wants to make sure it secures a leading position to capitalize on that opportunity in the future.
Bottom line
Apple’s pricing policies reflect that the company is prioritizing margins and brand differentiation over growth opportunities, at least when it comes to its biggest product, the iPhone. Investors looking for more aggressive growth companies in the sector may want to consider alternatives like Amazon, Google, and Netflix.
