Why PC Companies Fear Amazon

Bajarin is the president of Creative Strategies Inc., a technology industry analysis and market-intelligence firm in Silicon Valley. He contributes to Big Picture, an opinion column that appears every Monday on Techland.

Last August, I wrote an article on our personal site called “What Really Scares Apple’s Competitors.” In it I stated that Apple’s competitors really fear Apple’s sixth sense – its ability to anticipate what the customer wants even if customers don’t know they want it.

Many believe this came from Steve Jobs’ “gut feel” about products, since Apple doesn’t do focus groups or any real customer research at all. While that was part of it, the reality is that Apple’s execs create a product that they want and would like to use themselves, and that becomes their guideline for product ideas and designs.

Apple also does not necessarily invent products. It takes ones that are on the market and makes them better. For example, Apple did not invent MP3 players, but the iPod made the MP3 player better. The same goes for the iPhone and iPad.

But Apple takes this even further by using its products as a front-end to apps and services, which creates a great ecosystem for its customers. This not only sets Apple apart from competitors, but also makes the company very difficult to compete against. That becomes a very scary issue for Apple’s competitors.

I recently got a request to consult a giant, multinational tech company. This company wanted us to research the potential impact of Amazon on its future business. Although we did not get the project, it started us down our own research path about this issue, and we found out that Amazon is causing great fear among almost all tech companies in ways similar to Apple.

The reason is that while Amazon is not a tech company specifically, it’s an extremely broad consumer goods company that just happens to use things like the Kindle and Kindle Fire HD as a mobile front-end to access its broad array of products and services.

(MORE: Review: Kindle Fire HD Is a Very Amazon Tablet)

This became really clear at the recent Amazon Kindle Fire HD launch event in L.A. when Amazon CEO Jeff Bezos stated that Amazon does not make money on hardware. Instead, these handheld devices are mobile access points to the various products and services Amazon offers. Sure, they are e-book readers and tablets in their own right and therefore are quite versatile in what value they deliver to customers, but make no mistake; they serve as vehicles for users to learn about and purchase a whole lot of products and services Amazon has to offer.

Now imagine how the PC and even consumer electronics tech companies, which are hardware based, look at Amazon. Amazon, like Apple, is totally rewriting the rules of the tech game. Because of increased competition in hardware, which forces competing vendors into price wars, the profits on hardware are almost gone. Some vendors still play the numbers game, hoping to sell enough products in volume to hit margins between 5% and 10%.

But there is an interesting difference in the way Apple goes after the market as opposed to Amazon. Apple gets the best of best of both worlds. It still has margins of at least 27% on all hardware products it sells, and it makes money on apps, content and services. On the other hand, Amazon is content with making no margins on hardware, and getting profits on products and services that are purchased through its devices instead.

These two business models make it very difficult for any competitors to make real profits if they only have hardware to sell. This is because — especially in Amazon’s case — the profits come from the products and services people buy by way of the hardware. And at the moment, no PC company is capable of delivering its own ecosystem of products and services that even comes close to matching what Amazon has to offer its customers.

Interestingly, in the request we got from this multinational company concerned about Amazon’s impact on its future, the company was even thinking of exploring the purchase of a major retailer that had hard goods to sell online as part of its strategy to potentially compete with Amazon. However, Amazon has done such a brilliant job of creating its own hard goods store and distribution centers that there are not many online retailers that could even deliver the scope and breadth of what Amazon has today.

By the way, PC companies are not the only ones who fear Amazon. This week, Walmart stopped carrying all Amazon Kindle devices. Walmart finally woke up and realized that the Kindle tablets were actually competitive to its own business. Walmart served as a showroom for Amazon products. Walmart found that people would go to its stores to check out a product they wanted in a physical form, and if it was cheaper on Amazon, they would buy it there. This is especially true if they were Amazon Prime customers, which meant they paid no shipping fees and got the product cheaper. Earlier in the year, Target stopped selling Kindles for the same reason.

Amazon, Apple and even Google are proving to be 900-pound gorillas and direct competitors to the PC companies and big retailers. And while Amazon and Google don’t manufacture their own PCs, their business model centered around selling apps and services is very disruptive. This model is now causing all of these PC players to fear Amazon, a company that was not even on the competitive radar 18 months ago.

MORE: How Amazon Plans to Tackle a Lack of Tablet-Optimized Android Apps
Bajarin is the president of Creative Strategies Inc., a technology industry analysis and market-intelligence firm in Silicon Valley. He contributes to Big Picture, an opinion column that appears every Monday on Techland.