Think Profit.”

When Steve Jobs took the stage at Macworld in 1998, he did something unusual. For the first time in any presentation he had ever given, he ended with a slide reading, “Oh, and one more thing…” This phrase would of course enter the Apple lexicon in the subsequent years. But what was it that was hidden behind this first “one more thing”?
“Think Profit.”
You see, Jobs had just been named interim CEO in September 1997 after successfully pushing out the man who brought him (back) in, Gil Amelio. And he had good reason to do that: under Amelio, Apple had lost $1.04 billion in the prior year and was less than ninety days from being completely broke. Just a few months later, as he announced on stage, Jobs had the company back in black: a $45 million profit — the first profit the company had seen in more than two years.
Jobs’ move wasn’t magic. He slashed thousands of jobs and killed off dozens of products. Walter Isaacson details this time in his Steve Jobs’ biography. One part in particular stuck out to me.

In 1997 Apple was selling StyleWriter color printers that were basically a version of the Hewlett Packard DeskJet. HP made most of its money by selling ink cartridges. “I don’t understand,” Jobs said at the product review meeting. “You’re going to ship a million and not make money on these? This is nuts.”

I was thinking about this in relation to Amazon’s recent earnings. The company posted a record $17.4 billion in revenue in Q4 2011, but from all those sales, they were only able to squeeze $177 million in profit. Compare this to Apple’s most recent quarter in which they posted a record $46.33 billion in revenue and, more importantly, a record $13.06 billion in profit. The margin difference could not be any more stark.
Obviously, the first thing everyone jumps to is to say that Amazon and Apple are in two different types of businesses. Amazon is a retailer while Apple sells hardware. But the line is increasingly blurring between the two companies. Amazon now sells a number of hardware products thanks to its Kindle line. Apple, meanwhile, sells plenty of content via iTunes.
The thing is, even with Amazon entering the hardware game, they’re not making the kind of money that Apple is. In fact, with the new Kindle Fire tablet, it’s believed that they’re losing a small amount of money on each one sold. “This is nuts,” you could imagine Steve Jobs saying once again.
But is it nuts?
Amazon clearly views products like the Kindle Fire as a loss-leader to keep customers happy and keep them shopping for more content. Apple’s model is the exact opposite. Content sales are a loss-leader to keep customers happy and keep them buying new hardware.
At least for now, one model is working, one isn’t. Not only did Amazon only make $177 million on sales of $17.4 billion last quarter, they’re warning that they could actually lose money this quarter. They have enough money in the bank to sustain this for sometime, but at some point, they’re going to have to get back in the black in a meaningful way. And if they keep selling hardware, investors are going to look at their margins compared to Apple’s and wonder what the hell is going on?
Amazon has said time and time again over the years that they’re perfectly happy to live in the low-margin space. But these most recent margins are likely getting too thin for comfort. The Q4 profit numbers are 58 percent lower than they were a year earlier. Presumably, they have a plan that justifies these losses for the sake of the bigger picture. But again, it’s not unreasonable to think that this bigger picture will eventually pit Amazon against Apple directly.
Amazon may find itself in a race to get to Walmart-size revenues before there’s true competition in the space. Last quarter, Walmart pulled in $109.5 billion in revenue, which led to $3.3 billion in profit. As with Amazon, the margins are awful, but at that scale, it doesn’t matter. Walmart’s quarterly revenue more than doubled Apple’s which resulted in profit less than a quarter of what Apple saw — but at the end of the day, Walmart still walked away with over $3 billion in their pockets. That’s all that matters.
As their dance with the dreaded red line proves, Amazon isn’t anywhere close to operating the way Walmart does yet. In fact, Amazon’s margins are so slim that Facebook, which just filed to go public today, recorded nearly double the profit of Amazon last year ($1 billion versus $631 million). That’s pretty crazy when you think about it.
Jobs’ decision to exit Apple from the printer business 15 years ago proved to be a smart move. Of course, had Apple been selling ink — which has ridiculously high margins — it may have been a tougher call. Amazon’s problem is that the “printers” they’re selling have crappy margins and the “ink” they’re selling has crappy margins. It’s starting to sound a little nuts.
Source:http://techcrunch.com/2012/02/01/is-this-nuts/