Amazon’s Beautiful Low Margins

January 28th, 2013

Eugene Wei argues that Amazon’s low-margin approach is a strategic advantage:

Attacking the market with a low margin strategy has other benefits, though, ones often overlooked or undervalued. For one thing, it strongly deters others from entering your market. Study disruption in most businesses and it almost always comes from the low end. Some competitor grabs a foothold on the bottom rung of the ladder and pulls itself upstream. But if you’re already sitting on that lowest rung as the incumbent, it’s tough for a disruptor to cling to anything to gain traction.

True. That’s what makes Amazon a threat to Apple: they are in the position of creating cheap, pretty good mobile devices that have access to a pretty good media store. They can undermine Apple’s strong margins, which have driven their success.

But what if “the market”—the nature of it—is constantly being redefined? What if you end up clinging to the bottom rung of a ladder to a market that no longer exists?

Wei believes that Apple should compete at the bottom end with lower-margin devices to defend against low-end threats from Amazon and Google. I don’t think he’s wrong, but I think the most important defense Apple has is offense. They have to continue redefining what mobile devices are and do so competitors are constantly chasing them.