Beyond the Tablet Wars: Apple, Amazon, and the Cloud

12/23/11Follow @hoffmang

Much has been written on the battle between Apple and Amazon. Certainly Steve Jobs’ passing has made us all reflect, and perhaps on a much deeper level than before, on the man and the empire he created.

In many ways, the companies are more alike than they are different. What makes them both remarkable players is their ability to take the long view. Their business strategies focus on what customers will want a decade from now, not just next holiday season. Because they look at the future this way, both companies are comfortable breaking big rules along the way. And to date, they’ve both delivered, in ways that have exceeded even what their biggest supporters expected. Which is perhaps what makes this next round of battle most interesting.

No doubt both Apple and Amazon each have amassed an increasing share of the consumer wallet over the last few years.

Apple’s strategy has been to focus on a specific type of consumer: one who is comfortable with a higher price point, is keen on sleek design, and is drawn to an integrated software/hardware solution that’s easy even for your mother to use. Not to mention that along the way Apple built a brand cachet that started with its Think Different campaign and remains unmatched today. All of this means that Apple might be losing the bottom 30 percent of the market. But do they care? Recent figures confirm that Apple is capturing more than 50 percent of the profits with just 5 percent of the computer market. Next quarter’s projections have them snapping up even more with 60 percent. And that’s without even trying to account for the value of Apple’s extended ecosystem.

Amazon’s strategy, on the other hand, is to redefine entire markets, like books. In its software and its irresistible services, it takes a steady, go big or go home approach. They’ve created the world’s biggest electronic marketplace and are counting on the investment its consumers have made in the Amazon ecosystem: their Kindles, their Amazon MP3s, their Prime subscriptions, and their streaming movies.

Enter the Kindle Fire, the first real competitor to the iPad.

How will the Kindle Fire launch affect Apple’s 80 percent share in the tablet market—and could it in the end only help to spur interest in the iPad? In the short term Amazon will face big losses—as much as $20 per tablet—but the move will spur sales and help win over the low-end segment of market. It’s a gamble, but one Amazon is smart to make if it wants to compete with the iPad—and start-ups like Spotify—on music and movie downloads.

But is the tablet the important thing, or is it the services to which the device connects you? In the end I believe the digital economy is about the services you consume and the experiences you derive from them. Like PCs before them, tablets too will become a mere commodity.

Build It and They Will Come

As Apple builds out its iCloud and Amazon continues to expand Amazon Web Services, and as both companies secure customer loyalty within their respective clouds, this is where the real war will be fought. The real value in the hardware lies in its ability to connect the consumer to a cloud-services world worth living and working in. The war will be won by the company that continues to evolve, innovate and personalize those services, making them so useful, delightful, and entertaining that the consumer won’t dream of leaving. Think of a small business that builds its sales database, calendaring, and accounting program within a cloud that also holds birthdays, favorite restaurants, music and photos—a network on top of a network, all interconnected.

Now consider how to turn that loyalty into revenue. The ongoing lifetime value of each consumer is directly related to the volume of digital content and services they consume—and consumers who buy on a recurring basis have the power to boost the bottom line in dramatic ways. Getting a loyal customer to sign up for a recurring subscription, or renew an existing one, for example, is much easier than luring a brand new customer if done right. The company that takes better care of its current customer base now—even marginally—will, I believe, have the upper hand.

History tells us that there’s only room for three to four players in mature markets, and two healthily duking it out for the leadership position—spurring innovation with each new release and each new customer acquisition. Amazon will continue its relentless effort to disrupt entire industries, and Apple will always focus on expanding the boundaries of what’s possible in the mobile, entertainment and computing worlds. Thanks to the foundation both companies have worked tirelessly to build, the best is probably yet to come.

Gene Hoffman, Jr., is chairman and CEO of Vindicia, which provides strategic online billing solutions to merchants selling digital content, including online game publishers such as Activision Blizzard and Atari/Cryptic. Follow @hoffmang

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