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Apple, Google, and Amazon Are So Profitable Because They Know What to Lose Money On

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No company makes significant money from both content and hardware.

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So how does Google make money? Ninety-six percent of Google's 2011 revenue came from advertising. While Google might not describe itself as a content company, its entire Android business model is built around keeping users searching for and consuming content on its sites. Android tablets made by other manufacturers were selling poorly in comparison to Apple's iPad, so the company clearly felt the need to step in and create a device compelling enough to get users onto Android, where it can make money from them.

Apple

Apple gives away content, in the sense that it doesn't make money on it, in order to justify premium pricing.

Apple makes only "a bit over break-even" from the billions of dollars in music, apps and other content that it sells. It does, however, charge a premium for its hardware, achieving margins that none of its competitors can match. As a result, Apple is more profitable than all competing Android handset makers combined.

HTC, Nokia, Microsoft and a universe of commodity hardware

Without either free content or free hardware, brand-name stalwarts of hardware are forced to compete with regional manufacturers who are content with much slimmer profit margins.

The market for mobile devices is becoming "a big barbell with Apple-Samsung (PINK:SSNLF) at one end and China at the other end," wrote Vijay Rakesh, an analyst at Sterne Agee, in a recent note to clients. What that means is that users with money to spend are willing to pay a premium for the best hardware that gives them the apps and content they prefer, whether Apple's or Google's. And those without so much money are happy to pick up cheap hardware like the kind coming out of commodity tablet and handset manufacturers in China. (This is the same cheap hardware that Google and Amazon are selling through to their customers.)

HTC's (TPE:2498) profits are slipping, and Nokia just lost $1.27 billion. Microsoft still makes plenty of money licensing Office, Windows and other software to businesses, but the company is taking a huge risk by moving into hardware with the Surface. Its success or failure will depend largely on the population of apps for the new Windows 8 operating system which runs on Surface, and which is just getting off the ground. If developers fail to flock to the platform, and users fail to follow, the company could find itself competing with the same commodity manufacturers that are wiping out the margins of companies like Nokia.




No positions in stocks mentioned.
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