Steve Jobs (Via Wikipedia)
Steve Jobs (Via Wikipedia)

Amazon is legendary for its thin profit margins, but there’s a method to the company’s madness, as detailed in Brad Stone’s new book, “The Everything Store.” Part of it is that Jeff Bezos wants to avoid repeating what he considers “Steve Jobs’ mistake” in pricing products.

The story comes up in the book as Stone explains the logic behind the company’s pricing strategy for Amazon Web Services. Bezos decided to price AWS as a “utility with discount rates, even if that meant losing money in the short term,” writes Stone in the book.

At one point, Bezos explained to one of Amazon’s major shareholders that he wanted to avoid “Steve Jobs’ mistake” of pricing the iPhone so high that it created fantastic profit margins. The problem, Bezos explained, was that the strategy attracted a raft of competitors as a result.

“The comment reflected his distinctive business philosophy,” writes Stone. “Bezos believed that high margins justified rivals’ investments in research and development and attracted more competition, while low margins attracted customers and were more defensible.”

That’s just one of the points of conflict between the companies. The book offers behind-the-scenes details of their competition in areas including devices and media, and their battle over e-book pricing that resulted in a court judgment against Apple earlier this year.

Stone tells the story of one former Apple executive, Diego Piacentini, who left to join Amazon around 2001. Jobs asked the executive why he wanted to work for a “boring retailer” when Apple was in the process of “reinventing computing.” Stone writes, “Then in the same breath, Jobs suggested that maybe the career move revealed that Piacentini was so dumb that it was a good thing he was leaving Apple.”

Piacentini remains a top executive at the Seattle company, overseeing its international consumer business.

Brad Stone, the author of “The Everything Store: Jeff Bezos and the Age of Amazon,” will be our guest this weekend on the GeekWire Radio show. He’ll also talk about the book Oct. 22 at Seattle’s Town Hall. Tickets available here.

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  • don108

    This is one of the single most hilarious beliefs I’ve ever read. Perhaps it explains why for all of 2012, Amazon had a net loss of $39 million while Apple had a net profit of $8.2 Billion. If Bezos avoids “Steve Jobs’ Mistake” much longer he’ll make Amazon go bankrupt.

  • kcwookie

    Going broke is always the best way to avoid competition.

  • synthmeister

    A great quote from Slate.

    “…That’s because Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers. The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. Amazon sells things to people at prices that seem impossible because it actually is impossible to make money that way. And the competitive pressure of needing to square off against Amazon cuts profit margins at other companies, thus benefiting people who don’t even buy anything from Amazon.
    It’s a truly remarkable American success story. But if you own a competing firm, you should be terrified. Competition is always scary, but competition against a juggernaut that seems to have permission from its shareholders to not turn any profits is really frightening.”

  • stefsup

    Amazon parades down Wall Street like a emperor with not clothes and Steeters howl with praise and ticker tape. But then, Bezos loves conning the Street year after year, decade after decade, cus’ he has only contempt for it. The Street gets the full monty and it doesn’t even know it.

    Ben Bejarin suggests Apple’s cash war chest will be needed cus’ it’s competing now with Korean and Chinese companies that have limitless, national support. So Apple will go where no Bezos will ever tread.

  • isitjustme

    If Amazon were to sell their product more people will buy the same from someone else and save a dollar.

    Let’s be realistic, whatever Amazon is selling someone else is selling it and they simply cannot charge more for it.

    Throw in the sales tax and they will lose their competitiveness.

  • Rob Saric

    I wouldn’t bet against Amazon. Both Apple and Amazon are great companies but Amazon will become a consumer/enterprise utility for decades.

  • Volker Oppmann

    As Peter F. Drucker already stated several decades ago: »Closely related to both “creaming” and “quality” is the fourth bad habit, the illusion of the “premium” price. A “premium” price is always an invitation to the competitor«

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