In Defence of Delaying Gratification – Amazon from a non short-term Profit perspective

ReadWriteWeb writes an article about Comparing Apple, Amazon Based on Their Profits. It’s really interesting because they start off with the stupidest description of what Amazon does that ANY Silicon Valley worshipping Tech Blog has ever written -

Apple and Amazon are both in the business of designing small computers – tablets, ereaders, phones, media players – and selling them to the public. But how they do it is the big difference. And that’s best depicted by the astonishing difference in the two companies’ profits.

Did they just write that ‘Amazon is in the business of designing small computers – tablets, ereaders, phones, media players, and selling them to the public’?

Whether its Amazon or Microsoft, the tech press LOVES to bad mouth Seattle tech companies (actually any company not in SFO or the Valley). A company based in San Francisco that is selling users’ information or selling purple cows to users – the NEXT Amazing Technology. A company in Colorado making lifesaving equipment – Not worth a mention.

Let’s set some facts straight about Amazon. Then we’ll take a look at why Amazon is running a very different race from Apple. A race that might prove to be a much smarter race and a much longer lasting one.

Amazon is more than the Kindle and Kindle Fire

Let’s take a quick look at all the things Amazon does -

  1. Amazon.com.
  2. Amazon Web Services. This is, arguably, the #1 Cloud Services Provider. An industry that is going to be very, very significant.
  3. Lab126 – maker of Kindle.
  4. Kindle Store and book publishing divisions and companies like BookSurge, Mobipocket, CreatorSpace and various publishing imprints.
  5. IMDB.com. Movies Website.
  6. Amazon.com branches in multiple countries including Joyo.com in China and Amazon UK, Amazon Italy, Amazon Germany. Keep in mind these are ENTIRE country focused retail sites (not just a branch selling goods made in the US).
  7. Audible. Audiobooks.
  8. Zappos. Shoe and Apparel Retail.
  9. Shopbop. Retailer of Designer Clothing.
  10. Endless.com. Another retailer of Shoes and Apparel.
  11. Woot. Deals site.
  12. Amie Street.
  13. Lovefilm. Movie rental site in UK and Europe.
  14. The Book Depository. UK book selling site.
  15. Investment in Living Social, a daily deals site.
  16.  Brilliance Audio, audio book producer.
  17. A9 and Alexa – search and categorization sites.
  18. Amazon Movie Studios.
  19. Amazon Wireless. Selling phones and subscriptions.
  20. Operating retail websites for Lacoste, Marks & Spencer, Sears Canada, Timex, etc.
  21. Drugstore.com.
  22. Diapers.com.

Amazon is like the Hydra. You cut one head off and two others grow. It’s exactly the sort of strategy that stands the test of time. Just ask GE.

We basically have a LOT of billion dollar businesses that Amazon is running -

  1. Amazon.com. This is the main site.
  2. Amazon sites in different countries. Amazon UK by itself is a multi-billion business.
  3. Digital Media such as music and movies.
  4. Kindle devices.
  5. Kindle books.
  6. Cloud Services.
  7. Zappos and Shopbop and Endless.
  8. Diapers.com. Might not be a billion dollar business yet but it’s very close.

Amazon is setting up all these billion dollar businesses and it’s putting itself into position to make money from EVERY SINGLE THING that EVERY SINGLE PERSON buys ANYWHERE.

Yes, it’s probably going to fail in getting to that point. It will, however, end up as a company that -

  1. Has 100 million+ customers in the US. 500 million+ customers worldwide.
  2. Makes money from 25% to 50% of the items those customers buy. Consistent, recurring money – every single month for the life of the customer.

It’s going to be the ULTIMATE stable and HUGE business. If it gets to that point.

It might fail. However, the extent and scope of its ambition is impressive and ludicrous.

Microsoft was – a PC on every desk.

Amazon is – Every purchase by every person through Amazon.

Recurring Revenue is ALWAYS better than one time revenue

The single biggest thing Amazon understands very well is that it’s better to make money from customers repeatedly, than to just make money once.

  1. Better to make money from customers every month than just once every two years.
  2. Better to make money from customers from various products than from just 2 or 3 products.
  3. Better to make money from customers as often as possible.

Recurring revenue means that you know with a HUGE amount of certainty how much money you will make. You can invest now to grow and to make more profits in the future and to keep growing your recurring revenue.

It’s a vicious positive cycle – You keep using current profits as customer acquisition costs. And you keep increasing recurring revenue and profits. Then you keep pumping that back into new customer acquisition. It’ll take you a very long time to run out of customers to acquire. But when you do you’ll be left with 500 million to a billion profit generating customers for life.

Delaying Gratification = Long Term Survival

Those existing 7-8 billion dollar businesses that Amazon has. The additional 7-8 billion dollar businesses it is building up.

Those guarantee long-term survival (to whatever extent it can be guaranteed in such a fast changing world). If one product is no longer ‘The One’ then another takes its place. If one business gets defeated, then another takes up its place as a fundamental pillar for the company.

All those customers Amazon is locking up as long-term recurring revenue income streams – at the cost of current profits. Those are very, very valuable.

My prediction is that in 5 to 10 years we’ll see some very clear signs of what is the better approach – Selling devices for $200 to $300 instant profits to a somewhat smaller group OR Creating long-term customers for life from a somewhat larger group.

6 Responses

  1. On the Seeking Alpha financial site, commenter “Ewellin” stated, in a similar vein:

    “If you look at any single thing Amazon does, you can easily question the real impact on the bottom line, but when you put them all together in a seamless buying and media consumption experience, Amazon provides a very attractive offering.”

    I made the following comment, in response to the indented comment by someone else:

    “the market once again turned to believe in the Jeff Bezos theory that Amazon.com will make its money when its customers use the tablets, not when they buy them.” [The commenter think such sales would occur anyway.]

    “Ahh, but what if that’s just camouflage for what Bezos is really up to? Namely, making money on advertising on those gadgets. (All the recently announced items have daily ad-delivery built in by default.) Google has done well on ads. Amazon may not want its competitors to catch on and copy its strategy.

    “This diversion would fit a pattern. Bezos is a sly one. Previously (when the Fire came out) he’d implied that it would be nuts to go head to head with Apple. And before that he’d said (when the K1 came out) that the Kindle was meant specifically for “serious readers” and that color, etc. didn’t matter to them. It’s possible that he had big plans all along, and made those statements as camouflage, at least in part.

    “PS: Macy’s doesn’t tell Gimbels, you know.”

    I also commented:

    “His real aims may be 1) to migrate Kindle owners to Prime (thereby becoming somewhat locked in to buying from Amazon) through cheap/free media content available only to Prime members; 2) to make money on sales of ads on Kindles; 3) to push its own products through those ads.”

    Bezos is a good Big Picture guy. I just wish he’d be more perfectionistic about the small stuff (Kaizan-oriented, IOW) and fix the 100+ flaws and omissions in the e-ink readers that have been painfully obvious for years.

  2. Oops–I forgot to end the indentation after the first paragraph.

  3. The tech press, which is mostly based in Silicon Valley, worships at the altar of the start-up. For them, Instagram, at least until the recent decline Facebook’s share price, was a far more interesting tale because it captured the area’s mythos perfectly: some people put together a product that is bought by a bigger company and then go off and make something else, etc.

    • Yes, I don’t get the fascination with Instagram. Facebook bought it more to try to gets its $100 billion IPO launched successfully (which you might argue was a success since Facebook did get $10 for its own coffers).

      But it seems to be what Silicon Valley appreciates more than a company making actual money or actual products that are of value (other than entertainment and letting people pretend they are expert photographers).

  4. Another possible advantage to the approach you described is that it doesn’t require creating the Next Big Thing every two-to-three years. Eventually, the market for premium products at premium prices will slow down if not dry up. Or, someone else will create The Next Big. This is part of the reason Apple is gunning for Google. It worries that eventually someone will create an Android phone that will finally make people question the price premium on the iPhone.

    In contrast, as long as people need diapers, books, music, cloud services, etc., Amazon will be okay.

    • That’s a very good point Roberto. I was reading the biography of the founder of Revlon and It’s EXACTLY what Apple does. Every year they would have a grand internal meeting and try to catch the fashion pulse. If you get the chance you should read about him. You’ll feel he’s the predecessor of Steve Jobs in terms of catching trends and/or creating them and capitalizing on them.

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