Is this an Amazon Tipping Point?

Are we witnessing a massive Amazon Tipping Point? Is Amazon changing subtly but importantly as a company? Is it restructuring its DNA and raison d’être?

Well, let’s consider recent events –

  1. The rates increase for Amazon sellers that has a lot of Amazon 3rd party sellers up in arms. The rates went up from 7% to 12% which is a 70%+ increase in 3rd party seller fees.
  2. The decision to end associate commissions to sites that have gotten ‘too good’ at promoting Kindle Free Books. Want associate income from Amazon? That means you have to stop mentioning free books which Amazon loses money on (3G costs) and have to instead mention deals.
  3. The reluctance to fight the eBook Wars on price. Where are the big price drops after the end of the Agency Model?
  4. The handicapping of lower priced books. Basically, a shift from ‘We are the Future of Publishing’ to ‘We are the New Gatekeepers of Publishing. Just like the Old Gatekeepers of Publishing’.
  5. Amazon’s shift to In-App Purchases in its Android Store and its own Amazon currency in the Kindle Fire App Store. Interesting that a company that was totally focused on using ‘Free App of the Day’ to add customers is now shifting to selling ‘gold coins’ that can be used as ‘virtual currency’ to buy ‘virtual goods’. So many levels of abstraction that Zynga is clapping.
  6. Amazon signing a contract with the CIA where, instead of providing cloud services, it will provide in-house services. Basically, Amazon is morphing into an Enterprise Software Company for the CIA.
  7. Amazon’s inordinate focus on Prime and ‘profitable’ Prime customers. Has there been any other time in Amazon’s history when it focused on ‘profitable customers’ and not just ‘more customers’?

These (and other similar signs) signal some very big shifts –

  1. Amazon, at some level, is shifting from ‘gratification in the future’ to ‘profits now’.
  2. Amazon, at a very deep level, feels it has reached ‘untouchable’ status in lots of markets. Amazon’s algorithm and data analyzing PhDs are telling it – You’re home safe. There’s no other viable option. We’re past the ‘Amazon is King’ Inflection point. Now it’s time for new Inflection Points – Amazon as Profitable Company, Amazon as Benevolent Dictator.
  3. Amazon is realizing that it has to start making good on all the promises of HUGE Profits at some distant point of time in the future. That it can’t keep delaying gratification FOREVER.
  4. Amazon is perhaps realizing that the economy might go into a prolonged state of nothingness. That it has to shore up its defences so that it can survive. That for survival it needs more than $676 million a year in operating income.
  5. Amazon is, even though it doth protest much to the contrary, bowing down to Wall Street and its demands. Because Wall Street can really hurt Amazon if it decides Amazon isn’t playing along.

Let’s look at a few things.

  • Why is Amazon restructuring its DNA (or trying to) and shifting to a Profits Focus?
  • What happens if Amazon succeeds?
  • What happens if Amazon doesn’t succeed?
  • Can Amazon change customers focused on free and cheap to profitable customers?
  • What are the factors outside Amazon’s control?

First, the restructuring.

Why is Amazon restructuring its DNA and shifting to a Profits Focus?

Amazon was founded in July 1994 and it went online as in 1995. Today is April 23rd, 2013.

In 2012 Amazon had a whopping $61.09 billion in revenue and a surprisingly low $676 million in operating income. It even had a net loss of $39 million.

To put that in context, out of the Big 4 Tech companies (Apple, Microsoft, Google, Amazon), Amazon is the only company that isn’t raking in billions of dollars in profits every month. Apple, Microsoft, and Google are making roughly $3 billion a month, $2 billion a month, and $1 billion a month in profits.

Amazon is making nothing in profits. All it has are businesses that have HUGE potential and MIGHT be HUGELY profitable at some distant point of time in the future.

This is a problem for two reasons –

  1. Firstly, if there is another big crash or a prolonged depression, then Amazon will be in a lot of trouble. $676 million operating income on $61.09 billion revenue is a stunning 1.1% profit margin. That leaves absolutely zero room for error (or, for that matter, for sales tax impact).
  2. Secondly, it means Amazon keeps getting left further and further behind as Microsoft and Apple (especially these two) and Google keep adding to their Total Assets and their Profit Streams.

It’s one thing to invest in a big bet for the future. It’s something completely different to ONLY make big bets that will ONLY pay off in the far future. What happens if something goes wrong? What happens if your competitors and compatriots find businesses that are profitable NOW and also profitable in the FUTURE?

Fundamentally, someone at Amazon has realized that Profits aren’t a bad thing. It might seem trivial. It might be common sense. However, Amazon is so far-thinking that it tends to forget the present and near future. It’s nice that someone woke up and said – Hey, perhaps we can make billions NOW and also make Hundreds of Billions in 2059.

The other possibility is that Jeff Bezos woke up one morning and thought – My dreams of making a company that lasts for 10,000 years might get disrupted if we have another big crash and we don’t have enough margins or assets to survive. What if there’s a 5 year stretch of desolation? Wouldn’t it be nice to have $100 billion in the bank like Apple and Microsoft do? Wouldn’t it be nice to have profit streams of billions of dollars a month like Microsoft, Google and Apple do?

Whether you think of Amazon as a business that wants to make profits for shareholders (I promise I won’t laugh), or as a business that wants to live forever (a rather fruitless endeavour), shifting to a profits focus suddenly seems like a really, really good idea.

Remember: Profits = A Hedge against bad times.

What happens if Amazon succeeds?

Amazon has several businesses that can be shifted with some amount of effort to being very profitable –

  1. Kindle and Books.
  2. Kindle Fire and Apps and Movies.
  3. Electronics. I suspect this might already be quite profitable.
  4. Physical Media.
  5. Kitchen Sinks. You would not believe how much those custom fitted Italian Faucets cost.

Amazon also has several businesses that are probably already profitable and will keep becoming more profitable as Amazon scales them –

  1. AWS is the big one. This might end up becoming Amazon’s Star Cash Cow, unless other Cloud Companies (looking at you Azure) spoil the party.
  2. Luxury items like designer shoes and designer jeans and designer handbags.
  3. Amazon Wireless. While it is possible that Amazon is avoiding profits here, it’s hard to do. Even Amazon might be unable to avoid wireless data plan profits.

Finally, Amazon has new businesses it might be launching soon. These would provide additional opportunities to profit –

  1. Kindle Phone. This is going to be a big profit center if Amazon doesn’t get greedy about number of sales.
  2. Amazon Russia.
  3. Amazon expansion to other companies.
  4. Amazon Logistics Services and Intelligence to other companies.
  5. Amazon Ad Exchange and Advertising.
  6. Amazon NanoAnt Farming. Just checking if you’re paying attention.

So we see lots of businesses that Amazon has up its sleeve that will provide the ‘Profits Magic’ it seems to now be looking for. Add that to the ones that are already profitable and the ones that can be made profitable and we have quite a large portfolio of businesses.

If Amazon succeeds in making some of its existing businesses profitable and also adds some new profitable businesses, we’ll see something very interesting – A company that has never embraced profits ending up with 5 to 10 very profitable lines of business and perhaps even 2 to 4 BIG Cash Cows.

At that point Amazon will probably look for 5 to 10 additional big bets. It might even double down on some interesting bets like its own TVs, and its own TV Series, and its own movies, and its own cars and its Publishing imprints.

Perhaps most importantly, Amazon would suddenly be in a stronger position than any other technology company. Why? Because it would have all three of –

  1. Hundreds of Millions of Customers that are paying it money and are available for it to try lots of different experiments.
  2. 2 to 4 Big Cash Cows that are generating solid profits.
  3. 5 to 10 additional profitable lines of business that might one day become additional cash cows.

It could then collaborate with all the secret projects Amazon has a stake in (Space Travel, Reforesting the Amazon, Energy, etc.) and become a Samsung type chaebol/conglomerate. Except it would span the world and it would not run ads starring hipster baristas.

What happens if Amazon doesn’t succeed?

The first negative possibility is that Amazon just gets stuck in the ‘low profit, high revenue’ business state forever. Hard to beat because it’s willing to forfeit profits. Hard to like because it’s more of a charity than a business.

Note: Just because Amazon wants to change its DNA doesn’t mean it can. If all you have is a ‘We can take losses’ Hammer, then everything seems like a Zero Profit Nail.

The second negative possibility is that Amazon loses the ‘low profit, high revenue’ attitude but doesn’t quite get the grasp of the ‘high profit, high revenue’ model. Then it’d be stuck and might end up dead.

To be quite frank, neither of these is very likely. At least one and perhaps two or more of Amazon’s big bets are likely to pan out. That would mean it would have at least one highly profitable business and it’d be in a Google type position. One huge unassailable cash cow (well, seemingly unassailable) and trying to find more.

The most interesting thing with that scenario is that it might actually be worse for Amazon than its current state. In a strange sort of way, Amazon has the least worries of any of the Big 4 Technology companies. If Apple does something wrong and messes up iPhone, or if Microsoft does something wrong and messes up Windows, then those companies will suffer greatly.

If Amazon were to blow up Kindle. Well, that’d be $237 million a year in losses Amazon might never find again. I have this strange feeling Amazon would get over it, eventually.

Same for most of Amazon’s businesses. Amazon is FREE OF WORRIES because it doesn’t really have any cash cows to defend. If it were to go from this carefree state to a state like Google where 97% of its earnings and 100% of its profits were based on one Cash Cow (Search+Advertising), then Amazon might find itself fixated on protecting that one cash cow. Building moats instead of finding new billion dollar in profits a year businesses.

The most intriguing aspect of Amazon’s attempt to restructure its DNA and become a profit-attracting company is its customers.

Can Amazon change customers focused on free and cheap? Can it change them into profitable customers?

No, it can’t. However, there’s a very interesting solution as to what it can do with unprofitable customers.

It’s one thing to restructure your own DNA.

It is, however, almost impossible to change ‘cheap and free’ focused customers into ‘profitable’ customers. There will always be someone else willing to play the game of ‘We’ll make it up on Volume’. Cheap focused customers will choose that company instead.

Amazon is basically stuck with a large number of not-very-profitable customers and a somewhat small number of profitable customers.

The trick it can pull off, and it is very much trying to pull it off, is to turn these not-very-profitable customers into ‘products’ it can sell to advertisers.

So we get a mix of things –

  1. Attract new Profitable customers. This would be Prime and selling $499 LTE Kindle Fires.
  2. Filter out the existing Profitable customers. Sell more things to them.
  3. Turn the unprofitable customers into ‘end product’ for advertisers. Keep selling them things to keep them coming back.

So we get –

  1. Apple type customers and Microsoft type customers that Amazon sells things and services to. These are both existing and newly acquired. These are the profit streams.
  2. Google type customers and Facebook type customers that Amazon sells to advertisers, while also selling them some unprofitable or not-very-profitable things.

It’s a very difficult shift to pull off. However, you can see how Amazon is trying to do exactly this.

My guess is that, at some point of time in the next 3-4 years, one group of customers will win out and Amazon will focus mostly on those.

A lot of the shifts we are seeing i.e. focusing on recurring payments for apps (which is what IAP is, in a sense), taking a larger cut from 3rd party sellers, focusing on Prime customers – are all about filtering out unprofitable customers and attempting to influence customer behavior to make customers more profitable.

It’s a very drastic step. It’s very, very different from everything Amazon has done in the past.

What are the factors outside Amazon’s control?

Quite a few, actually.

  1. Changing a company’s DNA (or a person’s habits) is incredibly difficult.
  2. Changing unprofitable customers into profitable customers is almost impossible.
  3. Changing unprofitable customers into ‘products for Advertisers’ is also difficult.
  4. Amazon’s competitors specialize in Profits. Google specializes in profits from customers as product. Amazon doesn’t have any of this expertise.
  5. Amazon customers are habituated to ‘cheap’ and ‘deal’ and ‘great value for money’. How does Amazon shift to a profits focus without losing them?
  6. The Economy. All of Amazon’s efforts might be for nothing if the economy tanks. In fact, even if the economy stays as it is, Amazon’s grand plans are in danger.
  7. New companies that are quite happy with Amazon’s 1.1% profit margins. This is, in many ways, Amazon’s biggest weakness. As Amazon evolves into a profits focused company, it becomes very vulnerable to an attack by a new Amazon.
  8. WalMart.
  9. Microsoft and Google and Apple.
  10. The Internet.

Amazon is attempting the type of change we rarely ever see.

From a ‘volume is important, profit isn’t’ and ‘tomorrow is important, today isn’t’ type of company, to a ‘profits focused’ and ‘today focused’ company.

If you look at Apple and Microsoft and even Google – These are companies that have always stayed on the course they set out a long time ago, usually at their inception. Their values and DNA have been very, very similar to what they started out with. They might have entered new markets and they might have had ups and downs. However, the DNA was the same.

Amazon is transforming before us. It’s a $61 billion in revenues and $676 million in operating income company that cares more about 2059 than 2013. It’s transforming into something thrillingly different.

Whether or not it succeeds, and regardless of whether it ends up a $61 billion profits company or a disaster, it’s going to be a very interesting transformation. We are at the single biggest inflection point that Amazon has gone through. We might also be seeing the single biggest transformation this decade in a company’s DNA and raison d’être.

Kindle for Movies? Confused and Conflicted Thoughts about Amazon Studios

Not content with revolutionizing books (and in the process, inadvertently driving the value of books to zero) Amazon has also stepped into ‘movie production’ via Amazon Studios.

Here are some very conflicted thoughts:

  1. Great Idea. If you’re a company that likes to throw out lots of ideas and see what sticks, this is definitely worth trying out.
  2. Kudos to Amazon and Jeff Bezos for having so much ambition.
  3. Don’t think Mr. Bezos has ever seen a technology pie he didn’t want to stick a finger into.
  4. Amazon Studios might end up being Kind of a Big Deal.
  5. First get books right. There’s a grand curation problem in books – partly due to what Kindle has enabled. There’s a huge value perception problem in books – mostly due to what Kindle has enabled. It’d be really nice to see Amazon focus its attention on fixing that first.
  6. The line of logic that ‘we can still give as much attention to books, while also doing movies’ doesn’t make sense. Resources, especially time, are finite.
  7. Amazon Studios is to Movies and Kindle Fire what Kindle DTP is to Books and Kindle.
  8. Amazon’s ambition is eventually going to get it killed. My vote would have been with ‘Amazon’s reluctance to build up a huge cash hoard or a huge patent hoard’. However, increasingly it seems that Amazon’s reach might exceed its grasp.
  9. Amazon Studios should have begun to scare a LOT of movie producers. Not necessarily because it will replace Avatar – because it might be able to replace Paranormal Activity.
  10. Perfectly efficient markets kill the participating content producers. Amazon Studios is almost certainly going to end up being a close-to-perfectly-efficient market.
  11. Not sure why so many technical companies think algorithms can solve everything.
  12. Not sure why so many technical companies think getting people to work for free or cheap and then making money from that (due to scale/volume) is a sustainable strategy.
  13. It worries me that so many people and so many companies are now moving to an attitude that – ‘getting to have their books read/movies seen’ is enough reward for artists.
  14. The contract is laughably one-sided IF your movie becomes a big hit.
  15. If Amazon doesn’t option the rights – you have to still give it rights to use your movie.
  16. At one level it just seems a way for Amazon to be able to win the mythical Who has the most free movies? contest. Never mind that 70% of Amazon’s ‘free’ Prime Movies will be produced by 15 year-old-kids and will star Mentos and Coke.
  17. Amazon is like the jealous spouse who doesn’t even want you looking at someone else. Consider this:

    … for 18 months after you create a project at Amazon Studios, you cannot display, sell or license your script or test movie elsewhere, or withdraw it for any reason. However, when the option term ends, if we haven’t exercised our option and purchased your work, you will get back non-exclusive rights to your original material.

  18. That last phrase is genius – ‘you will get back non-exclusive rights to your original material’. There’s a pretty strong vein of ‘We’re doing you a huge favor and you better not forget it’ running throughout the FAQ.
  19. Amazon is the equivalent of a Stage 5 Clinger. Except, you have to take a blood oath that even if you break up, you will spend one weekend together in Paris every month.
  20. Content Creators are probably so desperate Amazon could have introduced a ‘You will swim with sharks before we read your script’ condition and they’d still sign up.
  21. There’s got to a more sustainable strategy than ‘let’s mass-produce cheap content and hope we get lucky’.

The one thing that really bothers me, and perhaps should bother anyone who loves books, is that Amazon doesn’t have the ends wrapped up with books yet.

Amazon should get the Kindle Store right first

There are lots of things that need to be fixed with books. The two biggest ones are:

  1. How do authors get paid? And No – sharing out $700K amongst 7,000 indie authors every month is NOT a solution. 
  2. Who does the curation?

Right now Amazon is just thinking – Wow, we figured out how to blow up an entire industry. Figuring out a new viable model is difficult. Let’s just go blow up another industry.

That’s a really strange way of looking at things. It’s very Amazon centric i.e. it doesn’t consider what happens to content creators or people or to quality.

You can’t make everything a loss leader

This is another example of what seems a strangely short-sighted Amazon attitude towards content.

  1. Content Makers are desperate. Content Publishers are inefficient. Let’s blow up the market and turn content into a loss leader that helps us sell other stuff.

It’s become a bit much. History will look back at the rise of the Internet companies and perhaps consider them the biggest value destructors for people who create content.

  1. Some tech companies want your creations for free so they can run ads against them.
  2. Some tech companies want your creations for free so they can use them as a lure or as loss leaders.
  3. Some tech companies want your creations for free so they can sell them for profit. 

Where on Earth are the tech companies that are willing to build sustainable business models? Internet companies make Microsoft and Apple seem absolute saints in comparison. To be honest – they really are. When you think of the number of HUGE companies that grew up based on the Personal Computer ecosystem. And the number of people who did well selling software and other things.

With Internet companies, it’s an anti-ecosystem. It’s a giant leech sucking all the blood out of content creators.

It’s great for consumers of content – until the malnutrition of content creators trickles through the system and blows it up.

Why do so many companies look for the easy solution?

It escapes me why the vast majority of tech companies want to build a model where they profit from other people’s hard work.

Capitalism is glorious. However, capitalism usually meant paying the people who made the products. The Internet in general, and Internet companies and people who have never had to sell anything in particular, are creating an environment where the creators aren’t getting paid. It’s just not sustainable.

And everyone is caught in the trap now. The glorious thing about it is that most of the tech companies using these strategies aren’t very profitable either. The Internet is just a huge destructor of industries.

At some point we won’t have people left who make a decent living. There’s not going to be a middle class. It’ll just be very rich people and poor people who’re supposed to feed themselves on the knowledge that invisible people on the Internet enjoyed their work and they got nothing at all from it.

Whether you sell a physical product or a digital one – It’s time to start wondering. What are you going to do when your arguments (an extra copy costs nothing, volume makes up for it, Internet makes everything cheap and efficient, X/information/value wants to be free) are used against you?

Whether you like it or not – The argument extends to whatever you do. There’s always some idiot somewhere who’s willing to do your exact job for free. And there are more than enough companies willing to leverage that into creating Giant Leech ecosystems that will slowly suck everyone and everything dry. Movie Producers and Book Publishers are evil – but they don’t make money if they don’t sell movies and books for profit. That’s the one big lesson – Be careful what you wish for, you just might get it.

Amazon = Most Trusted, Recommended Brand in the US

Millward Brown conducted a consumer study over the course of 2009 and came up with a list of the Top 10 most trusted and recommended brands in the US. Amazon came in 1st, followed closely by Fedex.

There’s a pretty straightforward methodology –

TrustR is calculated by looking at consumer responses to the questions “how trustworthy is this brand?” and “would you recommend this brand?”

The scores are indexed and combined to reach a TrustR score. The average score is 100, and anything over 105 is considered “good.” 

The top 10 brands were –

  1. Amazon. 
  2. Fedex. 
  3. Downy. 
  4. Huggies.
  5. Tide.
  6. Tylenol.
  7. Toyota.
  8. WebMD.
  9. Pampers.
  10. UPS (United Parcel Service).

Impact of Trust according to Millward Brown

Millward Brown feel that in a global recession trust in brands is especially crucial –

we found that the number one “TrustR” brand in each of the 22 countries we researched was nearly seven times more likely to be purchased and consumers were 10 times more likely to have formed a strong bond with these brands,” commented Eileen Campbell, Global CEO of Millward Brown.

They also have high praise for Amazon –, the brand ranked first in the U.S. by TrustR, has achieved that status through exceptional service and providing its own recommendations to users.

This combination has made Amazon the gold standard of trust and recommendation in the U.S.”

Why Amazon being the most trusted brand matters

Amazon have built up trust over a long time and their store of trust is crucial as they transform Publishing.

Consider the various attacks and events over the life of the Kindle –

  1. The 1984 incident. 
  2. The Pricing wars with Publishers. 
  3. NFB complaint that Kindles don’t work for blind students.
  4. EFF’s concerns over eReader privacy.
  5. Attacks on the lack of openness.
  6. Attacks on the DRM.
  7. Attacks on the share Amazon gets.
  8. The one user who got kicked out of their Kindle account.

A company that didn’t have as much consumer trust would not be able to handle even a few of these – let alone all of them.

The fact that Amazon came in 1st even after all these little flare-ups says a lot about just how much users trust it.

Customers’ trust in Amazon lets it do really big things

Consider the Kindle and the Kindle Store –

  1. Getting users to pay $259 for an eReader. 
  2. Telling users that Amazon is in it for 10 years and their investment in a Kindle is safe and users believing them.
  3. Getting users to trust their books and data are safe. 
  4. Getting users to trust Amazon over Publishers and Authors.  

There are just so many ways in which Amazon can think big and be aggressive thanks to customers’ trust in it.

You have to wonder how much bigger Amazon will think as customers’ trust in them grows.