The relentless pursuit of revenue has helped make Amazon a model for digital disruptors everywhere.
Global online retailer and logistics firm Amazon just turned 21. But if Amazon founder Jeff Bezos has his way, there’s a lot more growth to come. His company started out selling books and now sells everything from groceries to server space. “Media”, including video and books, now contributes less than a quarter of its revenue.
Today its services stretch from IT services to electrical goods to household plumbing.
In his early days, Bezos bought the domain relentless.com. That URL still takes you straight to the Amazon site, and it neatly describes the company’s approach.
In its US home market, Amazon earns 1.5 cents of every retail dollar – or as Benedict Evans, an analyst at venture capital firm Andreesen Horowitz, puts it, “they’re one-and-a-half per cent of where they want to be”.
“In 2010 they did actually make a profit. Somebody in the [financial] controller’s office got fired for that.”
Benedict Evans, Andreesen Horowitz
Amazon’s formula has been to single-mindedly pursue revenue growth, ploughing all its money back into the business, particularly warehouses. It makes essentially no profits.
Jokes Evans: “In 2010 they did actually make a profit. Somebody in the [financial] controller’s office got fired for that.”
Investors understand this preference for revenue, which is why Amazon’s capitalisation, at US$203 billion, is one of the highest on the planet. Among consumer services firms, only Walmart, Alibaba and (on a good day) Disney are worth more.
“If you were this company,” Evans asked in a presentation in May, “why would you stop and take a profit?”
In retail, Amazon’s strategy is to offer greater selection and lower prices simultaneously. It was a powerful formula for retail giants like Sears in the US. But Amazon has now stolen Sears’ territory.
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Evans believes that mobile technology will allow many more Amazon-style companies with global span and the power to transform industries.
“Ten years ago, Airbnb would have tried to sell software to Hilton. And that probably wouldn’t really have worked at all.”
He adds that ride-sharing companies Uber or Lyft might have sold software to taxi companies, but that wouldn’t have changed the industry. Now Uber, Airbnb and similar firms are having an impact across the globe.
“Far more companies will follow Amazon, will follow Uber or Lyft or Airbnb to disrupt other industries with technology,” Evans predicts.
Amazon’s growth ingredients
- One powerful weapon is its Amazon Prime memberships, which in the US provide free two-day shipping, free video and music streaming and other extras. Amazon Prime’s 41 million members spend almost US$1500 a year on average at Amazon, says research firm Consumer Intelligence Research Partners. Evans wrote last year that Prime “draws people to switch more and more of their online and offline spending to Amazon”.
- Amazon’s other successes include a cloud storage business, Amazon Web Services, which had US$1.57 billion of revenue in the March 2015 quarter.
- Its recent expansions include hotel bookings, video-game viewing and home services – in the US, Amazon will now take care of your dripping bathroom tap.
- Amazon’s one great disappointment to date is China. In March, it opened a digital storefront on the Alibaba-owned Tmall site. The move was widely seen as a dwindling of Amazon’s own Chinese e-commerce ambitions.
This article is from the August issue of INTHEBLACK