What’s the problem with Amazon’s new strategy?

Ever since Amazon started the company has had many doubters. Many thought that the idea wouldn’t work; people wouldn’t want to order books on the internet when they could just visit their local bookstore. Even then, when the dot-com bubble burst in 2001 and the stock went from $107 to $7 in just a few months, many thought it wouldn’t survive. Yet the company is now a digital king, dominating online shopping with people using it to order everything, ranging from clothing to cleaning supplies. All of this has seen their revenue grow from just $4bn in 2002 to $25bn in 2009 and a massive $75bn today. With this has come an incredible business and logistics network, operating at a huge scale worldwide, able to offer a massive catalogue goods at prices that are rarely beaten elsewhere.

Not content with that alone, the company has been pushing into new areas, extending the Fire range to include a tablet and phone. Of course, this is all an extension of the Amazon plan, drawing similarities with Amazon Web Services and Amazon Food Delivery. Effectively the company operates like a startup. Loads of new business lines are created and grown over time. This helps to explain why the company makes little profit. The established core businesses fund the loss-making new ventures. Profits are funnelled to new growth areas, such as into new countries or with the addition of new product categories. Over time this just helps the company to achieve its original goal – stocking an almost infinite number of goods and lower prices – ensuring that it becomes “the everything store” to as many people as possible.

Even when the company expanded into the Kindle brand this was a key part of their strategy, with Kindle apps available on almost every platform – Mac, iPad, iPhone as well as other smart devices. Everything was done to make sure that the opportunity for people to buy ebooks from Amazon was put in front of as many people as possible – with 97% of the world’s population currency able to buy ebooks on Amazon. This was at the forefront of their rapid growth over the past few years, such as allowing people who lived nowhere near a bookstore to be able to buy a book, all due to the internet.

Yet, I think their recent moves have started to sway away from this initial goal, with huge investment in content and more devices. This also brings a massive increase in costs, whether it’s due to investment in R&D, streaming rights or production costs for “Amazon Originals”, such as Alpha House, which will likely cost the same as big-budget TV, around $2.5m per episode. While it’s difficult to know exactly how much things cost due to opaque financials, this investment supposedly cost the company $500m in 2013, reaching $1bn this year – with cost of sales increasing faster than revenue due to an expansion of digital offerings. Plus, it’s not going to stop there, in a recent earnings call the CFO said that this would all continue to ramp up, with significant year-over-year growth, with production starting on a range of pilots in the coming months. But, perhaps, the biggest resource used isn’t cash, it’s more time and effort.

Of course, this all helps to get people into the Amazon ecosystem. Great TV shows help pull people in, with the tactic used to great effect by Sky, using Premier League TV rights to sell people other TV, broadband and phone packages. Similarly, these fantastic Amazon shows will draw people in. Especially when sold with Prime, these people are more likely to turn to Amazon next time they need something, benefitting the company even more.

However, to me this just detracts from their original goal, while also working as distraction from the things that Amazon is already doing well. Amazon is looking for growth in these new areas through a long chain of events as described above. All of the steps carry huge risks and challenges outside Amazon’s normal expertise. At the same time it also creates a set of incentives which contribute to the distraction. Amazon starts to compete more and more with suppliers – such as with HBO or Hackett Publishing – and potential partners become rivals. They’ve also started exploring devices, such as the Fire Phone, which Bezos (Amazon Founder) spent a lot of effort on, only for it to come with differentiated software, such as Dynamic Perspective, that doesn’t work. Thus, instead of this, why not use all of that money, time and resources in following the original goal? Why not invest in more goods at lower prices to help grow the online shopping business – which still has plenty of room to grow?

They should be developing killer apps on other platforms and at the same time, instead of pushing the Kindle phones and tablets, why not develop relationships with other vendors, such as Apple? This offers huge opportunity to the company, again, just like with the Kindle apps, opening itself up to as many people as possible. Investing in its own services and platforms hurts Amazon’s core business, there’s a distraction from being great and accessible to all whichever device they use.

To be fair, there is a good reason why Amazon might be trying to extend into these other areas: the shift to mobile. Maybe they feel that they need their own platform with their own lock-in. On mobile, just like what has driven Facebook to acquire companies and launch other apps, brand specific apps become just as easy to launch as Amazon is in the web browser – just requiring a tap on the home screen which is drastically different to having to visit each site individually on a computer. At the same time, Amazon’s strengths – the online reviews, etc. – aren’t as strong on mobile. All of this has led to research showing that mobile conversion rates are only around 1%, drastically different to the 3% on the computer. Thus, they might feel that they need to launch all of these distractions just to stay flat.

Overall I’m a big fan of the Amazon growth and business development over the past few years. Using profit to fund investment into new ventures, Amazon Web Services or food delivery, is genius. Expanding into new countries and providing new products all helps the company to reach its original goal – providing a bigger range of products at lower prices to as many people as possible. Original moves had the best of intentions but the recent advances have started to create distractions. Of course the people running Amazon are incredibly smart, but its decisions like this that when ignored can start to derail a company from reaching it’s potential.

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