Amazon Shows Diversification Is The Key To Success
Here’s a thing: in 21 years, Amazon.com has never turned a profit. Not really, anyway.
“It’s fair to say that the online store has always been a razor-thin low margin for Amazon. The retail part of the business has always been a near-zero proposition,” says Jack O’Leary, a Boston-based analyst at PlanetRetail RNG, a global retail insights firm.
But, even if it were a cash cow for the business, it’s likely that Amazon.com’s profits would instantly vanish. Why? Because it’d all go straight back into the business. More specifically, it’d go straight back into new parts of the business.
As a blueprint, the world’s biggest and most ubiquitous tech companies are proving that risk is the new standard – that daring diversification is now synonymous with not just growth, but survival.
It’s a falsehood to now consider Amazon solely as a retail business. Founder and CEO Jeff Bezos – who reclaimed the title of the world’s richest person late last year – has ensured that it’s far more fluid than that. Starting with their late-’90s acquisition of IMDB – the internet’s repository of film information – Amazon has proven itself to be an ever-changing ecosystem of products and services, each one a sizeable bet on the future. The end of 2017 brought perhaps their biggest – and certainly the most expensive – bet yet: a $13 billion acquisition of Wholefoods, the upmarket US shopping chain.
But Amazon is a hardware manufacturer, too: their famed Kindle device revolutionised publishing in 2007, and you can thank them for the influx of voice-controlled speakers that have flooded the market – they ignited that category in 2014 with their Alexa speaker, which some industry estimates peg as having captured nearly three quarters of the market.
These devices, Alexa in particular, feed an impossible amount of consumer data back into the Amazon mothership, which then directly informs new research and development for the company.
Peek through Amazon’s endless assortment of verticals, and you’ll see a slew of wild, unexpected ventures – some more successful than others. There’s Amazon Merch, which has allowed designers globally to sell custom t-shirts without ever handling inventory. There was the poorly received Fire Phone – the business’ attempt to enter the smartphone market. But even in failure, there were crucial lessons learned, says O’Leary.
“Out of that came the idea that Amazon believes they can be well-positioned to be a hardware provider – while inventing new product categories.”
Then, of course, there’s Amazon Video: their most aggressively risk-taking vertical of late. Its production of The Grand Tour, a spiritual successor to Top Gear, reportedly cost hundreds of millions of dollars.
“Amazon has a few mantras: ‘Start each day like day one,’ is one of them,” says O’Leary. “There’s also an internal attitude that’s unique, highly innovative and embracing of failure.”
Less known is Amazon’s quiet profit giant, AWS: Amazon Web Services, which, from a server farm in Virginia, provides cloud storage and services to a kaleidoscopic array of businesses and entities, from Slack to AirBnb to NASA to the Obama presidential campaign of 2012. Experts have estimated that AWS generates around half of all Amazon profits. One in three internet users visit an AWS-powered website, every day. So ubiquitous is the vertical, even its direct competitors rely on it – like Netflix.
The two companies have entered something of a filmic arms race, each throwing literal billions at original content each year, with Amazon nipping at the heels of Netflix’s astronomical budget. Both companies dwarf the spending of traditional channels like HBO. This year, analysts at JPMorgan estimated that Amazon would spend around $5 billion on its original video content.
Films aside, Amazon and Netflix have more than a little in common, culturally.
Last year, at a tech conference, Netflix CEO Reed Hastings admitted that Amazon was “terrifying”. But surely, with a string of hits and Emmys from shows like Stranger Things and House of Cards, and a swelling international subscriber base, he’d be content with his company’s chartered course?
“Our hit ratio is too high right now,” he said to the conference. “We have to take more risk…to try more crazy things…we should have a higher cancel rate overall.”
In the world of Bezos and Hastings, Amazon and Netflix, failure (or a poorly received TV show) isn’t anything more than an indicator of appropriate level of risk. Indeed, daring and diversification was crucial in Netflix’s formative decision to pivot – hard – toward video.
“The biggest thing that's made a difference is being willing to bet on a future,” Hastings told GQ when Netflix unfurled a global expansion a few years ago.
“When we bet on streaming it was very controversial, both internally and with shareholders. We were a public company at the time. It was speculative.
Later, when we started international, it was very speculative. And there was lots of scepticism. Finally, with the original content, there was tons of scepticism as to why is Netflix doing original content.”
It’s this ability – maybe call it a willingness – to observe and accept what’s coming, and adapt unabashedly to it, that’s defined each of the company’s major decisions. Even when shareholders, spectators and colleagues would (gently) shudder.
“Ten or 15 years ago we were renting DVDs by mail in the US. It was August of 2005 and I started watching some YouTubes on my office desktop computer. What was amazing was even though the video quality was not great, the ability to just click and watch was amazing, transformative. It was from that moment that we said streaming is really coming – finally.” It took Hastings and Netflix just 18 months to launch their first streaming content.
O’Leary says that small businesses – and individuals – should take note of the trend lines in companies like Netflix and Amazon.
“Having a general awareness and openness to new developments, areas to develop your own capabilities and your own talents is the path to success. Just as Amazon diversifies and makes a lot of small bets, an individual can do the same.”
“No one: no company like Amazon, and no individual, can really know which of these small bets will lead to the breakthrough for them.”
The answer, of course? Keep betting.
Steal a business trick (or two) from the monoliths
Failure is a valuable indicator
If you can’t remember the last time an idea or project fell a little flat, you could (and should) be taking more calculated risks.
Reinvest the Winnings
Bonus at work? Invest it somewhere. Nice windfall from part of your portfolio? Consider leveraging it into a new category altogether.
Don’t deny the future
Short courses, TED Talks, books and mentoring – get a taste of what’s out there, regularly.
Consistency is stagnation
A reliable source of income is brilliant – but taking it for granted could lead to disaster. Industries change; companies pare back. Spread your income – and your risk.
Risk & Reward
A timeline of Amazon’s acquisitions, investments and product development – charted against its share price.
July 5 1994 – founded
May 15 1997 –IPO’s at $18/share – $1.73
April 27 1998 – acquires IMDB – $8
August 5 1998 – announces a move beyond books – $18
Feb 2005 – Amazon Prime Launches – $35
Nov 2005 – Mechanical Turk Launches – $48
March 2006 – Amazon S3 launches – $37
September 2006 – Fulfilment by Amazon launches – $32
August 2007 – AmazonFresh grocery service launches – $80
September 2007 – Amazon Music Launches $93
November 2007 – Amazon Kindle launches – first hardware offerings – $91
July 2009 – acquires Zappos – $86
July 2010 – Kindle e-book sales outnumber hardcover books for first time – $118
Feb 2011 – Amazon Video is relaunched as Amazon Instant Video – $173
Sept 2011 – announces Kindle fire, an iPad competitor – $230
Nov 2014 – announces Amazon Echo – $338
March 2017 – acquires Souq.com for $580 million – $887
June 2017 – acquires Whole Foods for $13.7 billion – $968
February 2018 – acquires Ring for over $1 billion – $1512