Amazon’s £270m Record Loss

There was an article in the Daily Telegraph recently with the above title. It said:

“More than $15 bn was wiped off the value of Amazon last night, after the online retail giant reported the biggest loss in its history. The company increased sales by a fifth to £20.58 bn in the three months to October, but plunged $437 m (£273 m) into the red as it spent heavily on new projects. That figure is more than 10 times the $41 m loss Amazon reported in the same period a year earlier.

The business has been ploughing money into myriad new schemes as it battles to gobble up market share and tries to compete with rivals such as Apple that are increasingly treading on its turf. Jeff Bezos, Amazon’s chief executive and founder, has authorised the company to spend tens of millions of dollars developing drones and much more on new servers for its online data storage business.

He has also led a spending spree on film and television rights, so that Amazon can compete with the like of Netflix and Hulu, and has reportedly been selling gadgets such as its Kindle Fire e-reader as a loss, in order to build up its base of loyal users.

‘We’ve been for several years now, in an investment mode because of the opportunity in front of us,’ Thomas Szkutak, chief financial officer said.

Shares in the company fell more than 11 pc in after-hours trading in New York, to $278.62, their lowest point in over a year.”

As those of you who have read by blog will know, I have mixed feelings about Amazon. When there is something I need for the house or a book I want to buy, I will invariably turn to Amazon for service and price. But, at the same time, I think that Amazon has done a lot a damage to authors and to bookstores.

But, if I set my personal feelings aside, and think about the above announcement with my ex-corporate executive’s hat on, my impression is that Amazon is headed for disaster.

No one has ever built a giant, diversified company on market share alone. The key words in that statement are: giant, diversified and market share alone.

If one thinks of giant, diversified companies which are successful, there is General Electric (which I know reasonably well as I used to compete against them). They are an enormously successful, profit-driven company. Their businesses are mostly ranked among the top three in market share, but they are all profitable. They are all managed by top-flight executives who know their respective businesses very well. They are paid and motivated to increase earnings per share (profit) and the value of GE’s stock.

I think that Amazon could have been quite successful if it had confined its activities to books. It could have sustained a top market share in this sector and worked to make it profitable. But now, it is trying to enter a lot of other businesses and trying to get the top market share, using price as the weapon. This is a doomed strategy. Why? Three reasons:

Price is not a sustainable weapon. Somebody else will always find a way to do it cheaper, if that’s what the customer wants. Meanwhile, the business is bleeding money.
Focus. Executives can pay good attention to only so many things. The more things an executive has to watch, the higher the likelihood that one of those things will go wrong. The secret of diversification is to serve one market. In GE’s case it is the industrial market. What do online data storage, books and drones have in common? Since 1997. When Amazon was first floated, the company has bought about 60 businesses.
Experience. Jeff Immelt has many years’ experience managing huge industrial businesses. Jeff Bezos has no general management experience before he founded Amazon. He worked in computer science, international trade, finance, and internet enabled businesses, but I could find no evidence he had profit responsibility at a high level before Amazon. Information on the rest of the executive team is apparently available only on the proxy report to shareholders. How’s that for transparency?

What do I think will happen?

Well, if Amazon continues to experience losses of this magnitude, shareholders will revolt, and the attitude of Wall Street will turn hostile. As a result, several possibilities emerge: