Sure, the 40% revenue growth is impressive. What's more notable, however, is that Amazon's operating income is growing even faster (on the order of about 60% ), despite them ramping up IT spending to north of $800M. This suggests a couple of things:
(1) Amazon's high-margin "platform" services are probably generating an increasing fraction of their revenue.
(2) Spending over $800M on technology and less than half of that on marketing suggests that Amazon is clearly committed to growing the more pure-IT-centric parts of their business model. In a sense, these are substitutes, because growing the platform plays a key role in attracting and retaining customers.
(Remember the November 2006 BusinessWeek article that suggested Wall Street was worried about Amazon not focusing on its core retailing business? Here's how Amazon's stock has performed since then, relative to a large traditional retailer:)
It looks like Bezos' risky bet is paying off. But here's the paradox. First, Amazon built the most enduring aspects of its platform -- scalable ecommerce fulfilment and inventory management -- by raiding WalMart's experts. Makes one wonder why WalMart, with its legendary supply-chain expertise, couldn't do this themselves. Second, having created capabilities that set it apart from the ecommerce pack, Amazon was bold enough to turn itself "inside out", and, rather than leveraging this core competency, offer its computing, process and human expertise up to anyone competitor who wanted to pay for it. This is almost like WalMart deciding to rent out its procurement and supply chain to its competitor's in the '90s, rather than using it as the source of proprietary advantage that led to their dominance. And, strikingly, this platform business model is working. Maybe there's a parallel with American Airlines and the Sabre system from a few decades ago.
So here's to Amazon's continued growth. Though it might be wise to steer clear of cloud computing as a business line. Do they really want Google and Microsoft as direct competitors?
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Amazon's gross margins for the past two years are almost flat (23%).
If we look at its operating expenses growth rate from 2003 till 2007 (Graph shown here , here is what we see.
Year - 2003, 2004, 2005, 2006, 2007.
R&D growth - (4%), 21%, 80%, 47%, 36%.
SG&A growth – 17%, 18%, 21%, 26%, 34%.
Its 2007 R&D rate of growth at 36% is much less than prior two years (47% in 2006, and 80% in 2005). This could explain its over 60% operating income growth. In its statements, Amazon has not yet broken down revenues by segments. It may have to when it starts earning significant revenues from these services.
I would say that their online retailing model may be positively affected by its new business line initiative, as it is not just selling its services but enhancing its reputation and brand in the process. There is no additional investment required. Even if its cloud computing initiatives face competition, its core retailing business would still be unaffected.
At the very least, it seems like Amazon has found a relatively cheap way to leverage its technology to make money. Selling cloud computing may not be the best long-term decision - as you said, who wants to be a direct competitor with Google and Microsoft - but it's working for now. It also allows Amazon to gain experience with areas outside of the retail world and build relationships with technologists that would otherwise be out of reach. To continue to grow and build shareholder value, Amazon is going to have to find new ways to increase revenue...it looks like this is one of those ways, if only for a short time.
We discussed another potential
platform in class today -- ITC's eChoupal -- and whether they'd be served best by following the Amazon or Walmart strategy. From the conversation today I think the notion of what a "platform" is defined as is being somewhat blurred.
ITC is a wholesale soybean buyer that deployed computers and internet connections into local farming villages to promote access to its web portal for soybean famers. There was discussion that ITC can also be thought of as a "platform". But if ITC qualifies as a platform simply by selling other products on its website, how is this different from the way that Walmart is a platform/portal for P&G, J&J, Unilever, Colgate-Palmolive?
For ITC's methodology to become a platform I had envisioned a scenario where, for instance, DairyPlus, a wholesale buyer of cow's milk in Wisconsin, comes to ITC and asks it to develop a means of bringing a DairyPlus-branded IT solution to Wisconsin farmers to improve the quality of cow's milk production and efficiency of the cow milk market in this new region and industry. In this way, ITC's solution for the soybean market in India becomes a platform for other wholesalers in other areas of the world. For ITC to instead simply build on its portal in the soybean farm towns in India hardly seams like turning their technology into a "platform" any more than TimeWarner bringing an Internet connection to my home in Queens is bringing a "platform" for Internet retailers to me.
Also, there was no significant mention of the fate of ther other soybean buyers in class today. There was significant focus on how "open" and "unrestrictive" ITC was in its representation of the market prices for soy beans and yet it seems their effort were specifically focused on cutting out the other buyers by branding their eChoupals with ITC logos and building purchasing facilities separate from the regular soy bean markets, the Mandis. If their efforts were entirely focused on bringing more transparency to the soybean market and competing with other buyers on a level playing field then the eChoupals would not have had an ITC logo and competing buyers would be welcomed into the new and shiny ITC hubs. ITC was far from altruistic in their efforts...
I think ITC can be accurately compared to Walmart in the way that Walmart is also criticized for pushing out the smaller retailers in towns at the same time they are praised for bringing jobs and low prices.
..my 2 cents..
Let's reflect on IBM's transition from a 'Business Machines' manufacturer to an industry leader in services and business solutions - are there any analogies that can be drawn to how Amazon is transitioning from a marketplace (selling stuff) to a service provider?
Here is a link to a NYT article about the state of retail businesses in the US:
http://www.nytimes.com/2008/04/15/business/15retail.html?_r=2&hp&oref=slogin&oref=slogin
Clearly, more and more retailers are finding it difficult to survive; on the contrary, Amazon and Google are making merry. Is this a competition between e-commerce and brick & mortar?
I believe so. I think that slowly, e-commerce will be so pervasive, that the present day retail mega stores like WalMart, circuit city, etc. will be wiped out, and once again give way to mom and pop shops that once were. e-commerce will remain only for big ticket items.
This is the sign of the times!
Now has got to be the best time to get into offering computing as a platform, before Microsoft and Google are doing it. After all, MS and GOOG are just offering Saas, not the raw materials.
There's also an interesting article in Wired last month where Bezos briefly addressed the difficulties of competing in a commodity business, like utility computing:
http://www.wired.com/techbiz/it/magazine/16-05/mf_amazon
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