Amazon has a problem. A really, really big problem. Let me try to explain it in a small way. Imagine you owned a coffee shop, and for simplicity’s sake, you sold coffee for $1 a cup. After a really, really busy day, when you sold 750 cups of coffee, because of the price of the coffee and everything else, you’d end up with $3 to show for it. Twelve quarters. Really, it would be easier to panhandle for those 12 quarters.
Such is life for Jeff Bezos these days. Last year, the firm had nearly $75 billion in sales, but after paying to send all those smiley-faced packages around the world, Jeff Bezos had only $275 million in profit to show for that. Pocket change. A rounding error. And to make matters worse, that was considered a good year for Amazon, which lost money in 2012.
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Amazon did have a good year…for sales. That jumped some 20 percent in the fourth quarter alone. What does that mean? Sometime soon, that coffee shop will have to sell 1,000 cups a day for $3…1,200 cups a day….1,400 cups a day…to make $3. You get the idea. This has been Amazon’s problem for some time. Exploding revenues, flat or disappearing profits. See the chart — thanks IBTimes.
Jeff Bezos knows only one way out: Up. Some day soon, this will land him in outer space, and allegedly delivering packages with drones. But for now, it means up the stakes. Expand, expand, expand. Chiefly, gobble up any retail business imaginable to sell more stuff. Expand the mythology of the company with one media magic trick after another; expand the spell cast over Wall Street, which seems to make permanent dot-com bubble exception for Amazon. And most critically, expand the war with competitors by using its powerful market power to drag them down into the profit-less morass. Amazon is very good at making books appear at your door; it is also now very good at making the disappear from its virtual bookshelves unless publishers play by its rules. And it is able to undercut prices on everything from books to diapers to tablets, never caring that it’s losing money on sales, a sort of product dumping that expands Amazon’s power even as it threatens to burn down entire industries. Disruption, the kids call it. I’m confused why this isn’t more obvious to everyone: Amazon’s only end game will be to eliminate competition and raise prices to raise margins. That, or Amazon will end.
And so we land on today’s announcement of the Amazon Fire phone. Launch of the device is, refreshingly, pretty transparent. Pay to carry around our gadget, Bezos is saying, so you can become a mobile Amazon checkout counter. The device’s most important feature (to Amazon) is the FireFly feature, which will let you scan products at stores to see if Amazon has a lower price. Then, you will self-checkout the way you do today at grocery stores and drug stores. Experts call this “showrooming,” as in, all retail stores will become simply free showrooms for Amazon. Amazon thinks you will pay $200 or $300 for the right to become an Amazon mobile cash register. Heck, that price will probably drop soon.
Consumers with phone loyalties and crippling contracts won’t be lured simply by the chance to order more Amazon stuff, of course. One way to do this would have been to disrupt traditional cell phone sales models — back to true unlimited data, for example, or maybe a new pay-as-you-go model.
Nope. Bezos has employed Steve Jobsian techniques to brag about the device’s industrial design, and its sort-of-like 3D features that might make it available for hands-free use. It’s possible that’s a great feature — I won’t know until I play with it. But will consumers see it as so valuable that they can look past the obvious cynical side of FireFly?
We’ll see. For Amazon’s sake, it better be. The firm is running out of places to expand, and really running out of Bezos magic tricks. After the past two quarterly earnings announcements, the cult of Amazon stock has shown some vulerability. Shares in the firm traded lower after news that revenue was up for profit was disappointing. Creating yet another at-cost/loss leader product line might not cut it for more longer. Amazon’s phone only works if it makes you buy more from Amazon, and in fact, it only works if it starts to make you buy more profitable items from Amazon. Once the firm knows everything you buy and everywhere you are, one wonders how it might accomplish that?
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