I was reading an article recently about Amazon’s forays into the cell phone market. The article, typical for stories about Amazon in the past 5 years, centered around one maddeningly stubborn question:
Why, with over $74 billion a year in revenue, does Amazon so rarely ever turn a quarterly profit?
It’s a question that has been asked, in different forms, since Amazon’s earliest days. The company famously took more than 7 years to even get out of the red, and it has had losing quarters frequently ever since. But as the e-commerce behemoth pushes 21 years in business, the question seems particularly urgent (and particularly confusing) today. How does a company that seemingly dominates online e-commerce so frequently lose money, when smaller competitors like eBay turn billions of dollars in profit every year?
The standard answer from Bezos and Co has always been (I’m paraphrasing here) “we’re investing for the future. We could turn on the revenue floodgates at any time, but we’re currently spending money to grow.” But as Steve Ballmer pointed out, this is the kind of talk we expect from a company that’s two or three years old. Amazon has been around for 21 years now and it’s still eating any potential profits by spending on lavish projects like drones, phones, videogame streaming sites, and everything else under the sun.
So, why does Amazon never seem to turn a significant profit?
The Answer–At Least Partially–May Come Down To Their Marketing
Now, let me be clear. When I say “marketing,” I don’t mean their copywriting. I don’t think anybody would ever accuse of “man with a hammer syndrome,” of trying to view the entire world through the lens of my own profession. As much as I value great communication, I realize it isn’t everything.
What I mean when I say that Amazon’s problem might be with their marketing, I mean this:
Their message seems confused and unclear.
To explain what I mean by this, I need to back up a little bit.
In Amazons’ Early Days
Amazon in its early days was a company with a clear vision:
To be the most customer-focused company in the world. Essentially, it was a commitment to providing speedy delivery to customers for as low a price as possible. The idea was, even though the company would only be profiting at razor thin margins (or not profiting at all), this obsessive focus on customer service would eventually lead to Amazon owning global ecommerce market. They would be, for all intents and purposes, the Wal Mart of ecommerce; the low-cost provider of virtually every type of product to the world, so ruthlessly efficient and effective that no competitor could hope to keep pace.
This theme, of price and customer focus, has always been a focal point of Bezos’ speeches. On one occasion, he said (I’m paraphasing), “there are two types of companies, those who try to keep prices high and those who try to keep prices low.” On another, he said “A company shouldn’t get addicted to being shiny, because shiny doesn’t last.” These points (aside from revealing perhaps a thinly-veiled animus for sort-of competitor Apple’s business model), suggest one thing:
A relentless commitment to affordability and customer service.
Flash Forward To Today…
Things look a little different.
This past October, Amazon posted its biggest quarterly loss. At the same time, its revenue growth has decreased down to a modest 7-14% per quarter. In the past, Amazon’s dramatic revenue growth was used to justify a lack of profit. But today, with amazon closing in on 21 years old and with revenue down to 7% year on year (lower than mega-profitable Google), the question everyone seems to be asking is…
… Why, with all that revenue and 21 years of solid growth, can’t Amazon seem to turn a consistent profit?
It pays to look into where Amazon has been spending its money.
Over the last few years, Amazon has been spending on increasingly ambitious projects:
>> Delivery services.
>> Uber-efficient robot-powered warehouses.
>> Kindle Tablets (not just e-readers, but more ambitious iPad-competitors as well).
>> And most recently, the Fire Phone.
The Fire Phone was, as you can probably guess, Amazon’s ill-fated attempt at a Smartphone. It was intended to compete with the likes of the iPhone and high-end Android devices. It was originally priced at $650 (or $199 with contract), but has since seen its price reduced to 99 cents with contract.
It’s this product, more than any other, that signals a problem with Amazon’s marketing.
Amazon’s intent with its phone (given that it was priced at $650 and outfitted with all kinds of fancy 3d features) was to position it as a high end luxury device. Bezos’ intent was to outfit the device with cool, neat, slick features that nobody had seen before… And use that to justify a big price tag.
Why is that a problem, when after all, Apple (for example) has been able to do it so well in the past.
Well, let’s look at it like this. In order to be able to sell a speculative luxury product and be taken seriously for it, you need a brand that screams “value.” Amazon, as I mentioned earlier, had spent most of the 2000s developing a brand around two qualities “cheap and efficient.” Cheap, in that they tried to sell products for the lowest prices possible. Efficient in that they tried to deliver as quickly as possible.
The problem with the Fire Phone was not that any of its new, high-end features were bad. It’s just that the market wasn’t interested in ever owning a phone with “Amazon” printed on the back of it, because Amazon isn’t known as a luxury brand whose logo signals premium quality.
This isn’t just an isolated case study.
Instead, it’s a microcosm of everything that makes profit so difficult for Amazon. If the company had focused on its core business, it may not have had as many losing quarters as it has had recently. Instead, it has been burning money on, essentially, a confused brand message: “Amazon.com is a hyper-efficient online retailer and… hyper-innovative premium phone and tablet manufacturer?”
It just seems hard to swallow.
This ties in with something I’ve been saying about marketing forever:
Unity and simplicity of concept trump virtually everything else. From your brand concept, to the layout of your page, to the features in your products, to the themes in your advertising… It all comes down to unity and simplicity. Apple built an empire on nothing more than elegantly-designed products that did one or two things extremely well. Google’s famously basic home page, is perhaps the most visited site on the internet. And amazon, too, for most of its history, seemed to follow a simple concept: fast online delivery.
Today, that seems less the case. And if I’m proved correct that this is what’s behind Amazon’s weak recent performance, that’s a lesson any entrepreneur can take to the bank.