Amazon doesn't have a strong core business, and this should be the first point on Founder, Chairman & CEO, Jeff Bezos' list for correction. Instead of applying talent to areas such as phone, Bezos should refocus on a core contingent of devices that are (a) profitable and (b) within Amazon's remit of knowledge, so that they excel in their chosen field.
As the Amazon vs Hachette saga has shown, Amazon runs its core businesses at such low profit margins that it's almost impossible to exist on them alone – and coerces sellers on its site to run with this practise.
There's a reason that Amazon is undermining existing retail outlets and has risen to dominance over the past few years: a brick-and-mortar store has any number of bills to pay and, as such, needs to charge a larger premium on a product than Amazon does (since Amazon only runs warehouses and a website). In turn, this gives consumers much better deals on products and items – leading to more sales and more price cuts, and so on – but creates almost no profit for Amazon.
A rock and a hard place
The headline figure on Amazon's Q3 results press release was their sales increase to just over $20 billion, with no mention of profit, which sums up the problem. Whether Amazon can ever successfully up the prices it charges is still up for debate.
Does Bezos have a profit 'tap' that he can simply turn on, hiking up prices and creating profit? The answer is likely not, and so Amazon as a company needs to create new revenue streams.
Amazon is in between a rock and a hard place with this problem, because one of the reasons that consumers love Amazon is the cheaper prices; removing the cheaper prices in order to boost revenue and profit will drive consumers elsewhere, lowering the two metrics.
Despite being located in Seattle, Amazon is still driven by one of the rules of Silicon Valley: 'disruption'. If Amazon raises prices to please shareholders, the company is ripe for disruption from a competitor who could potentially swoop in and offer the low prices Amazon does at present.
Killing unnecessary product lines – phones, for example – will help ease the profit situation to some degree. Analysts estimate that it costs hundreds of millions (perhaps even billions) of dollars to bring a phone to market, a figure proven by the $170 million write down on the Fire Phone.
The resources that were, and still are, allocated to the phone can be deployed more effectively elsewhere, rather than being wasted on a product that's estimated to have sold no more than 35,000 phones. Amazon's current line of Kindles is looking stronger than ever, but the Kindle Fire tablet still needs work.
The Amazon web store is a prime example of the internet delivering where the physical world can't, and it's unfortunate that the model is not sustainable. But with some careful re-crafting, Amazon could become a viable business in the coming years.
With changes to how resources are allocated, moving talent away from doomed projects to revenue-generating areas, Amazon could regain its focus once again.
- See those Amazon Q3 figures for yourself.
