Defying the Rules (Why Amazon Plays by its Own Rules)

Warren Buffett

In 2008, in the midst of the financial crisis, Warren Buffett published an Op Ed piece in the New York Times. Warren wanted the world to know that it’s time to get greedy right now, as fear sent stock prices plunging across the globe. While he acknowledged that the financial world was a “mess” and the economy will only get worse in the near term, he argued that over the long term, “the stock market news will be good,” just as it has been throughout the 20th century. All the bad news creates opportunities for investors willing to look five, ten, or twenty years into the future.

Amazon

Amazon has been able to defy the rules for a few decades now.

As its revenues consistently continue to grow at an exponential rate, their net income has been flat. This is because they 1) have razor thin margins to stay competitive, and 2) choose to reinvest all profit into new ventures and technologies. By winning the trust of their shareholders, they can seem like total a loser on paper, while actually being a bull if you were to peel back the onion.

Amazon got their start in book sales, but set themselves up for the future by making smart decisions on investing in ebook technology and readers.

Stores like Borders, because of the lack of the same foresight, had to shut down their operates. Borders was a direct competitors to Amazon, because they primarily sold books. At their peak they operated over 1000 stores. Some experts said they grew too fast. They saw that people loved buying books, they just didn’t realize that customers were agnostic on which retailer they would buy the books from. It seemed like Borders believed in this famous quote from Henry Ford, “If I had asked people what they wanted, they would have said faster horses.”

Amazon was building cars. They recognized that rather than pay for expensive rent in cities to house their books, they can use cheaper warehouses near airport hubs to quickly ship a book to anyone.

Carrying this mindset in Amazon’s mission of thin margins and not having a brick and mortar presence, Amazon was able to grow from only selling books to creating new products and services. Some of it’s physical products include: Kindle reader, Kindle tablets, Kindle Fire phone, Dash Button, Echo, and Dot.

Recently, there were reports of Amazon opening up physical “bookstores.” While these stores might sell books (a commodity), the main purpose is to push their own products. These products might have slightly higher margin because they are Amazon’s own. In addition, they will push the proliferation of Amazon services and products, such as Kindle ebooks and Prime Video.

The reason for this latent entry into brick and mortar is because as opposed to Apple, Amazon didn’t have their own products up until 2007. Everything else Amazon sold, you could have found at other stores, played around with, and eventually bought on Amazon. The term for this practice is Showrooming.

Amazon didn’t devalue physical bookstores. Since the launch of Amazon and more importantly ebooks, other distractions have emerged to keep people entertained. Bookstores had to adapt by selling those goods. Unfortunately for those brick and mortar stores, the distractions became digital (music, movies, and games) and a need for a physical location became obsolete.



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