As a consumer, I love Amazon. During my years overseas it was an important lifeline for me, reliably sending me books and videos to some pretty out of the way places.
When I moved back to the US, I almost immediately signed up for Amazon Prime and now not only get free delivery, but can stream movies and TV shows too.
Besides being the greatest e-commerce site on the planet, Amazon also brings impressive innovations to market, such as Amazon Web Services and the Kindle tablet. Undoubtedly, Amazon is a great company.
Unfortunately, it's not a great business. According to Yahoo Finance, the company earned only a slim 1% operating margin during the last 2 years and a not particularly impressive 4% margin in 2010. While there's more to a business than just the bottom line, those are worrying numbers.
Jeff Bezos insists that he can turn on the earnings spigot any time he wants and is merely plowing money back in order to grow the business, but that seems thin to me. Last year Amazon grew its top line 27%, very good, but not unusual for a technology company (Google Google, for comparison, grew 32%).
Further, Amazon is far from the only business that invests in the future. Google put $6.8 billion (13.5% of revenues) into R&D last year. Microsoft Microsoft, for its part, invested $10.4 billion (13.4% of revenues). Both are money machines, pulling down $12.7 billion and $26.7 billion in operating profit during the last fiscal year, respectively.
I believe that there is a much simpler reason for Amazon's poor earnings performance: They simply do not hold a leadership position in any major category. To see what I mean, let's look at three: retail, web services and tablets.
Retail: First, the obvious. Amazon is not a clear market leader in retail. Walmart dwarfs it in size and Target Target is significantly bigger too. Yet, unlike Amazon, both of those companies manage to earn good money every year.
On the other end, Amazon also competes with a whole slew of specialty retailers, ranging from Neiman Marcus, to Williams Sonoma to Crate and Barrel, who hold an advantage not in volume, but in merchandising expertise.
While these firms certainly can't match Amazon's e-commerce platform, who says they have to? They and roughly 100 other companies use BloomReach's service, which replicates many of Amazon's technology advantages. The technology you own isn't as important as the technology you can access.
So with neither market heft or cache, it's hard to see how Amazon will ever significantly exceed average retail margins and, as of now, it doesn't even achieve that.
Web Services: Amazon was a first mover in web services, in which it basically rents out its formidable infrastructure to companies that either don't want or can't afford to build their own. It's a great idea and a fantastic service.
Alas, here again, Amazon is getting squeezed. This time between Microsoft's Azure and Rackspace. Microsoft, it should go without saying, is a much stronger technology company with deep enterprise expertise and Rackspace has a lot of appeal to startups.
Tablets: When Amazon launched the Kindle in 2007 it became the first tablet to really capture the imagination of consumers (although, at the time, it was really just an e-reader).
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