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Why Amazon is in Trouble

8/5/2016

1 Comment

 
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I assume you are reading this and saying to yourself that the author is a complete idiot. But, if you listen to my logic I think you will realize that this is what is keeping Amazon’s outstanding management team awake at night.
Since the beginning of Amazon, they have been able to sell the future to outside investors. First in books, and then in all merchandise Amazon has been the leader in low prices. They could do this because their goal was not profitability, but gaining market share. They had the backing of the investment community. So, normal retailers had to compete with a company that had no true conviction (in this writer’s opinion) to make a profit. And they could do it because the Amazon management team was smart, open-minded, and resourceful.

Amazon started AWS (Amazon Web Services) to sell the excess capacity they had from their computer power. In their quest to optimize the use of their assets, they were smart enough to say they had excess capacity and wanted to monetize it. They also knew they had much more intellectual power than small startup businesses would have. So, as any Rising Star should, they went and built this business from nothing where no one else was playing. This business has significant more margins than Amazon retail and contributes meaningful profit to Amazon Corp today. This then gives Amazon’s retail business the ability to put pricing pressure on all other retail competitors. And they are.

But, now comes the problem area. AWS and its soaring profits is the drug that Amazon is hooked on. Because of the growing popularity of cloud computing and AWS’s strong position in this business Amazon is counting them into the future. But there are some real competitors entering the market. Competitors with pockets even deeper than Amazon’s. While AWS I have read, has a 33% market share today, second on the list is Microsoft. But there are more competitors on the horizon with Alphabet, Oracle, and WalMart working to stake strong claims to the cloud.

What could make the difference is the structure of the business. Neither, Microsoft, WalMart, Alphabet, or Oracle rely on the cloud for their current profit structure. They all have significant financial war chests available to them and none of them is shy about earning market share.

So, let’s say that one or more of the four of them determines that price could make a difference in gaining market share. (And yes, I realize that pricing is going down rapidly already because the cost of computing is dropping faster than ice melts in the Texas heat.) They could all afford to bring the fat margins that AWS is now enjoying down significantly without hurting their core business. If those margins were to fall too fast for AWS, Amazon might have to change their retail business model.
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So, is Amazon in trouble today,? Perhaps not. But smart people should be looking out for opportunities. WalMart is not in rumors to buy Jet.com because they don’t think they have an opportunity to compete. The pressure is going to be on Amazon for the foreseeable future. They have an incredibly smart and alert management team that has been able to come up with tools and products to keep them going forward. Only time will tell.









1 Comment
Harper link
10/5/2020 04:14:14 am

Success in business depends on a variety of factors, including skill level, effort, market factors, and much more. Thus everyone’s results in an Amazon business will differ. So no promises or claims are made as to your income potential or lack thereof. And, of course every business has some risk involved. That said, Amazon is an huge opportunity and has helped my family and I have the lifestyle and freedom we want. Maybe it can do the same for you, if you apply some effort and energy to it.

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    Rich Hollander is a retail expert with over 40 years in the industry.

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