It’s a fundamental law of tech business: Grow or die. Few online companies are better examples of that maxim than Amazon, which has made a habit of venturing boldly into new markets. But the online retailer’s recent initiatives have brought challenges, including eroding profit margins and entry into markets where it lacks leadership. Has Amazon’s incessant growth become a liability?
For years, Amazon was known as, first, the premier online bookseller and eventually a realiable, low-cost and easy place to buy everything from MP3s to electronics to groceries. The company expanded in a careful, considered way that led to years of slow, steady growth.
Even as Amazon dominated those early markets, it moved into new areas. At first, these expansions met with similar success. The company began offering startups access to its formidable tech infrastructure through Amazon Web Services, a business that contributed $1.1 billion to revenue in the first six months of this year.
The company moved into hardware with the Kindle ereader. It introduced the device just as smartphones and tablets were gaining popularity. But Kindles sold well, driving sales of Amazon’s Kindle books as well.
The past year or so has seen Amazon expand into even more markets, putting it face-to-face with entrenched competitors. It began offering streaming video to its Prime subscribers, taking on Netflix and Hulu. It introduced the Kindle Fire tablet, jumping into a cuthroat market dominated by Apple’s iPad and populated with myriad Android tablet makers. In recent months, it has started offering social games through its recently launched Amazon Game Studios. It’s looking into producing TV shows. It’s setting up storage lockers in 7-Eleven stores to speed deliveries. It may be pushing into mobile advertising to help cover the costs of making Kindles. Most audacious, it seems ready to introduce its own smartphone.
Amazon typically doesn’t expand haphazardly. Even when it moves in an unexpected direction, the action is usually related to technology it has already developed. Amazon Web Services opened computing and storage capacity to the public that Amazon had built for its own use. The Kindle was the low-cost platform Amazon created to take advantage of its ebooks.
But to position the Kindle Fire as a low-end tablet, priced at $199, Amazon had to eat a lot of the manufacturing costs. That helped push its operating margins down to 0.8 percent last quarter, from 2 percent a year earlier.
Indeed, analysts are bracing for Amazon’s first net loss in over nine years. What’s more, the early surge in Kindle Fire sales is slowing significantly this year. And it may taper further now that Google’s Nexus 7, starting at $199, is gaining in popularity. Revenue growth slowed to 29% in the second quarter, compared with 51% a year earlier. And Amazon is bracing for the inauguration of online sales taxes in many states.
Yet, Amazon is expanding aggressively in the face of these challenges. Capital spending rose 70% from the first quarter, mostly a result of building infrastructure to support Amazon Web Services.
As Amazon expands, it also faces challenges that are less financially measurable but still important. For most of its 17 years, it has led markets that it sometimes created. But the markets it’s pushing into now – streaming video, cloud computing, tablets, games – are established. Here, Amazon’s relentless focus on cost gives it an advantage, but probably not the decisive clout that it enjoys in online retail. Some segments of its business, notably smartphones and tablets, are littered with well-designed and well-financed products that couldn’t compete with leaders like Apple.
If Amazon comes to be perceived as an also-ran in many markets, its brand could be affected. The company once known as the world’s premier online retailer could become a tech company with its fingers in too many pots. Tech companies that set agendas, like Facebook and Google, have clear missions and identities.
Amazon once had a clear identity. But the more it grows, the more it’s starting to look like its mission is just that: to expand where it can.