The Cloud

Amazon Is All About Growth, Not Profits

Charging off in all directions, getting big fast, there’s a method to Amazon’s madness, and investors seem to believe in it.
David RosenbaumApril 27, 2012

Founded in 1994, taken public in 1997, recorded its first profit (to the surprise of many) in the fourth quarter of 2001. But Amazon has never been about profits. Indeed, Amazon CFO Tom Szkutak yesterday announced that the protean Internet retailer, cloud provider, digital content distributor, and lately original equipment manufacturer’s profits for the first quarter of 2012 dropped 35%. But its revenue grew 34% to $13.8 billion from $9.86 billion last year. On this news, Amazon’s stock soared 14% by mid-day today, despite Szkutak’s dour warning that there could be a significant decline in operating profit in coming quarters as Amazon continues to spend money on a host of improvements, lines of business, and growth initiatives.

“We’re investing on behalf of customers and sellers as well as retailers,” said Szkutak, noting that Q1 capital expenditures were $386 million, an increase over last year, and a reflection of Amazon founder and chief executive officer Jeff Bezos’s long-standing commitment to a big picture focus on what Amazon can become rather than what it may be at any given moment in time, or quarter.

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The breadth and scope of Amazon’s investments is singular for a retailer, extraordinary, in fact, for any business.

As a traditional seller of consumer goods, Szkutak announced, Amazon would be opening 13 new fulfillment centers (warehouses) in 2012 which, he said, would help support Amazon’s third-party retail growth, which increased 60% in Q1. And last month Amazon announced that it would acquire Kiva Systems, a maker of warehouse robots, for $775 million, to improve warehouse capacity and efficiency.

As a digital content distributor, Amazon Prime, a subscription shipping service, has added free, unlimited streaming of movies and TV shows, putting Amazon in direct competition with Netflix, among others. Szkutak said that the company would be investing aggressively in content. (Right now, Amazon’s library is small – only about 5,000 movies and TV shows – and, compared to Netflix, outdated.)

As a manufacturer, Amazon’s tablet, the Kindle Fire, released less than a year ago,  has astonishingly already captured 54% of the Android tablet market, with number two Samsung limping badly at 15%. This, in turn, will help grow Amazon’s digital and e-books business, which Szkutak, with atypical enthusiasm, termed “great.”

Finally, with Amazon Web Services (AWS), the company has taken the infrastructure it built to become the Walmart of the Internet, selling everything from books to baby carriages, and the technology it used to accelerate and personalize the shopping experience with easy click-through, preference algorithms, customer score rankings, and purchasing suggestions, and monetized it. It did that by becoming a highly flexible, scalable infrastructure-as-a-service provider, with spot pricing and bidding features that will doubtless appeal to CFOs. Szkutak yesterday emphasized the potential of AWS to drive business growth.

“Amazon has become a tech provider,” says Jeff Muscarella, an executive vice president at NPI, an IT spend and portfolio management firm. “We’d been hearing about cloud computing for at least five or seven years and here comes Amazon with the real goods.” In fact, says Muscarella, “You can go to the AWS Marketplace and buy IBM WebSphere [an enterprise-strength middleware product]. That’s pretty geeky stuff, very expensive, and now you can buy it on an hourly basis. And, if you don’t like it, you can turn it off an hour later. That’s pretty new.” 

As is the fact that AWS Marketplace supports customer reviews and will suggest, for example, that “others” who looked at WebSphere “also looked at . . .”

“You engage with IBM or SAP,” Muscarella points out, “you throw a couple of weeks of your life away. With Amazon, it’s 20 minutes if you know what you want.”

“Amazon understands the power of leveraging identity to deliver new, personalized business models,” says Steve Shoaff, chief executive officer of UnboundID, an enterprise integrator of customer and user information.

The fact that IBM and SAP and other enterprise providers seem to be willing to give up their exclusive relationship with their customers to partner with and sell their software on the AWS Marketplace testifies both to the burgeoning strength of Amazon’s channel and the robustness of its IT platform.

The question now becomes whether Amazon will attempt to move up the cloud value chain by becoming a software-as-a-service provider itself. Given its core identity as a retailer, there’s no reason to think there’s anything Amazon couldn’t or wouldn’t sell.