Unveiling the magic of Amazon: What did Bezos do behind the miracle of low profits and high valuations?

Lishi Introduction: Since its listing in 1997, Amazon has had only a handful of profitable quarters, but in the past 20 years, its stock price has risen more than 400 times, with a market value of 350 billion US dollars. What kind of magic is behind this miracle?

In the 2016 Forbes Rich List, Amazon founder Jeff Bezos surpassed Warren Buffett with a net worth of $70.7 billion to become the second richest person in the United States, second only to Microsoft founder Bill Gates, who has a fortune of $81 billion.

Bezos founded Amazon in 1995. Since the company went public in May 1997, it has had only a handful of profitable quarters in the past 20 years and has been struggling near the break-even line.

However, this has not prevented Amazon's stock price from rising more than 400 times since its listing, and its market value has reached 350 billion US dollars, making it the world's largest online retailer, the world's second largest Internet company, and the fourth largest technology company in the United States by market value. In October 2016, Amazon ranked 8th among the world's 100 most valuable brands in 2016.

What kind of magic is behind Amazon's miracle of low profits and high valuation?

A retail company that reshapes lifestyles

After receiving a computer science degree from Princeton in 1986, Bezos worked on Wall Street for eight years. Once, Bezos accidentally entered a website and saw a number of 2300%, which was the rate at which Internet users were growing every year.

Bezos was shocked by the rapid growth of the Internet, so he chose to leave his lucrative and stable Wall Street company and start his own business .

In 1994, he moved from New York to Seattle and started building this book-selling website - Amazon - in his garage. Bezos positioned Amazon as "the largest bookstore on earth." To achieve this goal, Amazon positioned itself internationally from the beginning, adopted a large-scale overseas expansion strategy, and at the same time adopted a low-price strategy in exchange for business scale.

After officially launching in July 1995, Amazon covered all 50 states in the United States and 45 countries around the world in the first month of operation . At that time, mail-order advertisements listing books were published on the inside pages of magazines in many countries around the world, and a book club called "Bertelsmann" regularly sent you a booklet recommending new books to order.

In the first week of its public launch, Amazon received $12,000 in orders. Amazon’s early delivery methods were not “smart”; they had no inventory. It often takes several weeks or even a month for a book to be delivered to the user, and the speed of arrival depends entirely on when the bookseller sends the book to Amazon's office. In the first week, they gave away only $846 worth of books.

But publishers saw Amazon as a "savior" because it provided another channel option besides traditional chain bookstores at the time. Three years after its launch, Amazon was called the world's largest online bookstore by Forbes magazine. He has since changed the way people buy books. However, Bezos' ambition is not limited to just establishing "the largest bookstore on earth."

In 1998, a report from Amazon's marketing department showed that a considerable number of users would not use the Amazon website at all because they were not interested in reading. This "bad news" made Bezos excited: it was time to expand the business to a larger scope. If they didn't buy books, he could sell them other things.

Starting in 1999, Amazon expanded the product categories it sold and began selling clothing, children's toys, home appliances and other items on the website. In 2010, sales of its books, audio-visual and other media products reached US$14.888 billion, accounting for 43%; while sales of consumer electronics and other products reached US$18.363 billion, accounting for 54%. Amazon has successfully transformed into a comprehensive e-commerce website.

In the 1990s, when many Internet companies were growing rapidly, Amazon's shareholders kept complaining that Bezos's business strategy was too conservative and slow. However, when the Internet bubble burst in 2000, those fast-growing Internet companies went bankrupt one after another. Only Amazon, which had maintained steady growth, remained profitable, which became a unique story at the time.

In the decades since the advent of the Internet, its rapid development may seem dazzling, but in fact it has only done one thing, which is to reconstruct a new space-time order, which also means reconstructing the human way of life. Amazon has gone to great lengths to reshape the way we live.

Starting in 2006, Amazon's sales began to grow rapidly. On the one hand, Amazon has been competing head-on with traditional businesses within the old framework of time and space, spending billions of dollars to build more than 90 sorting and distribution centers around the world and using tens of thousands of robots to process orders for customers.

At the same time, in the new e-commerce era, logistics is one of the core competitive advantages of e-commerce companies. For companies that have reached a certain scale and volume, the operational capabilities and quality of warehousing logistics determine how big and how far an e-commerce company can go. Amazon has become recognized by the industry as the world's most efficient logistics company, and has built its operations center into the world's most flexible commodity transportation network.

Entering the new century, Bezos saw the trend of traditional industries continuously transforming towards digitalization and the Internet, and began to think about the book and audio-visual market, which accounted for half of Amazon's business.

In 2007, Amazon released the first generation Kindle e-reader. The emergence of this reader also changed the way people read and heralded the advent of the electronic publishing era. Now Bezos has tens of millions of reading terminal users and his own payment channels.

When Amazon first sold hardware products such as the Kindle, it did not make money. Instead, it made money from users purchasing digital content such as books, movies, TV, and games . Bezos hopes to use the Kindle system to build a book ecosystem like Apple's iTunes.

Since April 2011, Amazon has sold 105 e-books for every 100 paper books it sold. Its e-book sales have exceeded paper book sales for the first time. It now accounts for nearly 60% of the e-book market, almost four times the share of the print book market.

After several years of planning, Amazon has penetrated into every market segment and link of the publishing industry, and has expanded its digital content business to all links of the industrial chain. It is subverting the traditional publishing industry.

Breaking into the cloud

In addition to its online retail business, Amazon also provides platform services to other suppliers through its cloud service "AWS" (Amazon Web Services). Suppliers can sell on Amazon with the help of Amazon's traffic, warehousing and other resources.

In 2004, Sun Microsystems announced a service that shook up the computing industry. The company will build several large data centers and then sell access to those computers for $1 an hour. This would directly transform the high-margin hardware sales business into a computer rental service, allowing customers to bypass a one-time multimillion-dollar hardware investment and instead use multiple small payments. This technology is called Sun Grid, which is the original prototype of cloud computing.

At the time, Sun was marketing its products to executives at traditional large companies, but none of them wanted to buy Sun Grid as a computing system.

When Sun was having a headache, something unexpected happened. Amazon launched its own computing rental system in 2006, which later became AWS. At this time, cloud computing did not show many advantages.

But Bezos insisted, "Cloud computing allows people to control their business remotely. We think this technology will become meaningful and will create real money someday in the future."

In fact, it is no accident that Amazon unexpectedly entered the field of cloud computing and grew into a giant enterprise. AWS services originate from the idle resources of Amazon's own warehouse facilities, data storage devices, and technology platforms, so Bezos began to rent them out to other companies in need, which not only shared its own internal costs but also saved costs for customers.

In 2000, Amazon launched a product, Merchant.com, to help retailers build online stores. Later, it was discovered that these methods could be used not only for retailers, but also for the wider market.

In the beginning, AWS was just a set of infrastructure services. Soon, Amazon added the storage service Simple Storage Service (S3). In July 2006, just four months after its launch, Amazon's S3 storage service carried more than 800 million files. The following year, startup Dropbox launched its own product based on Amazon's cheap computing platform. However, as of 2010, AWS services still accounted for less than 3% of total revenue.

Unlike Sun, Amazon is targeting developers, not CIOs. AWS is primarily used by small startups, providing them with cheap website testing and hosting services. Back then, startups like Netflix, Airbnb, and Slack all used AWS as their cloud computing partner.

In 2013, Netflix, the video service giant that accounts for about one-third of North American Internet traffic, handed over all computing tasks to Amazon Cloud.

Amazon, which is highly favored by Wall Street, relies on its advanced layout of cloud computing to win at the starting point with its first-mover advantage. Amazon's latest quarterly financial report shows that Amazon's operating profit in the second quarter of 2016 was US$1.3 billion, and the operating profit from AWS was US$718 million. In other words, AWS contributes about 55% of Amazon's operating profit, exceeding all other businesses including Amazon's main e-commerce business. This rapid growth has made AWS worth $160 billion, making it Amazon's most valuable business.

Analysts estimate that AWS can currently provide cloud computing capabilities equivalent to the combined computing power provided by its next 14 competitors. If AWS can take the lead in this field, its market value will be between $417 billion and $1,115.2 billion in 2024, and Amazon could become the first company in history to have a market value of over $1 trillion.

Controversy Bezos

For Bezos, doing things against the grain is a common occurrence. Amazon’s internal ban on PPT is a famous example. As a 20-year-old company with 132,000 employees and annual revenue of $75 billion, Amazon often reports losses. Compared with Apple's public disclosure of accurate iPhone sales, Amazon resolutely refuses to provide basic data such as Kindle sales. Even Bezos's supporters say the opacity is a drag on Amazon's stock price.

Another major misconception about Bezos is that he doesn't care about profitability. From all angles, Amazon's mature businesses such as online retail are highly profitable, and the reason for the book losses is Amazon's heavy investment in new businesses.

Bill Miller, a fund manager at Legg Mason, has held Amazon shares since its IPO. In his view, Bezos truly embodies the arguments of Christensen's article "The Capitalist's Dilemma," which argues that most corporate managers ignore the financial metrics that really matter.

Some observers even believe that at a time when large companies (especially Apple) are keen to hoard cash, Amazon should be praised for its ability to reinvest and innovate in new areas and tolerating temporary losses caused by these investments.

Bezos remains calm in the face of questions from all sides about Amazon's financial strategy. He said he has been publicly advocating that Amazon focus on long-term cash flow rather than net profit, "What we need to do is to clearly explain Amazon's strategy and then give investors the choice."

"So we focus our energy on these unchanging things, and we know that the energy we invest in them now will continue to benefit us in 10 years and 10 years from now, so it's worth it for you to continue to devote a lot of energy to them," Bezos said.

This is indeed the case. Amazon invests every penny it earns into expanding its scale and improving user experience, with no end in sight.

It is based on this strategy that Amazon continues to invest energy and resources in several key areas, becoming the undisputed leader in the digital publishing market, online retail and cloud computing.

Criticism of Bezos goes beyond financial strategy. Like Walmart, Amazon has been accused of disrupting industries, eliminating competitors and reducing jobs. Since the Kindle ignited the e-reading market in 2007, Amazon has been accused by the publishing industry of forcing low prices for e-books.

Despite this, Bezos has been selected as the world's best CEO of listed companies by the media many times. Some media commented on him: "Bezos is recognized as the most visionary CEO."

In the fully competitive US market, Amazon's rise and continued success are by no means accidental. In terms of business acumen, strategic choices and management capabilities, Bezos is an indispensable strategist and activist.

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