The road to money is bleak: When will Bezos' Amazon model end?

Following the huge losses caused by price cuts and inventory due to poor sales of Kindle Fire phones in the third quarter, Amazon under Bezos' leadership does not seem to have any plans to terminate the project. On the contrary, at Amazon's third annual AWS conference held in Las Vegas recently, Amazon even put forward the statement and goal of building data centers in every major country in the world in the future as part of the company's broader investment strategy.

It seems that Amazon will not only not give up its investment in hardware equipment, but also its "profit for market" model driven by continuous investment will not change in the future, although since the beginning of this year, Amazon's aggressive model has led to its largest annual loss in 14 years, causing its stock price to fall by about 20% cumulatively, and for the first time, it has aroused doubts about this model in the industry. So should the Amazon model created by Amazon CEO Bezos, which was once favored by the industry and many investors, really be questioned or even abandoned? The industry has different opinions on this, with mixed reviews.

The industry knows that although Amazon's investments involve many different businesses and even different industries, its core is still an e-commerce company, and Bezos's many investments are all under the banner of core businesses. However, we believe that Bezos has ignored the problems and challenges that his core business may encounter.

When talking about the core of Amazon's business, we have to mention the Amazon Prime membership service, which is an important part of its core business. This is a membership service launched by Amazon in 2005 that allows two-day express delivery. To enjoy unlimited free package delivery services on Amazon, all users need to do is pay an annual fee of US$79. But the problem is that it is said that the initial price of US$79 was set arbitrarily by Amazon, because it was impossible to predict how many people would upgrade to Prime members at that time, so the so-called Amazon Prime membership service was not a mature business model. It is for this reason that the Amazon Prime membership service has been in a loss-making state for most of the time since its launch.

Although in 2013, the average spending of a single Amazon Prime user on Amazon was $1,244, and Amazon also received 20% of its revenue from this service, the average cost of logistics and media streaming provided by Amazon to a single user was $55 and $35 respectively, and the combined expenditure of the two items was $11 more than the $79 annual fee, which ultimately led to Amazon raising the annual fee for Prime members from the previous $79 to $99 this year. In this regard, some industry analysts said that Amazon's increase in Amazon Prime membership service fees may lead to a slowdown in the growth of its membership in the future, or even a loss. But what worries the industry is that Consumer Reports magazine has questioned Amazon's Prime payment model and believes that for most users, this price is not actually cost-effective.

Compared with the unclear and questioned business model of Amazon Prime membership service, what should worry Bezos more is that according to the 2014 FutureBuy Global Online Shopping Habits and Preferences Survey Report released by GfK, more and more American consumers are returning to offline shopping. Specifically, in 2014, the "showrooming phenomenon" in the United States decreased by 28% year-on-year, while the "anti-showrooming phenomenon" increased by 41%. The "showrooming phenomenon" refers to consumers looking at products in the store and then buying them through the online store; the "anti-showrooming phenomenon" is just the opposite, which refers to searching, browsing, and researching products online, but buying them in physical stores. Similarly, IBM's related survey shows that smartphones supported by cloud computing have exposed personal preferences, health needs, and social relationships, and retailers can quantify these data within 5 years, transforming into a giant distribution center for private customization and providing a precise shopping experience. Under the competition of the ever-growing express delivery services in shopping malls, express delivery that takes two days to arrive online will become a "snail" slow delivery.

In addition to the fact that the industry development trend is not good for Amazon, in the current e-commerce market alone, Walmart, which has an e-commerce business, has already surpassed Amazon in terms of e-commerce revenue growth. China's Alibaba has also raised a large amount of funds through its IPO; social e-commerce startup Wanelo has also become a leader in the new round of online e-commerce; and mobile shopping platform Instacart has even launched a "one-hour delivery" service for goods.

It is precisely because of the above-mentioned reverse industry development trend and challenges from competitors encountered by Amazon's core business that Amazon's overall revenue growth has slowed down, and Bezos' investment strategy has become even more lacking in support and blind. We have previously analyzed its investment in the hardware field represented by the Fire Phone smartphone, which is needless to say. Even cloud computing, a business that is favored by the industry and in which Amazon still has a leading position, is bound to put Amazon into an investment vicious circle.

For example, in the first quarter of this year, Google was the largest spender and the fastest growing spender, with capital expenditures reaching $2.3 billion, almost doubling year-on-year. The increase in this figure was mainly due to the construction of data centers. The company's capital expenditures for the whole of 2013 grew even faster: from $3.3 billion in 2012 to $7.4 billion. Microsoft's capital expenditures in the first three quarters of this fiscal year ending in March were about $4.2 billion, up 69%, mainly used to invest in meeting the needs of corporate customers who are moving more software online (cloud computing). In order to support Microsoft CEO Satya Nadella's cloud-first strategy, Microsoft's capital expenditures are expected to grow in the next few years.

In contrast, one of the reasons for Amazon's losses in the second quarter of this year was that the revenue of its Amazon cloud computing business Amazon Web Services (hereinafter referred to as "AWS") and other non-retail businesses fell by 38%-60% in the first quarter. Therefore, Amazon cut the prices of many services in AWS in the second quarter, with a reduction of 28%-51%, which became one of the reasons for the huge losses in the third quarter. Despite this, with the huge investment of Google, Microsoft and other companies, Amazon's leading advantage in this field has begun to shrink. What is more worrying for the industry is that Andy Jassy, ​​Amazon's senior vice president and head of the "Amazon Web Services" (AWS) department, said at the AWS conference that Amazon did not provide a timetable for completing these investments. Does this mean that Amazon will continue to invest endlessly in the cloud computing project alone?

Some people in the industry may argue that Google and Microsoft are also investing heavily. That’s right, but Google and Microsoft have the capital to invest heavily. That is, the revenue and profit are guaranteed. For example, in the first quarter of this year, although Amazon’s revenue was between Microsoft and Google, in terms of profit, Microsoft was 57 times that of Amazon, and Google was 35 times that of Amazon. In other words, even from the perspective of investment and burning money, Amazon’s sustainability is far inferior to that of its competitors, and it may even be dragged down by its competitors. In fact, the most direct price war caused by the heavy investment of competitors in the past two quarters has put Amazon’s performance under tremendous pressure. If this continues, Amazon will only fall into a vicious circle where the more it invests, the more it loses.

Based on the above analysis, we believe that Amazon's still unclear core business model and the challenges it faces from the industry and competitors, especially Bezos's insistence on an unclear investment strategy, should be what the industry and investors are really worried about. Unfortunately, in an interview with a TV station last year, Bezos admitted that although he believed that the Amazon model he created "will be overturned one day", he hoped that this scene would not happen in his lifetime. Is this a reminder to the industry, especially Amazon's investors, that they should either continue to endure Bezos's so-called Amazon model that has a bright future but no "money" prospects, or let Bezos and his Amazon model end together.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.