Amazon’s complex world is hard to fathom

The Amazon rainforest is the world’s largest ecosystem, an area so vast and varied that it belies comprehensive understanding. Critical aspects of the Amazon are only barely understood, such that it’s almost impossible to predict what repercussions damage to certain animals or areas will have on the overall ecosystem.

I always figured that when Jeff Bezos chose a moniker for his online book-selling company when it went online in 1995, Amazon was a largely random choice – an easy to remember name that began with the letter A. But perhaps it is only at this juncture, nearly 20 years later, that we can appreciate how surprisingly fitting the name is, for it has grown to become a vast organisation of unparalleled scale that belies comprehensive understanding.

Okay, hands up, the analogy is gimicky, but it does serve to make a fairly important point – has there ever been a major company quite as hard to fathom as Amazon? The online behemoth is credited with basically inventing the future of shopping and hastening the demise of the era of bricks and mortar retail; with the introduction of the Kindle range of e-readers, Jeff Bezos is being heralded not just as a major figure in ecommerce, but also in consumer electronics.

But for all the acclaim thrown his way, Bezos is rarely taken to task for a peculiarly overlooked and inconvenient truth – Amazon makes very, very little money. In January, Amazon announced a 45 per cent decline in year-on-year Q4 profits, managing to make a meagre net profit of $97 million on turnover of $21.27 billion; in April, the company revealed that in Q1 2013, its net income was down by 37 per cent year on year. Analyst estimates for its second-quarter results, due to be released on July 22nd, predict earnings per share of just $0.06.

But its stock is doing just dandy – it ended 2012 with a mind-boggling price-to-earning ratio of 2,596:1, while last week its stock price was trading at an all-time high of $292.33, up 27 per cent in a year.

These anomalies prompted economics writer Matt Yglesias to make a particularly cutting assessment of the company a few months ago: “Amazon, as best I can tell, is a charitable organisation being run by elements of the investment community for the benefit of consumers. The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. Amazon sells things to people at prices that seem impossible because it actually is impossible to make money that way.”

Yglesias’s acerbic take on the company resonated – why does normal financial gravity seem to have no bearing on Amazon? Wall Street’s seemingly infinite patience with Bezos and his razor-thin margins are essentially stacking the odds against all those retailers who actually do have to make money somehow. The criticism sparked a response from Bezos, who bridled at the insinuation that his company was benefitting from unwarranted investor confidence: “I think long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.”

Just wait and see, Bezos seems to be saying – all these kleenex-thin margins are serving to create a legion of loyal Amazonians which will eventually lead to healthy profits. If that’s the strategy, Bezos is demanding an awful lot of trust.

Technology writer Glenn Fleishman, in an article about the disproportionate value attached to scale in the technology sector, was particularly scathing about this line of reasoning – and Fleishman's perspective boasts more insight than many others, as he knows Bezos from way back and even worked at a nascent Amazon in the late 1990s. "That seems a bit hard to swallow," he wrote of Bezos's strategy. "If you can't perfect this model after this long at this scale, what hope do you have in the future?"

And Fleishman also touched on an intriguing possibility about the company’s future – odd as it may be to consider it, there is every chance that in years to come the retail side of Amazon will be eclipsed to the point that they stop selling physical stuff altogether, instead focusing on its burgeoning virtual server and data business. At the same time, it could conceivably also become the world’s only book publisher of scale. Out of a seemingly coherent ecommerce business, two or more very disparate businesses might emerge.

From today's perspective, we might instinctively consider that a form of failure, but just to pick two of the most notorious examples, Nokia didn't thrive by staying in the papermill industry, and Nintendo didn't achieve worldwide fame by continuing to manufacture playing cards.

That’s the big lesson we can draw from Bezos and his singular firm – for lots of companies, internal innovation and consistently reinventing the self can be more important than bringing innovations to market. By the looks of it, Amazon’s investors are going to give Bezos plenty of time to hit on the right formula.