Frank Thoughts: The Amazon Journey
Frank Boland
November 12, 2021

An analyst at J.P. Morgan recently wrote about Amazon, “… next year its business will exceed Walmart’s and become the largest retailer in the world.” Jeff Bezos is already one of the richest men in the world. But what is more startling; his wealth of close to $200 billion or the short timeframe in which it was created? From the time of the industrial robber barons to the knowledge/service-based fortunes of today, no one has ever become so rich so fast. Tim Berners-Lee’s creation of the coding for the internet in 1989 had made it all possible. So, there is an element of luck or timing in becoming rich.

The internet eliminated the need for physical stores which forced Amazon to create the concept of “cloud” computing. An idea that was unrecognized by competition for seven years! Bezos described that as “the greatest luck in business history.” Technology infrastructure was a way for Amazon to make money “renting” out their access to other corporations. It saved customers from buying their own technology infrastructure. In effect, cloud computing is a 21st century version of the 20th century’s concept of renting expensive IBM mainframes once pioneered by Leasco Data Corporation in 1961.

The role of luck in business can never ever be overstated. Often, it is opportunity created by others who simply do not recognize the potential of what they have. An example is the computer mouse invented by Park Labs (owned by Xerox) which was “borrowed” by Steve Jobs, and then Bill Gates. Another source of creativity and inspiration can often be those in your immediate partnership. Jeff Johnson, a Stanford classmate of Phil Knight and partner in the creation of Nike, contributed the name Nike, the Greek goddess of victory. The previous name for the sneaker had been Dimension Six.

Amazon’s business plan was to grow sales rapidly regardless of profitability. As a result, its online sales growth has already imprinted the public’s perception of it as the country’s largest retailer. Yet while sales have grown rapidly, the company has never shown a significant profit, even using non-GAAP accounting. This is because they have always forgone profit in the quest of creating additional future sales. A strategy which has subsequently been imitated by many new 21st century companies. It is the direct opposite of the old industrial economy’s business plan which was based on profitability.

There are now hundreds of wannabe examples such as Uber, DoorDash and Snowflake. Change that is beneficial is often accidental. It was often true in drug discovery with synthetic chemistry. But it has also been true in technology. Amazon’s original premise was based on retailing but without stores, it required technological assistance. This ultimately led to the “tail” becoming the dog. Cloud storage, Amazon’s “real” business, is just 12% of sales, but 60% of profits. Obviously, Amazon’s “real” business is renting technology infrastructure. Much as Saul Steinberg did with Leaseco Data 60 years earlier.

In the past 27 years Amazon has prospered greatly in 15 of those years while the economy did not. The two major crises – debt and covid 19 – negatively impacted the economy but enhanced the businesses of online retailing and cloud storage. When Amazon started in 1994, Fed Funds were 5.83%; today they are 0.25%. Interest rates have never been this low in the 5,000-year history of civilization. Luck has proven to be a significant factor in the Amazon journey. Retrospectively, the business was definitely in the right place (internet) at the right time. But as interest rates move higher and Microsoft and Google now effectively overcoming their late start in cloud computing well …

-Francis Patrick Boland

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