Ben Thompson on Amazon

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He writes,

To be both horizontal and vertical is incredibly difficult: horizontal companies often betray their economic model by trying to differentiate their vertical offerings; vertical companies lose their differentiation by trying to reach everyone. That, though, gives a hint as to how Amazon is building out its juggernaut: economic models — that is, the constraint on horizontal companies going vertical — can be overcome if the priority is not short-term profit maximization.

Read the whole post, which is too deep to summarize. I agree with his discussion of fixed cost and marginal cost. I am not as convinced as he is that Amazon’s investments will pay off. Sometimes a fixed investment is a scalable reduction in marginal cost, and sometimes it is a railroad to nowhere.

Years from now, of course, hindsight will be perfect. At that point, it will seem obvious whether Amazon has been correct all along or throwing away investors’ money.

5 thoughts on “Ben Thompson on Amazon”

  1. TBH, I am a lot more pro-Amazon because:

    1) Amazon is the business some investors don’t care as much as profitability and can make good long term decisions and not get stuck protecting a core business. Looking at Wal-Mart, why can’t they compete against Amazon on their web-site? Probably the store division (80%+ profits) internally push against too much website success. (I have seen this in our office.) And isn’t Wal-Mart (and Target) since the Great Recession appear to stuck in third gear. See compare Wal-Mart today to Sear in 1970. (Not saying Wal-Mart ends up like Sears but even CNBC doesn’t treat Wal-mart like they did in 2007.)

    2) Amazon still feels like a small business innovator with their ideas with access to lots of capital. They can try lots of stuff and still fail 70 – 80% of the time. But the 20% success is big deal.

    3) Tech really has a weird ability for quick domination as it appears users like to consistently use the same system. (Although I don’t understand the Uber lover here the last 2 years but there is lots of investors.)

    4) In our area, there are a lot more Prime users than are learning to constantly order stuff on Amazon, like batteries. (Basic everyday items that people made Target runs for.) Also, even non-Prime shipping is getting quicker these days.

  2. The Kiva story doesn’t make sense. There are very few warehouse robots outside Amazon which suggests the tech is not fully baked, unless Amazon is way ahead of the pack, which is unlikely. If robots are so much more efficient, you would see far more warehouse robot companies in 2018. Instead, they are still in the startup phase. Here is what a logistics expert says about Kiva and warehouse robots: “Robotics in warehousing has not been very successful. Robotics are not flexible….you cannot raise productivity, but you can lose productivity when the equipment fails. Instead of having lower wage employees that can work in a variety of conditions, you have fixed production volume with robots/automation. They will also need an on-site maintenance team to keep the equipment operating…..downtime is expensive! Automation equipment generally operate at a fixed speed….thus, there is no easy way to improve productivity without changing the equipment. When automation equipment breaks down, you ship nothing until it is back online. The advantage of having people is that you can increase throughput easily by adding people. That may not always be the best decision (especially if unions are involved) but it an option. Sometimes people suck, you might prefer to deal with the problems of dealing with automating equipment. But if risk of downtime is higher than the costs of people……stick with people.” Thompson is probably way too credulous. Amazon bought Kiva for the mystique value, not because Amazon wanted to deny competitors a technology that doesn’t work yet.

  3. Thinking about questions like these, one can usually do worse than by asking “What would Henry Manne say?” Not that Manne was any kind of one-trick pony, but with what is going on with Amazon you have to wonder where the market for corporate control is. Bezos is a megalomaniac and Amazon doesn’t pay a dividend. The only thing propping up shares is index fund investing. With Sarbanes Oxley blocking any market entry/growth via public offerings, only private capital can go after this opportunity. Amazon into too many things to be run tight or right. Already the Amazon brand name is sliding with delivery not living up to its billing. Amazon is just going to die a slow death with smaller firms finding ways to take an imperceptible nibble here and an imperceptible nibble there. Bookstores are already coming back. Anyway, that is just what I would guess Manne would say. Here is the man himself in the best that I can find with a quick google: “To begin, unless entry into an industry is actually prevented by law or private coercion, it is highly unlikely that new firms will not enter any industry in which some firms are presently and persistently realizing monopoly profits. The information cannot be hidden for long. In this fashion, as the new firms increase total industry production, they compete down the monopoly profits previously being realized and will frequently be more efficient than the older firms.

    This process of competitive entry is so powerful, and so irresistible without government protection, that we need only consider one possible limitation to it as a complete solution to any monopoly problem, real or imagined. There may be substantial nonproduction costs for entering an industry. These would mainly be entry costs associated with government regulations, since any other costs should be considered merely capitalized costs of production applicable to any firm in the industry. To the extent that these artificial entry costs exceed the present discounted value of anticipated net revenues from production and sales, monopoly profits can persist.”

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