Donald Trump’s dislike of Amazon is well-known, if not exactly reality-based. They abuse the USPS, they pay no state sales taxes, they are shuttering shopping malls built by some of his developer friends. In the real world, package delivery (unlike first-class mail delivery) is the one brightish spot on the Postal Service’s dismal balance sheet, Amazon now pays sales tax in every state that levies it, and the company boasts a growing portfolio of physical stores (Whole Foods, Amazon bookstores, and the just-debuted Amazon Go.)
But Trump just fired another tweet missile across Amazon’s bow. The stock dropped precipitously, losing more than 200 points from its 2018 high. Half the analysts didn’t know what to say. The other half touted it as an incredible buying opportunity. And it would be an incredible opportunity if shipping, stores, and sales tax were the dark clouds on the horizon. They’re not — something much more ominous looms.
To really understand it, we need to get in our time machine and travel back to the 20th century.
The Second Avenue Days
In the mid- ’90s in Seattle, if you could get your pants on with the zipper in the front, you could get a job at an Internet company. They were cropping up everywhere. None of them were profitable, but venture capital was pouring in. AOL was carpet-bombing the country with ‘free trial’ cds — you could hardly open a magazine without one of those discs falling out — and the Gold Rush was on to build online worlds for the new AOL subscribers to visit. Bill Gates’s seminal “Content is King” essay pointed to the future power of the Internet.
Amazon had just gone public.
But even in those days, back when Susan Benson’s corgi Rufus was bounding the hallways in their shabby walkup office on a seedy stretch of Second Avenue near the Pike Place Market — down from the teriyaki place and the grimy old porno storefront — if you asked someone who worked at Amazon what the company’s goal was, the answer would be: “Get Big Fast.”
They never said anything about books. Or ecommerce, which wasn’t even a word in those days. They all just said: “Get Big Fast.”
Getting Big was not a means to an end. It was an end in itself.
In the course of getting big, Amazon discovered that retailing everything under the sun to its bazillions of customers was not a very profitable business. The margins were wicked thin at the best of times, and even pouring billions of dollars into expansion never yielded any eye-popping economies of scale. But simply by keeping its eyes open, it discovered something else.
By turning everyone in the world into an online customer, it had built a parallel empire, a very profitable empire, where size mattered more than anyone could ever have predicted. That empire was AWS.
At a 2017 re-invent conference, AWS CEO Andy Jassy explained succinctly the benefits of cloud enormity:
“You just can’t learn certain lessons until you get to different elbows of the curve in scale,” said Jassy. “With a business that most estimate is several times the size of the next nine providers combined, we’ve learned certain lessons that you just can’t learn until you get to that level of scale. “
AWS rules the lucrative world of cloud computing. Bigly.
AWS rules the lucrative world of cloud computing. Bigly.
And that is what brings the company to an unknown precipice, one where it needs to re-evaluate almost all of its strategies.
LISTEN TO TIM
Tim Cook opined this week that Amazon’s HQ2 sweepstakes is a mistake. He’s right. When it’s over, and Amazon announces as it likely will that it has chosen the DC area for its second HQ, there will be 19 bitter losers across the country. They worked hard, they put their best foot forward, they lost.
And now their final Round 2 proposals, covered during the bidding process by Amazon’s NDAs — of dubious legality in the first place because of sunshine laws — will be subject to public records requests which will reveal exactly what they were willing to give The Giant. Every local company with any leverage in one of these cities is going to say, hey wait a minute, we want those tax breaks, those zoning variances, those exemptions.
Amazon screwed us, those cities are going to realize. And that will be one more step up the ladder from smart, plucky, nimble upstart to bullying ogre.
Cracks are already appearing around its brand. Amazon makes its profits from AWS and, increasingly, from advertising, where it has had a surprisingly small footprint over the years. The company was poised to ramp up advertising revenue — which would of course be boosted by the huge amounts of data it has mined from its customers — but in the wake of the Cambridge Analytica scandal, they must tread extremely lightly.
The same goes for Alexa devices. If anything could be worse than the Facebook scandal of stolen friends and toxic political advertising, it would be an Alexa misstep along the same lines. Any whiff of malfeasance here and the headlines write themselves. You let them put a listening device in your home — you paid them to do it — and look what happened.
In the meantime, the conservative non-profit Less Government is running negative ads in the New York tabloids (including the NY Post — known to be one of Trump’s favorite newspapers) regarding the so-called ‘Jedi’ cloud contract, which looked at one point like it was sure to go to AWS, which has already established itself as the premiere provider of secure military-grade cloud — the lucrative ‘air-gapped’ IL5 and IL6, ITAR-compliant infrastructure few other companies (none, some experts say) can provide.
one of the anti-Bezos Less Government ads
On another troublesome front, Amazon and AWS are of course reliant on data centers. Data centers are quickly becoming the coal mines of the 21st century. They suck enormous amounts of energy and spew waste heat. Where Apple, Facebook, Google, Microsoft have bent over backwards to be transparent about their data center electricity and whether or not it is ‘clean,’ Amazon has obfuscated and dragged its feet. Facebook, Google, Apple all earn A ratings from Greenpeace’s ‘clickclean’ project, but Amazon has only managed to work its way up to an overall C, with an F for energy transparency.
Amazon has to fix this, and expensive P. R. drone videos of Jeff Bezos atop one of the company’s wind turbines won’t get it done.
Bezos Action Figure
And that leaves out the biggest turd in the punchbowl, and the one thing Donald Trump is right about. While Trump runs the country like a business — a failing business — Bezos has always run Amazon like a country. Saving for the distant future and the rainy days, plowing money into infrastructure, creating jobs jobs jobs rather than profits for the next quarter.
One of the company’s most important legs is Prime, its subscription revenue and customer loyalty program. Prime Video, a major competitor to category-killer Netflix, is a big part of that picture. Amazon is now spending an estimated $4.5 Billion a year on video content for Prime; last year it plunked down an “insane” $250 million for the rights to make series based on Lord of the Rings. There is no question that Amazon desperately wants a Prime tentpole, something to rival HBO’s Game of Thrones or Disney’s blockbuster Marvel series.
The problem is Amazon increasingly owns both the production and the distribution of its Prime Content, which is exactly what occasioned the landmark Paramount Decree. Until that 1948 Supreme Court decision, large American studios owned theaters and filled them with their own films. That blatant anti-competitive behavior allowed the government to come in and make dramatic changes. What Amazon is doing with Prime is cut from the same cloth.
The very worst thing that could happen to the company would be government intervention, because one of the main remedies the courts pursue in antitrust cases is breaking companies into pieces. And that’s something Trump, arguably, might relish.
The risk that Amazon could get Ma-Belled is the real dark cloud on the horizon. Amazon the Everything Store cannot survive without AWS, the profit center. And even a whiff of monopoly proceedings could send the stock into a death spiral.
Amazon did what they said they would do. They got big fast. Now they may need to think small for a while.