Jeff Bezos Says ‘Amazon Is Not Too Big To Fail.’ He’s Right

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From Forbes:

Yesterday, CNBC reported that Jeff Bezos, in an all-hands meeting earlier this month, said: “Amazon is not too big to fail…In fact, I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years.” He was responding to an employee asking if the CEO had learned any lessons after Sears and other big retailers recently filed for bankruptcy.

There are a few reasons why Bezos right. As one retail investor said to me, “the nature of all retailers is to eventually go bankrupt.” It’s a cynical point of view but it reflects reality: Retail goes through cycles. Certain kinds of retailers become popular, but then they fail to adapt and their businesses decline and eventually vanish. We see that over and over again. The retailers who can change are the exceptions, not the rule.

But Amazon is now the second-largest retailer in the United States. How is it possible that a thing that big could vanish?

It’s possible that the company could lose touch with its customer, but that seems highly unlikely for Amazon. That’s the one thing it’s known for being hyperfocused on.

. . . .

It’s well known that Amazon is not judged on its profitability. If it were, its stock price would be a small fraction of what it is now. Amazon has done an incredible job at many different things, and one of them is getting the financial markets to value the company based on its revenue growth, with the assumption that profitability will come later. Amazon explains away its low profits by saying that it uses what profit it makes to invest in new ideas and experimentation to stay ahead. So far, the market has accepted Amazon’s explanation. People I talk to say that as long as Amazon keeps growing its revenue by 20-25% per year, the market will impute future profitability to the company and the stock price will continue to rise.

For over 100 years before it went bankrupt, Sears had everything for everybody and successfully adapted to what its customers wanted.

. . . .

But as Amazon blows past the $200 billion revenue threshold, it gets harder to find sources of revenue that will have the impact it needs on revenue growth. You can’t, for example, double the number of Prime subscribers in the country; there aren’t enough households left to do that and the saturation is already too high. It needs to find new sectors to bring online, like it first did with books. It needs new industries, like grocery, health care, banking or automobiles, that have relatively low online penetration and the potential for conversion to online sales to sustain its revenue growth. But the thing about that is, it’s hard and it’s uncertain. Amazon has owned Whole Foods for well over a year and the conversion to online doesn’t appear to be happening, at least so far.

If Amazon doesn’t find new sources of revenue growth in other industries, its expansion will slow. And because its stock price has been so influenced by revenue growth, it won’t continue to rise. That’s key for Amazon more than for most companies because so many of its middle- and upper-level employees are incentivized by company stock. An important part of their compensation, more than for most other companies, is based on the stock price continuing to rise. If that stops happening, Amazon employees, who are already very sought after by other companies, will be more susceptible to other offers than ever before. When they start to leave, the stock price stagnation will make it hard for Amazon to replace them and the whole wheel can stop spinning in a hurry.

You may say that Amazon is too much a part of people’s daily habits for it to vanish. That’s true for a while, but when a company loses its best people, the ability to innovate goes away, too. It isn’t long before it’s overtaken.

Link to the rest at Forbes

PG suggests that one of the characteristics of business organizations in a capitalist economy is a very high likelihood they will not last forever.

That’s a feature, not a bug.

If a business organization fails, quickly or slowly, to be responsive to customer’s needs, whatever they may be, it will start to decline. If the organization doesn’t turn its focus back to what its customers and prospective customers want and will pay for, that organization will decline and eventually disappear.

Unlike other organizations (dictatorships, for example, or government-owned businesses), business organizations in free economies must continue to please their customers upon pain of corporate death. The opportunity for new companies to start and grow into competitors to established businesses (see, for example, as Exhibit A: Amazon) is an important part of this model.

Without the threat of failure tied to customer dissatisfaction, organizations will almost inevitably turn inward and focus on internal organizational issues as key players compete to succeed under the rules that evolve for internal organizational standards and practices. That can and has happened even in the face of failure.

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14 thoughts on “Jeff Bezos Says ‘Amazon Is Not Too Big To Fail.’ He’s Right”

  1. 1) Profitability will come later
    2) Thirty years (I think Amazon is around 20 years, maybe 25.)
    3) Is someone seeing the writing on the wall somewhere?
    4) “No man is truly happy until the day he dies.” It may be that to truly assess Bezos as a businessman, we need to do so after the failure of Amazon.
    5) At the moment, I find myself wondering about the fundamental stability of the economic status quo, of Amazon, Microsoft, Google, etc, and of interactions with IT.

    I’m wondering if there aren’t severe issues with the way we fund and organize programmers, that are causing economic effects from programming flaws, that will eventually metastasize and force a profound change.

      • Sorry for disappearing. Basically, long story.

        Suppose a high status silicon valley company is using a large customer base to borrow money to hire a lot of programmers. That company could have an influence on the programmers (and users), without necessarily having a well designed system. The larger and more complex the code, the more defects, and the more impossible it is to entirely eradicate the defects.

        Suppose several such companies have significantly influenced a generation or two of programmers. We would have a bunch of huge, overly complicated systems chugging along. We would also have a bunch of security flaws driving a high cost of software maintenance. As the situation started to get away from us, we might expect to see an increased demand for programmers and for cybersecurity experts. But throwing programmers at conceptually flawed systems is like leading another bayonet charge across no man’s land against a well supplied veteran outpost with numerous machine guns.

  2. Bezo is absolutely right. Eventually, he will retire. If I’m still alive when that happens, that’s the day I sell my Amazon stock.

  3. My crystal ball says Amazon will voluntarily split itself into separate companies. When things level out, stockholders will see more value in separate firms than in one single firm.

    The owners are happy to ride the stock appreciation and revenue growth while it lasts, but the time will come when greater value lies in a different direction.

    In the future people will talk about the XYZ company which was once part of the orignal Amazon. “Really? You mean asteroid mining started out as a bookstore? As my venerable ancestor always said, ‘God Bless the free market'”

    • The spawning might even be in sight.
      (HQ2A and 2B)
      Being too successful is attracting the wrong kind of attention so the other kind of “stock split” might be an option.

  4. Bezos is (probably purposefully) glossing over one key aspect of corporate longevity: diversification.
    He was trying to focus the troops so pointing out Amazon’s insurance policy wouldn’t have served his agenda but the fact is that a lot of Amazon’s valuation is due to the broad range of its interests.
    Underperformng in one sector or missing a trend here or there won’t be as deadly as it’s proven to be for countless single product companies.
    Since Amazon is really a consortium by now, it can afford a unit failure or two, much like IBM and Microsoft, the former well into its sixth generation through constant reinvention, the latter heading into its third generation firing on all cylinders.

    ADSers shouldn’t take too much heart from the headline: Amazon isn’t too big to fail but if it comes to that it’s going to be a long time falling and it’ll have ample time to recover from any missteps. It’s not going to happen any time soon.

    • The article does have some very good points, though.

      The revenue growth rate is unsustainable – and is approaching the limit. Amazon will eventually fall back to a more normal healthy retail growth rate of between 2% and 5%, even assuming consistent intelligence from their executive suite (never a guarantee, which is probably what Bezos was imparting to his people).

      I think that Jeff does see this, and is doing things to keep the company healthy through this very dangerous transition period. I note the elimination of stock options for lower level employees (compensated for with a rise in wages) – this will probably migrate slowly up the chain, as middle and upper management are weaned off of the expectation that they will get wealthy through stock options rather than short term compensation. (This move does have the effect of propping up that expectation for a bit longer, though, as value dilution of the options will be slowed.)

      You specifically cite Microsoft and IBM, which are indeed still going strong. They are doing so, however, by “reinventing” themselves from hot companies to steady performers (a task that IBM nearly bungled, by the way). You don’t buy MSFT or IBM these days in anticipation of selling it a couple years down the road for a healthy capital gain – you buy them for a reasonably assured income stream, and an expectation that you’ll get your investment back in real dollars when you do decide to sell the stock (assuming you don’t follow the herd of panicking bulls when the general market takes a dive, that is).

  5. I see Forbes needed ADS space filled again.

    Of course they can think of anything useful to say – so they’ve turned to a rather idiot ‘AI’:

    http://www.thepassivevoice.com/forbes-using-computer-generated-stories-instead-of-writers/

    and who can forget:

    http://www.thepassivevoice.com/amazon-should-replace-local-libraries-to-save-taxpayers-money/

    Quickly followed by:

    http://www.thepassivevoice.com/forbes-suggested-amazon-should-replace-libraries-and-people-arent-having-it/

    .

    It’s a coin toss between ‘You can’t make this sh1t up’ and “You can’t fix stupid’. 😉

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