Wednesday, August 28, 2013

Questions about Amazon

Vacation was wonderful, and now it's back to preparations for the new academic year... as well as a return to blogging.  As I'm catching up on various business news, I began thinking a great deal about the future of Amazon.  I have a few questions for readers to ponder:

1.  Will Amazon reach a point of  diseconomies of scale and scope sooner rather than later?   Many firms strive to achieve the benefits of size and scope, hoping it will juice their profit margins and overall return on invested capital.  At some point, though, size and scope become a handicap rather than a strength.   The complexity of managing a large, multi-business enterprise becomes problematic.  As we watch Amazon, as well as its founder Jeff Bezos, moving into more and more lines of business, one has to wonder whether the company will reach that point of diseconomies BEFORE it ever generates strong profit.  For years (17 years, in fact), investors have bet on Amazon, in hopes that its strategy would eventually yield high profits.  They have been very patient, incredibly so in fact.   What if the profits never materialize because Amazon gets too big and complex to manage?  I'm not predicting this fate, but I am wondering about how thin Bezos may become stretched as the company expands, and as he engages in other ventures such as the Washington Post.

2.  What exactly is the Amazon business model, and how new is it?    I read the other day that Amazon Prime accounts for a significant share of the company's rather thin profits.   That reminded of another business model.  Think about Costco.   The successful company makes a big chunk of its money from the membership fee.  Amazon Prime is essentially the membership fee.  In other words, Amazon's business model resembles Costco much more so than a traditional retailer.   Most warehouse clubs operate with very thin margins, and they use the membership fee as their profit engine.  Amazon may be the same, more similar to brick-and-mortar retail than many have imagined.

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