A spaceship to conquer the universe
Jeff Bezos has a boundless passion for Star Trek. Last July he showed up on the set of Star Teck Beyond for a guest appearance as an anonymous alien. It is said that he arrived on the set with nine bodyguards and three limousines and that he waited all day for the scene to shoot. The passion for the epic television series led him to found Blue Origin, a company owned by Bezos himself, which aims to practice space tourism and perhaps, in the future, colonize the universe. Space exploration is a passion Bezos shares with other luxury visionaries like Elon Musk and Sir Richard Branson. For the moment, Bezos' spaceship, which is called Amazon, is colonizing planet Earth at a furious pace.
Perhaps the fever for space enterprises has also shaped Amazon's entrepreneurial thinking and action. A company that thinks and acts in the long term and is not at all captivated by the sirens of shortism that Bezos quiets with his explosive laughter.
Now Amazon's long-term vision is starting to bear fruit even among the most wary and censoring Wall Street analysts. Since the beginning of 2015, Amazon's shares have grown by 173% bringing the capitalization to 400 billion dollars which places it in fifth place among the companies with the highest stock market value. Morgan Stanley expects growth of 16% annually between 2016 and 2025, more sustained than that of Google and Facebook. Credit Suisse estimates that if Amazon maintains 15% growth, it will pull off the "fastest, longest, largest, most aggressive large-company expansion in the history of modern business."
Beyond e-commerce
In 2017, Amazon will invest $4,5 billion in content for television and cinema, more than HBO and Netflix. Amazon Web Service, the set of cloud computing services for third parties, reached 2016 billion in revenues in 12 with an annual increase of 150% since 2014. The e-commerce platform, made available to third parties, still generates double of AWS revenue. Amazon can also easily expand into other sectors such as logistics, advertising, big data and so on. Sir Martin Sorrell, the boss of WPP which is the largest advertising agency in the world, recently declared “Do you know what worries me the most when I fall asleep in the evening and wake up in the morning? It's Amazon!” Sorell himself invented the term to define relationships with tech companies like Amazon: frenemy (friend+enemy). For many companies, Amazon is a marketplace platform on which to develop their business and at the same time a formidable and resolute competitor of that same business. Amazon has declared that there are more than 100 companies that develop an activity on its marketplace that generates revenues exceeding 100 dollars. Some analysts speculate that Amazon's future is that of utilities.
Clouds on the horizon
Not only are the skies clear and clear above the Amazon, there are also clouds that are gathering menacingly. There is the hostility of Donald Trump who begins to no longer suffer from the watchdog of the Washington Post, which, in 2013, Bezos bought from the historic Graham family. A Washington Post investigation led to the resignation of Michael Flynn, Trump's national adviser. According to "Twitter's Hemingway", as Trump defines himself aspiring to the Nobel Prize for literature, Bezos has a huge antitrust problem and it could be precisely the antitrust that is stopping Amazon's race, as happened with Microsoft.
The magazine "The Economist" has dedicated two extensive services to Amazon from which we have obtained the information in the previous paragraphs. One of these, Amazon Empire, well summarizes the magical moment of the company founded by Bezos. We offer it to our readers in the Italian translation by John Akwood. Welcome aboard the Amazon enterprise.
It's just the beginning
Amazon is an amazing enterprise. For every dollar spent online in the US, Amazon gets half of it. It is the world's leading cloud computing provider. Amazon will spend twice as much as HBO on TV content this year. Among the products marketed under its own brand are batteries, almonds, clothes and speakers to be connected to virtual voice assistance devices capable of controlling, among other things, the switching on and off of lights and garden sprinklers.
Amazon investors are operating on the premise that we are just getting started. Its share price has soared 2015% since the end of 173, seven times the previous year and 12 times the average increase of the S&P 500 index. At $400 million, it is the fifth most capitalized company in the world. . Never has a company recorded such a high capitalization with such low profits: 92% of its value is due to profit expectations that can only occur after 2020.
That's because investors are predicting dramatic revenue growth from $136 billion in 2016 to half a trillion dollars over the next decade. There is hope that Amazon will become the highest profit generating company of any corporation. There is a lot of skepticism about it: Amazon has to grow faster than any other large company in modern times to justify this assessment. Can you reasonably do it?
It is easy to identify some difficulties. Rivals do not stand still. Microsoft has ambitious plans in cloud computing; Walmart already has revenues close to $500 billion and is strengthening its online presence. If something happens to Jeff Bezos, the founder and boss of Amazon, the vacuum will be exceptionally difficult to fill. But the more glaring question is how many chances does Amazon have of achieving an unprecedented goal?
A new kind of approach
Amazon's growth is largely due to the unusual two-sided approach to the life of a business. The first of these is the weather. In an age where the routine is to work for short-term results, Amazon is resolutely focused on the long-term. Bezos does not fail to underline the importance of developing Amazon's two main businesses, e-commerce and cloud computing service (AWS). In the e-commerce sector, the more consumers Amazon can bring to their store, the more retailers want to sell on it. This brings Amazon more resources for new services such as two-hour delivery or audio and video streaming which, in turn, attracts new consumers. The third virtuous circle begins to revolve around Alexa, if it is increasingly used by consumers. Thus developers will be stimulated to create more and more services.
As long as shareholders maintain their faith in this model, Amazon's sky-high valuation looks like a self-fulfilling prophecy. The company will continue to invest and these investments will help make it stronger. That confidence is backed up by Amazon's record, though it's had its fair share of problems — its attempt to build a smartphone was a failure. But the business is starting to grind for cash. Last year cash flow (before investments) was 16 billion, more than four times the level reached five years ago.
If Amazon's approach to growth is unusual, so is the sheer diversity of its businesses. The list of potential competitors, as stated in its annual report, includes manufacturing companies, search engines, social networks, food industries, service producers and media of all kinds. Such a breadth of business is more suited to a conglomerate than a retailer; which makes Amazon's stock valuation even more surprising: stock markets generally apply a "conglomerate discount" that reflects their objective inefficiencies.
Many of these services support Amazon's expansion as well as that of other businesses. The obvious example is AWS, which powers Amazon's operations as well as other enterprises. But Amazon rents space to others in its fulfillment centres. In Kentucky, a freight handling center with a fleet of aircraft is under construction with an investment of 1,5 billion dollars. Amazon has also launched a new technology, Amazon Go, the world's first cashless supermarket. It is also experimenting with drones for home deliveries. Presumably these new tools will be made available to other potential customers. Some think Amazon could transform itself into a new kind of utility providing infrastructure for commerce, from computing power to payments and logistics.
A giant who cannot hide
And therein lies the real problem with expectations on Amazon. If he manages to complete this program of his, it will certainly attract the attention of the regulators. An antitrust action is unlikely at the moment. Amazon is still not the largest retailer, the most mature market in America. Antitrust intervenes when a situation affects consumers and prices. Seen from this point of view, Amazon appears outside this sphere. Consumers love Amazon: according to a Harris survey it is the most highly regarded company in America. Plus AWS is a boon for startups.
But the more it grows, the more the fever for its power rises. On a purely antitrust level, this begs the question: if it can make as much money as investors expect, a rough calculation estimates that its earnings could be worth the equivalent of 25% of the sum of all the profits of listed Western companies in the media and retail area. But regulators are changing their approach to the technology. In Europe, Google is under investigation because it tightens its grip on adjacent businesses. Digital platforms' immunity from legal liability for their businesses — such as Facebook posting inflammatory content or framing drivers for Uber — is under intense scrutiny.
Amazon's business model will push regulators to think differently. Investors are pricing Amazon's growth in terms of profits, which makes predatory pricing all the more attractive. In the future, businesses will increasingly depend on the tools provided by their biggest competitor. If Amazon becomes a utility for commerce, it will need to be regulated as such. Shareholders are right to trust in Amazon's potential. But her success will bring her up against an even bigger beast, the government.
