Amazon's Strategy Problem

I used to write about Amazon often.  What's not to like - a prototypical fast growing entrepreneurial concern that created new markets and beat up the incumbents.  Nowadays, I just can't seem figure the company out.  I looked to Amazon as a big box category killer, but its' investments in new businesses and out of scope areas leaves me scratching my head a bit.  What really is Amazon's strategy?

I thought their ultimate desire was to take on Walmart.  And they were successful at it.  They surprised many by successfully building out efficient distribution capabilities.  While traditional retailers were good with logistics, they were slow to adapt to ecommerce.  Amazon has both.  In addition, online competitors were no match for Amazon's low pricing and world-class customer service experience.  They simply outperformed online and bricks and mortar competitors while taking share from both.  All of this success was compounded by the 15% overall annual growth in the e-commerce industry.  Carving out a greater piece of the pie in a growing market is a great recipe for success. So why is Amazon changing its course?

Traditional ecommerce is now on the backburner. Apple, Netflix and other projects seem to be on Bezos' mind.   I realize that digital products may pay off over time given their better margins, but isn't it a distraction from their core business?  Amazon Web Services (AWS) is a great growth story, but what does it have to do with diaper sales ?  From buying companies that build distribution robots to its recent decision to open an online bank, they seem to invest time and money into anything and everything.  

Business Schools tell you to pick a strategy and focus on building strengths and a sustainable advantage around it.  Trying to to do too much could leave a firm "stuck in the middle."  Apparently Jeff Bezos never got the message.  Does Amazon have the management discipline and capability to run seemingly disparate set of businesses?  These are not separate portfolio companies that run independently - they all seem to tie in somehow to Amazon's special sauce. I just can't figure out how.

Unseating Walmart is a full-time job and retailers are catching up (Walmart's online and site to store capability is really good).  Amazon's sales tax advantage is gone.  Online competitors are better funded and managed now.  My anecdotal experience on Amazon's site shows prices creeping up and the service experience dropping.  The sky is not falling, but Amazon does seem to be putting its core business at risk by delving into other endeavors. 

One thing I can say is that it is hard to bet against Amazon.  Their recent operating loss for the first time since 2003 has spooked many investors, but makes no difference in the long run.  Amazon has consistently defied the odds for so many years that quarterly results and business school textbooks may not apply in the end.  With its execution so good in core retail, I thought that Amazon's Seattle Headquarters should point at Bentonville not Cupertino.  Perhaps Bezos' quest for worldwide domination leaves room for both - its just hard to see a clear path to it from here.

The Post-PC World?

With everyone now claiming the death of the personal computer, it is hard to swim against a moving tide.  According to a recent WSJ article, PC shipments may have hit its peak and actually decline this year for the first time in history.  Dell and HP stock prices are at ten year lows.  Tablets, phones, and all things smart have been growing at a torrid pace.  All signs point to the inevitable end of an era; so why, then, am I so skeptical? Is the Atma Business Blog trying to "party like its 1999"?

Make no mistake, PC manufacturers are being squeezed and will continue to be so.  On the one end there is mass move to smarter, smaller devices.  On the other end, Asian manufacturers such as Acer and Lenovo are dropping prices and stealing share from incumbents.  In the enterprise space, cloud based solutions and the growth of data centers is diminishing the need for computing capacity on a local level.  We're not dealing with a growth story here.    

However, the buzz for the new devices is probably overdone right now since they are in the early stages (remember when PCs were supposed to replace servers?).  Even in today's "smart" world, PC's are still the most intelligent devices out there.  PCs provide more computing power, storage, and access to software applications.  Tablets have great functionality but do less.  Whether it be enterprise level data mining or consumer internet shopping, the need for horsepower and the desire to do more will continue to grow.  Also, as I alluded to in a post a few years ago, we will not be satisfied with keeping all of our valuables exclusively in the hands of third-party cloud providers and will require some level of local storage . 
 
Tablets and other gadgets are nice to have but seem to be incremental to PCs.  Mass use of the internet is still best done on a PC.  While Twitter gives us instant information, it is no substitute for the New York Times. Good luck trying to utilize your CRM or ERP system in a meaningful way through a tablet.  And to this day, software "apps" like Powerpoint are head and shoulders above iOs "apps."   Perhaps households and corporations will need fewer PCs in the future, but I don't they can get by without them. 

What will change is how tomorrow's PCs will look and who will bring them to us.  To this day, I still can't figure out how HP and Dell missed tablets and smartphones.  How did Intel give away low power processing chips to ARM ? Certainly Innovator's Dilemma was at play.  Perhaps manufacturers like Samsung or Apple who seem to have successfully changed their products with the times will continue to gain share.  There also seems to be an unmet need in which new players could emerge through innovation.

Expect a convergence of the things we like from a PC with the UI and ease of smart devices.  Today's gadgets appeal to our "wow" need rather than taking a comprehensive approach.  The need for intelligence and personal computing will continue to rise and tomorrow's PC's will need to reflect that need. The next generation will be more robust and remain the center of our computing needs.  Call me crazy, but  I wouldn't be surprised to start seeing VC investment into the next generation of PCs. And perhaps those entrepreneurs will take their sales pitch on the road in their little red corvette.   

The IPO Quandry

While only a few have the luxury to debate whether it should file an IPO,  it is a decision that should not be taken lightly.  The monetary benefits come with numerous downsides such as constant analyst scrutiny, restrictive disclosure and governance, and an overall focus on short-term financial results.  Facebook, which had no need for the cash or extra distractions, is a recent example of a company that is probably second guessing its decision.  If there are so many drawbacks, why are all the IPO-worthy candidates going forward with it?   Do these companies have other options besides a public equity offering ?

Firstly, thanks to the recent JOBS act, Facebook did not have to go public.  It chose this route for probably the same reasons that other similarly situated companies do.  Top talent (from Sandberg on down) were poached from other Valley successes with the promise of liquidity and Menlo Park real estate.  The VC investors were silently pushing to  pad their fund returns.  Perhaps a little envy from the competition either going out or ballooning in market value weighed in.  Let's face it, a $100B stock offering is hard to pass up in many ways. But as Fortune's Dan Primack eloquently put it, going public made Facebook "uncool."

Many of the most successful companies in the world have paved their own way while staying out of the public limelight. Of the top privately held companies (excluding state run and PE gone private deals), many, such as Ikea and Koch, are still owned and operated by the founding family.  They have been able to maintain their culture, quality, and ultimate corporate mission while realizing growth comparable (or better) to publicly traded peers.  Some, such as Cargill, have even tapped public debt markets while keeping their equity off limits.  The $23B Wrigley acquisition by Mars shows private companies' wherwithal to execute blockbuster deals (many public deals are cash/debt anyway).  While difficult to keep stakeholder interests aligned as private companies experience rapid growth, many have shown success in doing so.

Some new trends may help companies stay private.  Crowdfunding's torrid growth on the early stage end  may help avoid VC-mandated exits.  For later stage companies, private exchanges such as SecondMarket are becoming widely used  platforms for individual stock transactions (in fact FB was valued more privately than it is today).  I wonder if IPO-tepid companies like Google would have delayed or cancelled IPOs if these markets were well established at that time.   Private equity is still a traditional option but still requires to play by the five year exit time horizon rules.  Debt instruments work for larger growth companies, but smaller ones either can't get it or require risky personal guarantees.  And even if going public ended up being a mistake, the excess money on the sidelines creates opportunities for founders to buy back their company  as Best Buy's Dick Schultze is currently attempting to do.

The IPO is a logical exit for many companies who are looking for cash or easily tradeable currency.   Trulia's first day pop today shows that the end of the IPO is not happening anytime soon.  Perhaps those that chose to take the long view for their companies will be less inclined  feel less to do so thanks to recent debacles like FB or expensive Sarbanes-Oxley requirements.  Maybe the democratization of information and the availability of alternate market vehicles will bring required investor returns low enough to avoid the pressure of going public.  Since the Silicon Valley techies hate the public markets so much, you would think their uber-creativity would have brought some innovative alternatives.   But then again, why would all the VC firms be on Sand Hill Road?

The Entrepreneurs of Sport

Ever since I read Moneyball many years ago, I could not help but to seek parallels between the sports world and business.  In Michael Lewis' chronicle of the Oakland A's baseball club,  GM Billy Beane used novel analytics and an outsider approach to build a perennial winner despite having 1/3 of the payroll of teams such as the Yankees.  The compelling tale reads like an entrepreneur's blueprint for success; a cash-strapped upstart completely changes the industry through innovation and creativity.  Are there other examples of game-changing entrepreneurs in the cut-throat world of big sports?

Certainly one of the biggest changes in recent history is the almost instantaneous access to almost any sport thanks to the rise of ESPN.  Similar to other founders, Bill Rasmussen turned his personal desire (Connecticut Sports) into a businesses phenomenon.  Several early moves, such as the negotiations of NCAA basketball rights and launch of SportsCenter, turned the fledgling network into an almost overnight success.  Like other startups, unfortunately, the need for early cash diluted Rasmussen's power and equity forcing him out well before the real money came in.  The rest of the story is pretty well documented as ESPN has become the most influential network in modern day sports.

Due to the strict revenue share rules, it is hard to find innovators in the greatest sports cash machine that is the NFL.  Robert Kraft's unorthodox acquisition and success of the New England Patriots might be the closest thing.  Starting with an option to buy the adjacent land next to the Pats' old stadium, he later acquired the stadium and eventually the team through a decade long series of transactions.  Smart personnel moves (Brady and Bellichek in 2000) and a unique focus on the collective team versus star players (managed like an interchangeable "portfolio of 53 stocks") has led the team to three super bowl titles and the best winning percentage in the league during his ownership.  Oh by the way, it doesn't hurt that the team is worth at least ten times more than Kraft's initial purchase price.

Kraft's story was a bit unusual as the traditional sports franchise ownership story is pretty uninspiring.   A billionaire hobby owner buys the team at a premium using debt, raises ticket prices, and throws alot of cash at the team in hopes for championships.  Sometimes this results in an increase in franchise value (Mavericks, Yankees) and other times they land in bankruptcy (Dodgers, Rangers).  The most recent example of this is Manchester United's IPO where it is still too early to assess whether the Glazer's investment will ultimately pay off.  But in the end, it usually doesn't matter for the billionaire owner who has made their money elsewhere.

Hobby owners aside, from apparel juggernauts we all know such as Nike to the latest social media sport startups, savvy entrepreneurs have channeled their unbridaled passion for sport into thriving businesses throughout the years.  Of course, just as in the business world, there have been some slip ups along the way (remember the USFL?).  As power continues to shift to fewer and fewer hands (don't get me started on the BCS), it will be interesting to see the creative destruction that new startups can create as a counterbalance. Certainly the passion for sport will not dissipate which should keep the business side thriving - let's just hope future Billy Beane's continue to emerge among the clout of billion dollar TV deals.     

Can Entrepreneurs Multitask Companies ?

Entrepreneurs that have the capacity to change the world are hard to come by.   When they do, the smart money and resources tend to follow them in droves.   Two of my favorite ones that I've tracked for quite some time, Jack Dorsey and Elon Musk, have a good shot at transforming the entire landscape of media, automotive, energy, and financial sectors. While ambitious to say the least, they are both attempting this feat by leading multiple companies at the same time.  Are entrepreneurs in such short supply that we rely on them to take on multiple engagements?  And is it possible for them to effectively do so?

As a cofounder of Paypal, Elon Musk has made enough to spend it all in hopes of bringing space exploration and sustainable energy platforms to the masses.  To do so, he is attempting to build three multi-billion dollar businesses as the head of Tesla Motors, SpaceX, and SolarCity.   He generally splits his day between the companies;  he is notorious for being a stickler for details which makes the task even more daunting.  So how is he doing?  He's had his share of ups and downs but showing some signs of progress.  Earlier this year, he announced a successful rocket launch into space as well as Tesla's completion of significant safety test hurdles for its new electric sedan within days of each other.  Certainly too early to call (all in early stage, pre-profit), but Musk is showing no signs of restraint.  No wonder he was the inspiration for John Favreau's "Iron Man"  in the recent movie.

While no superhero, Jack Dorsey made his name in a big way as co-founder of Twitter.  His latest venture Square is a frontrunner in the white-hot mobile payment space.  Shortly after departing for his new company, Twitter experienced a major management and technological  implosion which almost derailed it.  Now Dorsey is back at the helm, leading both concerns.  In public, he articulates his vision and passion for both in great depth, but some inside think the dual role is taking a toll on the companies (see recent Fortune article  on Square employee frustration). To be sure, the imbedded large players that Twitter and Square both look to unseat have significant money and resources invested in competing with them.  Dorsey will need to successfully thwart the likes of Google, Facebook, Paypal, and Visa all at the same time.

Is there any precedent to Dorsey and Musk's attempt ?  Let's start from the top.  Steve Jobs was very successful in multiple endeavors, but not all at once.  Pixar's big splash occured between Jobs' stints at Apple; the IPOD and IPhone did not come out at the same time given different technologies and market strategies required.  It is debatable, but I don't think he would have been able  upend animation, PC, phone, and the music industry all at the same time.  In looking through all the major industrialists, it is hard to find one that has done so (or even attempted).  Certainly inventors throughout time have created multiple blockbuster innovations, but did not commercialize them into full fledged businesses.

 In today's laser quick internet pace, it is much more plausible than before.  Technology allows for scalability and virtualization and sophisticated investor backing provides management expertise and an earlier way out.  Perhaps the role of these entrepreneurs have changed with the times.  Maybe we don't need them to build huge businesses like Henry Ford did, but rather to incubate new ideas for experienced business management teams to grow.  I  tend to think you lose quite a bit of the cultural DNA when you separate a founder from his or her business (it didn't work for Apple).   Call me old fashioned, but isn't building a space-age travel company enough for one mere mortal?  Apparently not.

Managed Care's ACO Scramble

Health reform is upon us.   As managed care companies struggle to adjust their business models to compensate, there is a frantic race to become integrated service providers by moving downstream.  They are making blockbuster acquisitions in the consumer and provider care space in order to move towards "accountable care organization" models that bring together patient care, reimbursement, and facilities all under one roof.  Will these managed care companies be able to pull it off? And more importantly, is it better for all of us in the end?

The deal activity is flourishing .  Wellpoint has announced several recent acquisitions including direct to consumer company 1-800 Contacts.  Examples such as Humana's deal for urgent care provider Concentra and UnitedHealth's purchase of physician network Monarch HealthCare further illustrate this growing trend.  On paper, these deals make a lot of sense.  If you control the consumer or provider, you can cut out inefficiencies, control costs, and reign in the current layers of external profit margins.  The downside is that they run the risk of alienating their third party panel in addition to the significant execution risk of historically pure play insurers successfully moving into patient care.  There is very little choice but to try however;  the stand-alone insurer model will face meaningful price reductions as part of the health care overhaul. 

But can this be good for end users?  On the one hand, these integrated models can help us move away from the current fee for service model that seems to be the underlying flaw of today's health care system.  It makes no sense to pay per procedure without any concern for medical results. By merging patient care with reimbursement vehicles, there is a greater incentive for preventative care measures and alignment with patient interests.  On the other hand, Americans are not accustomed to a closed network's perceived lack of choice.  The HMO model didn't work in the 80's and there is not a mad rush to go north of the border for medical treatment. 

Many think the integrated approach is the way to go and point to Kaiser Permanante as the poster child.  Kaiser's roughly 9m lives have been utilizing the provider's own doctors, hospitals, and insurance plans for many years now with many clinical measures of success.  They have yielded an improvement in patient care, a decrease in costs and emergency care, and a relatively healthy profit margin to boot.  Not having any firsthand experience with Kaiser, I can not comment on how the model is working from a consumer perspective.  But if the Kaiser approach is the right model, is it scalable?  And if so, isn't it the similar to the nationalized health care policies that so many countries are struggling with?

Although some of the latest moves by large managed care companies are potentially very interesting if done right, I am skeptical that all of them will be able to successfully transform from actuarial based businesses to ones that actually take care of patients. It almost seems to make sense to move from the other direction (ie. patient care to insurance), but providers lack the necessary resources as they are smaller and more regional in nature.  If Kaiser and the ACO model can yield even marginal improvements to the cost side with improved medical results, it would be vastly better than the unsustainable course of our current system.  And of course, amidst all the chaos and uncertainty, look for shareholders of provider and consumer networks to continue to cash in.

Was I right?

As Atma Business Blog recently eclipsed its two year anniversary mark, I thought it would be interesting to take a look back at how its predictions have fared thus far (yes a bit narcissistic I know).  First and foremost, I would like to thank all of my readers who have been with me since 2010 (Is M&A still evil?) and those that have only recently been able to bear my ramblings.  The most rewarding element for me has been the interesting dialogue, comments, and push back generated which has changed my viewpoints on many of the topics addressed.  It's also been nice to be published on some leading business sites along the way.  On to the results:

Monetization versus Free: I predicted the demise of Netflix's power as the content guys gain more courage to charge.  This has happened much quicker than I expected.  Even Apple hasn't cracked the negotiations code with TV as their offerings have been less than modest so far.  More broadly, I wrote about the end of our honeymoon of all things free.  Everything from apps to entertainment are moving to pay-based models.  There is still room to go.  Most news content is still free; powerful services such as Maps and service tools we have taken for granted might require a credit card soon.  I still can't figure out how FB or app developers can monetize enough.  Can you imagine a monthly fee to remain a LinkedIn member ?

Meaningful Innovators: An area of particular passion for me, I've spent many characters on true disruptors that not only changed industries but also broader stakeholders that they affect.  All but 2 of Fortune's Top Entrepreneurs (sorry FedEx, Infosys for the oversight) have been featured in my posts in varying contexts (ie. Bill Gates' pledge).  I continue to seek those that leverage their success for the greater good and bring significant consumer-focused improvement to a given market. Continue to send me leads!

Transactions and Financial Sponsors: I've written about the perils and advantages of M&A and those that drive them.  Large scale transactions continue to fail while focused ones have a better chance at success.  Given the backdrop of slowing earnings and long-term debt of the country, expect the traditional tools of leverage and cluster investing to not be enough to generate returns for investment funds.  Since the Facebook disaster, there has not been an IPO executed.  It's not a bubble, I promise.

Social Entrepreneurs:  Traditional businesses, non-profits, and individual entrepreneurs all have an obligation and ability to lift society through efficient market-driven ways.  From microfinance to fair trade, I've written about many of these innovative efforts.  I was disappointed to learn about the lack of tech philanthropists, but happy to see "feel good" concepts being more integrated into daily transactions.  The internet is the ultimate scalable tool, let's use it to the fullest extent we can.  In addition, building sustainable platforms is just good business.

Other Notes:  I can't figure Amazon out.  It caved faster than I expected on sales taxes. I thought it was well equipped to swing at Walmart, but it seems to have refocused on digital products.  I loved GroupOnomics but its model has had less of an impact than I expected so far.  I still don't have clear visibility into the next US jobs engine or how to retrain the existing employee base, but let's hope our core strengths (innovation, entrepreneurship) can carry us beyond the strong headwinds that are coming our way.

In the end, it's about creative entrepreneurs that take on the oligarchs, large companies that eclipse the innovator's dilemma, and capitalistic efforts that yield powerful businesses and meaningful benefits to society.  I will continue to write along these lines as I hope to bring unique, unbiased perspectives on current business events and trends.  In return, I only have three requests from my reader base:  1) Do not spam my posts (rather pass along the interesting ones) 2) Continue to send me ideas and suggestions on content 3) Send ideas on outlets to approach or ways to market my site to a wider audience (since I have no idea on how to do so).   There you have it - I have now linked to more than 1/3 of my articles to date.  Thanks for reading.

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