October 18th, 2014

Amazon Through The Long Term

These days, my physical shopping is limited to grocery stores and lumberyards. Jeff Bezos has changed the way I buy almost everything. I have not been to a mall or a downtown shopping area in months. I don’t think I am alone and I don’t care to change.

Bezos and Amazon have accomplished this with relentlessly innovation and attention to what customers want. Their site is convenient and easy to use. The selection of goods is broad and appealing. Their customer service is exceptionally accommodating. The downside is waiting for delivery, which most people get used to. The upside is you can shop from almost anywhere and purchase almost anything.

I often hear that Amazon has such a large role that it is approaching a monopoly. With this, I differ.

Monopoly

Amazon is critically different from Standard Oil and AT&T, the two most prominent monopolies of the last century. In 1911 when Standard Oil was ruled an illegal monopoly, it had oil wells, refineries, and fuel distribution systems that would require massive capital and effort to reproduce. The same goes for AT&T’s telephony gear, transmission lines, and maintenance organization. Because they held an exclusive lock on critical infrastructure, these companies could charge whatever they felt like, be bonehead stupid, and still make huge profits.

Amazon, on the other hand, does not have special equipment. They have a web site for selling goods. So does eBay, Walmart, Home Depot, and many others. Amazon relies on generic infrastructure, computers and shipping operations that are used by almost every other industry. They have a distribution system, but other than warehousing, product delivery is executed by services like UPS, Federal Express and the US Postal Service, all services that are available to anyone.

Unlike monopolies of the past, Amazon’s strength is in ideas. Their site is the best and most convenient, because they are always experimenting, trying new concepts, refining what is already good. Their product line is the broadest, designed to appeal to the largest consumer market because they are always seeking new sources and goods. Their prices are consistently good, if not the best; because their supply chain gets the same care and innovation as their web site and they consistently negotiate optimal prices with their suppliers.

Ask this question: as a monopoly-buster, how would you break Amazon up? Standard Oil and AT&T were broken up into smaller companies to compete with each other. Amazon is not regional; it does not appear to be significantly organized in divisions beyond physical goods, downloadable goods, and web services. If Amazon were broken up into those segments, they would not compete with each other anyway.

Achilles’ Heel

But Amazon has an Achilles’ heel. The instant they run out of innovative steam, they will fade as quickly as Myspace. There is nothing to stop another company from taking their place as the consumer friendliest store on the planet because there is no monopoly on great ideas and drive to be the best. With advances in technology, it is easier than ever for a rival to overcome Amazon. They may last for decades. But they can always be replaced by the next company with vital ideas and ambitions.

Predicting how long Amazon will last is crystal ball work, which I avoid. But it is vulnerable and could be replaced in a few years by an ambitious and smart competitor when one appears. For that matter, the smart competitor may have already appeared. In 1995, do you suppose Sears was looking at Amazon as a threat?

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