Special permission from shareholders to ignore short-term results - leads to an uneven playing field with competitors
Here is a company that confounds the most popular tenet of corporate wisdom - that the maximization of shareholder value should be the most urgent and immediate concern of management. Amazon takes a radically different approach – obsessing over the customer, and letting everything else fall into place. This is the company that aspires to be “the earth’s most customer-centric company”. You can read the latest letter to shareholders here for instances of how customer-focussed the company is. In other words, Amazon has the freedom to ignore short-term profits - which act like a leash constraining all other companies. Why, even mighty Apple’s share price took a beating in 2013 because investors turned pessimistic about the company’s profit margins in the wake of the threat from Android. Amazon is the only large company in the world whose shareholders cheer merrily even after the company reports successive quarters of losses.
This makes it an uneven playing field between Amazon and its competitors.
Observers have long puzzled over Amazon's repeated moves into uncharted territory. But should they?
Amazon was originally an online bookstore and nothing else. Over a period of time it has morphed unrecognizably from a bookstore into an anything and everything store. Today you can buy books, movies, diapers, toiletries, internet infrastructure and computing power (Amazon Web Services), and just about everything from this company. People have struggled to understand the logic behind the company’s merry moves into every conceivable arm of human activity. But is there actually a common thread to all of its moves over the last twenty years? Of course there is…..
The ultimate goal is to take a transaction fee out of every conceivable economic activity
All economic activities have a chain of intermediaries that link the producer and the consumer. These intermediaries provide various kinds of services, for example, storage, transportation, delivery, and all manner of value-added services. What Amazon is trying to do, is to completely wipe out this chain of intermediaries and implant itself as the sole intermediary between the producer and the consumer of any product. Now that is truly scary.
It is easier to accomplish this in some industries than others. In general, it is easy to disrupt media industries - books, music, videos etc because these industries have practically no storage costs for each marginal unit of product. And in books, for example, there are only two truly indispensable participants – the reader and the writer. Everyone else in the book business is dispensable. Editors are dispensable. Publishers are dispensable. No wonder Amazon started out by tearing apart the easiest industry to disrupt – books, because here is where the intermediaries are the most vulnerable. It has subsequently gone on to replace intermediaries in other industries. If you look at it this way, all of Amazon's disparate businesses have a similar strain.
If every economic activity is like a superhighway, then Amazon is taking over the maintenance and management of each and every superhighway in exchange for a small toll to be paid by the users. Amazon makes travel on this superhighway a truly enjoyable experience for all participants. In return, it receives a small cut from every vehicle that travels on the highway, i.e. a portion of the profits of every economic activity conducted on the face of this earth. Isn’t that terrifying!
Nothing is inconceivable then. I won’t be surprised if Amazon gets into banking and financial services. Or, if it starts delivering cars and industrial machinery to customers. No industry is off-limits. Imagine a world where every economic activity is controlled by a single company. That would be too much power in the hands of one company. Of course, regulators would not allow that to happen. Amazon would be broken up if it acquires monopoly power by becoming too large in all possible industries. However, this is quite a likely scenario unless regulators intervene.
In short, Amazon is frightening because it is on its way to controlling every economic activity in the world. Next week, we’ll see why Google is one of the scariest companies in the world.
This article is based on the information that is readily available. I have no information about Chinese companies. A portrayal of the future devoid of dominant Chinese companies may not be an entirely accurate portrayal because -
1. China has one-sixth of the world’s population, and has several large companies about which little is known. To quote specific numbers, there are ten Chinese companies in the Forbes list of top 100 companies by largest market cap. Many of these are banks.
2. Alibaba (the Chinese counterpart of e-Bay) which is having an IPO at around $130 bn – which puts it at a size below Amazon, but Alibaba was already doing a gross merchandise value of $170 bn in 2012 – when Amazon had a gmv of only $92 bn (approx calculation – Amazon operates both a market place and a direct-selling operation).
3. China’s rising status as an economic power, and the unified backing of the state for most of these behemoths means that these companies are going to grow faster than their global peers.
- Shyam Sunder Ramakrishnan.
Read other articles from the knowledge cafe here.
Read other articles by Shyam Sunder Ramakrishnan here.
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