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Business

Jeff Bezos is building Amazon into a killer tech industry competitor...armed with razor thin margins

Amazon is emerging as a major player in the convergence of the tech and media industries and its founder Jeff Bezos is gaining a lot of media attention...
Written by Tom Foremski, Contributor on

Jeff Bezos is getting a lot more attention these days from the media and it's for all the right reasons: he has a distinct vision and his success is hard earned.

I had the great pleasure of meeting Jeff Bezos a few years ago (above, with Matt Greeley CEO of BrightIdea) and I was very impressed. It was a casual conversation but surprisingly striking in many ways. He clearly loves challenging conventional wisdom and exploring contrarian business strategies.

Jeff Bezos spent many years in the media limelight more than a decade ago, he was one of the poster boys for the e-commerce revolution of the late 1990s. And AMZN found itself in the forefront of a very enthusiastic stock market bubble following Wall Street analyst Henry Blodgett's notorious prediction of a $400 target price, which it achieved in record time. It set off a two-year stampede, a rush by investors and companies to acquire a piece of the future, where fortunes would be made by e-commerce companies.

The bubble lasted a surprisingly long time but when it bust it almost bust AMZN too.

Jeff Bezos is gradually returning to the media spotlight. Although he never went away, there's clearly a renewed interest in him and his company. And it's driven by a vacuum in the media landscape, the media's need for a charismatic and successful tech business leader, especially one with a clear vision of the near future. Steve Jobs used to have that job and while Jeff Bezos is not Steve Jobs he does fit the media's role fairly well. Get used to seeing a lot more of Jeff Bezos.

The media loves personalities but there are few left in a tech industry. Ten years ago there were plenty of colorful characters leading Silicon Valley firms, stirring up the media and succeeding in drawing a lot of attention to the tech industry and its drive to drag us all into the future. Our current tech leadership is very bland and is in danger of becoming even blander--that's bad for markets.

Steve Jobs' death leaves a position open for the media's built-in desire to focus on a strong personality that communicates well, runs a successful business, and is driven by a disciplined vision of the future. Someone who has been around for a while rather than a boy wonder. It's an important job and Steve Jobs did it well: helping to drag us all into the future.

Jeff Bezos fits that role. As founder and CEO of Amazon he runs a vast chunk of global online commerce -- more than 40 per cent in the US and growing. And he is willing to take big risks on ventures such as the Kindle, plus cutting big Hollywood content deals.

What's even more impressive about Mr Bezos is that Amazon's success is drawn from very slim profit margins. Steve Jobs led an Apple with huge profit margins and was able to stash a massive cash hoard.

Same for Bill Gates, Larry Ellison, and Larry Page - lucrative profit margins with plenty of cash in the bank -- it help gloss over many mistakes and bad decisions. Mr Bezos doesn't have the luxury of a big float, he has to be right about key decisions the first time -- not the second or third time.

Here's AMZN's operating profit margin: 2.47% in its most recent quarter.

GOOG's is 33%, AAPL -- 31%, MSFT -- 39%.

AMZN has to be successful on less than one-tenth of the operating profit margins of these tech leaders. That's impressive.

Amazon's slim margins are a key component of Mr Bezos' business strategy in keeping competition away: how low can you go? It's a lot easier to take on an incumbent when they hold a price umbrella high above your head. AMZN forces a competitor to fight in the gutter over margins that are rounding errors for others.

Amazon can thrive on profits that none of the tech leaders could bear for longer than a quarter.

It's also an effective way to discourage hostile takeovers. Estimates of Apple's cash and market securities holdings at the end of 2011 are $100 billion -- more than enough to make a generous bid for AMZN, with a market cap of $82 billion.

But AMZN's profit margins are so thin they would kill AAPL's margins, it's shareholders wouldn't never let it happen. The same is true for many other companies that might want to buy AMZN. Its razor-thin margins are a better protection against being swallowed up than any poison pill provision.

So how do you compete against a monster company that can thrive on single digit profit margins and can't be acquired? It's a brilliant business strategy.

Mr Bezos has a distinct vision of the future especially around the rapidly converging worlds of tech and media. I've often written about how Silicon Valley is becoming a Media Valley and Amazon is very much in the lead pack, (despite being in Seattle). Amazon is very much a (highly) technology enabled media company, heavy on the tech -- just like Google, Facebook, eBay, Yahoo!, AOL, and increasingly Microsoft, plus thousands of startups.

The renewed media interest in Jeff Bezos is also helping to refurbish the image of Amazon--from being a bit tarnished and an unexciting place to work, into a cool place to be-- which is hugely important in attracting top talent.

Here's a recent example of Amazon's new hipness, by Matt Rosoff: Why Everybody In Seattle Suddenly Wants To Work For Amazon

Over the New Year's holiday, I visited Seattle for the first time since late 2010. A bunch of people in the tech scene told me the same thing: Amazon is THE place to work now.

Here are some of the reasons people want to work at Amazon:

- It has a great looking new campus in a hip district of Seattle, compared with its former HQ in an old VA Hospital.

- Amazon Web Services is hugely successful -- it is the top choice of the coolest Silicon Valley and New York city startups.

- Amazon is rapidly becoming a media company and that's sexy.

- Kindle tablets are succeeding where Tablet makers have failed and that means Amazon can build a significant gadget business, maybe even a smart phone business too.

- Amazon is hiring a lot of people -- 8,000 worldwide in its most recent quarter. Momentum is a great boost for company morale.

- The most important reason to work at Amazon is that there are a lot of cutting edge projects underway and that's the number 1 way to recruit top software engineers. Forget perks like top chefs in the canteen, the best engineers want to work at places where they can hone their skills on great projects.

Jeff Bezos is very high on my very short 2012 CEO Watch list. So is Larry Page but more on him later.


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