It has been over two decades since Amazon (NASDAQ:AMZN) launched the initial version of its e-commerce website. Amazon revenue has now grown to $74.5 billion as of last year and it has established itself as the e-commerce behemoth. The company has been at the forefront of a lot of innovative products and services. It was one of the earliest entrants in the cloud space. With Amazon earnings in the negative as of last quarter (Q3 2014), we look at some of the Amazon failures. Embracing failures, Jeff Bezos, remarked in the last Business Insider Conference in New York:
“I’ve made billions of dollars of failures at amazon.com. Literally”
The fire phone marked the entry of Amazon in the smartphone arena but failed to enthuse the critics as well as the consumers. There were several issues like heating of the product and poor battery life. The pricing of the product also was a major error. Priced at $199 the fire phone secured AT&T as its single distributor. The phone was priced like the premium phones in the market released by Apple (NASDAQ:AAPL) and Samsung despite having no revolutionary design or features. Finally Amazon accepted its mistake which led to a fire sale of the product and the price reduced from $199 to 99 cents within 45 days of the release. Amazon had to write off $170 million in unsold inventories and supplier contracts. The consumer devices team in Amazon faced flak but some of them deflected the blame to the ambitions of Amazon’s chief Jeff Bezos.
After the initial euphoric hype and customer purchases of the Kindle Fire, the device sales fell off the cliff. The market share of Kindle Fire in the tablet market fell from 17% in Q4 2011 to a mere 4% in Q1 2012. One of the main reasons why Amazon was interested in making these products was that it wanted an ecosystem where customers would consume Amazon products, videos, music, etc. for a long time. It did not want to be dependent on Apple and Google (NASDAQ:GOOGL) platforms. Hence the device was priced aggressively and was a great benefit to Prime members of Amazon. But the main issue with the device has been the lack of channel partners and a bigger product line, hence making it one of the bigger Amazon failures.
Amazon could also have used other ways like building stronger partnership with other smartphone makers to facilitate its final goal. Having said that it has by far the biggest advantage in this market, that is, even if it sells the products at 0% gross margin or even a loss it can recoup most of the losses through the long term value from the devices.
This was a project which was started in the heydays of dot com boom. The company decided to take eBay head on and completed the entire auction site from scratch within 3 months in 1999. A lot of energy and resources were directed towards this project to make sure the customers accept the final product. However the consumers were not enamored with the functionality and the product didn't gain sufficient traction.
This product was then changed into zShops which was again a failure. Finally from this came the Amazon Marketplace where third party seller business is conducted and which currently accounts for 40% of the total units sold on Amazon.com. This learning curve has been a part of Amazon’s business practice and provided it with several successful products in the end.
Amazon Fresh cannot exactly be classified as a failed product but for Amazon, which has been growing at 20+% in the past several years, this service has failed to gain good response. Started way back in 2007 in Seattle where the company delivered fresh grocery products to the customers, the company planned a huge expansion of their services. Given the fact that the company had the requisite technology in place, this product has taken far too long to reach a good level of acceptance. There are already several competitors in this category and the company will have to bolster its efforts to gain a good percentage of the market.
This Amazon failure was a site which was co-founded by the creator of Kosmos.com in which Amazon had invested $60 million during the dot com era. Askville provided questions and answers in a crowd sourced fashion. Started in 2006, it finally closed in 2013. This was an attempt by Amazon to build a broader customer interaction portal. However the growth of other social media portals ensured that this product died before it reached maturity.
Amazon has had some great successes like Prime, AWS and Kindle but it has also suffered major failures. These Amazon failures have taken great resources as well as time. In 2014 the company spent an approximate $9 billion in R&D!! Compared to this Apple spent around $5 billion, IBM $6 billion and Google $8 billion. Lab126 of Amazon has been behind the release of products like Fire TV, Fire Phone and Amazon Dash for groceries. But as other brick & mortar retailers build their online retail capabilities Amazon would be left with lesser margins and lesser resources to make these investments. Profitability has been a constant concern for investors and Amazon is facing increased competition from biggies.
Retailing requires operational efficiency whereas R&D requires an ability to learn from mistakes. Jeff Bezos is trying to merge both of them but this strategy can back fire when the company faces higher competition from Wal-Mart and other retailers or due to a successive string of duds. Down the line Amazon would have to separate these two segments to allow smooth running of its retail venture and provide justifiable resources to build new products and services.
Amigobulls has always cautioned investors of the high valuations and wafer thin bottom line of Amazon. For more information please see Amazon stock analysis.
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