Glenn, I think Billy is right. Amzn needs to be a software company.
And if it doesn't get out of retail...all will be lost, except for the insiders who made $billions on the way out.
>January 19, 2001 12:00 AM PT
by Aaron Goldberg
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From the February 2001 issue of UPSIDE magazine
Just because a company achieves dazzling success as one thing doesn't mean it's got precisely the right strategy. With all the success that comes in the first business, it's hard to change course and become another.
Yet this is precisely the challenge that Amazon (AMZN) faces and, in my opinion, is the only way out of its current capital-structure predicament.
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Virtually every b-to-c site is compared to Amazon, and hardly any measure up.
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You see, the reality is that Amazon has far and away the best and most innovative consumer experience on the Web. Virtually every b-to-c site is compared to Amazon, and hardly any measure up.
Why not bottle that expertise and sell it? Simply said, let's make Amazon a software company! Not only would it help drive new and different revenue sources, but it has a number of very interesting patents that can be a base technology platform for this software-licensing business.
Imagine the possibilities
Consider, if you will, the impact that such a development might have on the Amazon financials and, by extrapolation, the capital structure of the firm. Taking the latest quarterly numbers, let's start with the assumption that Amazon could quickly grow to $150 million in sales. Not an outlandish figure, but certainly no gimmee.
So let's add about $45 million of revenue to Amazon for the last quarter and about $150 million for the last 12-month period. Although this is not enough money to wipe out the loss from operations -- not even close, mind you -- it does make a big dent.
Not only does it make a dent, but if we assume that this revenue is highly leveraged by Amazon's current development efforts, it should yield a very tidy profit. Perhaps as much as a 25 percent margin, depending on how you allocate development costs between the site and the software company.
Clearly, such an improvement to the business model would make a huge difference to the company's beleaguered capital structure. Further, depending on how Amazon accounts for its development activities, it might yield further depreciable expense to improve future cash flow.
Imagine the market power that would come from Amazon's ability to drive the usage and interaction model of most of the successful b-to-c commerce sites. Everyone would have the same one-click checkout, all sites would have the "Page I Made" feature, and all sites could have a very similar navigational path, making it far easier to transact actual purchases than today's myriad designs do.
This would also give Amazon a Microsoft-esque (MSFT) market power in the b-to-c space. As long as it is driving the paradigm, building market presence, revenue, and the entire industry, it improves the value of the company.
I was initially thrilled with the zShops concept, but this is an even better approach for Amazon, as it's a far better business model and creates an opportunity for huge leverage on its market position as the premier Web e-tailer. It's the most effective way to leverage its patent portfolio, also.
A good idea?
It's clear to me that there is huge promise for Amazon in taking a bit of a different view regarding its business strategy.
Yet this isn't to say that Amazon should run right out and do this. There are many important issues that would need to be resolved if the company were to be successful. Not the least of which is actually creating a software company from scratch -- no mean feat.
Or perhaps, instead of selling on its own, it could license some very successful sales organizations, such as IBM (IBM) or Oracle (ORCL). The reality is that much of the value that Amazon creates is not just about e-tailing. The company is truly one of the best and most capable software developers.
How can you have that position, yet drive $0 from it? The key is to unlock all the value the firm has, especially when you're looking at a boatload of convertible debt coming due. |
