The Amazon Takedown

Never did the financial world ever imagine that the word “Amazon” would elicit so much fear in the investor community. But this has now become a favorite pastime in the markets for the last couple of years. Amazon so much as breathes a word and the whole world shivers.

As I was driving to work today I was listening to a podcast by the “Harvard Business Review-Ideacast” where they were interviewing an author of a book “Leap”. The premise of the book was about organizations that transformed itself into completely different entities rather than adapting to competition. The idea is that adapting gets you in the catchup game while redefining your core competency makes you uncatchable. This something that is more radical than a disrupter who comes along and changes the way you do something a little bit differently, but rather somebody who does something completely different so as to make the established players completely irrelevant in the long run.

Amazon has admittedly done this in couple of industries very successfully. Retailing has been redefined by Amazon on its terms. While a website that sells products is a great idea, the real catch in Amazon is everything that surrounds it. The data collection, the supply chain, the mobility, the artificial intelligence and everything else. Amazon has made retailing something of a secondary idea and redefined the experience of shopping no matter what it is that you are trying to buy.

Cloud computing is something that has changed the world and Amazon sits at the forefront of it. The notion of not owning your infrastructure or your enterprise equipment was not a new idea. I used to work for a startup that wanted to deliver network routing as a service in 2000. But what Amazon did was to deliver the whole package of infrastructure as a service in a amazingly usable format at a time when competition was too busy optimizing how they sell gear. Today, as in online retail, Amazon is by far the leader in that space.

But the scariest part about all this is not necessarily the product that is being delivered but the scale at which it has been done. The numbers, both in retail and in web services is just staggering and has left the respective industries breathless. It is not so much that Amazon has become a leader in that space, but how far ahead it is in the scale and scope of its leadership. And this is what has investors running for the hills when Amazon so much as looks its way.

The Whole Foods purchase had the grocery businesses losing billions in market capitalization on the day it was announced. The Pill Pack acquisition had all the retail pharmacies decimated on that day. And today with the announcement of white boxes, it had the networking world running for cover.

I have to admit I have been painfully skeptical of Amazon for the past 5 years when the company has quadrupled in market cap. But I still am not convinced this is something that Amazon can keep doing. The law of large numbers and strength of the competition is going to bear down of it at some point. While Bezos has proven every skeptic wrong to this point and might very well do so again, I am a little weary of companies that get an aura of invincibility around them.

Today Amazon battles a very healthy WalMart, Target and Kroger in the retail space. While this might sound like a non-threat on paper, it is not to be overlooked that neither of these players and struggling financially and are establishing their presence online. They may lack the scale and agility of Amazon but that may not be enough to keep them at bay in terms of eroding the lead that it enjoys in that space today.

CVS and Walgreens and licking their wounds from couple of weeks back when Amazon did a number of them too. Pill Pack is a $800 million buy and by no means is any sort of a competition for the established pharmaceutical companies. But that was not enough for them to get slaughtered. It was was the possibilities of an online pharmacy with the scale and precision of Amazon retail that had the market scrambling. But CVS and Walgreens are not small players but battle hardened, regulation wading behemoths that will take the battle to Amazon after what they have seen happening to Barnes and Nobles and BlockBuster.  So you can put Amazon down for some heavy spending and execution risk on this accord.

Microsoft, Google and Oracle are not poor cousins in the cloud space and each comes with a kitty many times bigger than Amazon to spend and conquer what they have lost. In the cloud wars the winner will be the one that takes the Enterprise customers with it and for that you have to bet of Microsoft and Oracle battling it out till death. IBM is another player that will not let go of its Enterprise customers unless you pry it out of their cold dead hands. So to continue to lead, Amazon had to battle with scale and precision. Today’s announcement is once again targeted at the Enterprise customer migration and that is why the market caught a cold and though it was the network equipment makers that were taken to the woodshed you have to imagine it is not going to be that simple a turn to make.

My skepticism only grows about the future success of Amazon. But then again, it has been a fools trade to bet against Bezos. Even Warren Buffet admits that he misjudged Bezos and that Bezos is by far the best CEO in the world to have pulled off grand successes in two seemingly unrelated businesses. But I can’t look past the amount of dollars that are fighting against Amazon, both in its established and new businesses. I cannot also look past the fact that I only see a narrowing moat in the cloud business and a non-existence moat in the grocery and pharmacy business.

I have been wrong for the past five years and very well could be wrong for the next decade. To measure just how wrong one could be, today AMZN hit $1815 and I started my journey in skepticism at $400.