Losing money: November 15, 1999 issue of New Thinking

November 15, 1999 New Thinking:
Losing money

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November 15, 1999

Losing money

By Gerry McGovern

Wherever an Internet crowd gathers there is always someone who dismisses Amazon.com, stating the obvious fact that they haven’t made a profit yet.

I began to reflect on this after I had lunch with an acquaintance last week. He was what you might call a traditional entrepreneur, having built up several successful businesses. He was coming late to the Internet and was wondering just how he might get going.

In the course of the conversation he made the very sensible statement: ‘I have always believed that a business should make profit from the day it opens its doors.’

Now, in the industrial age, that statement made a lot of sense. However, in the digital age it would seem that it has been turned on its head. Very few Internet ventures are making profit today and many project losses for several years to come.

Why?

Well, I believe the answer can be found in the difference between an industrial age relatively stable and defined environment and marketplace and the expansionist economy and landscape that is before us in the digital age.

I know the Wild West metaphor has been done to death when trying to understand the Internet, but that doesn’t mean it’s not a valid way of understanding things. I saw a ‘Western’ a few years back where a race was about to begin at the edge of a town. Each rider had a set of flag poles. Basically, whoever rode out the hardest and fastest and stuck their flag poles down first would own the land within the perimeters of these poles.

Right now, Amazon.com is racing out there across the plains of the Internet sticking down as many flag poles as quickly as it can so as to own as much as it can. It knows that the more ‘land’ it has, the more wealthy it will be in the long-term.

The ‘land’ that Amazon.com is chasing is customers, because customers and their spending power are the gold mines of the digital age.

It was never about books, you know. If that was the case then Amazon.com would have called itself ‘books.com’. Amazon.com has always wanted to own the customer. Books was a good way of starting the relationship but I would say that one of Amazon.com’s ultimate aims is to become a bank.

Their success will be based on the customer switching costs they create, as they offer more and more choice and convenience to the customer, and in the process manage more and more of the customer’s online spend. Everything they sell might be at razor-thin margins, but they will make their profit from economies of scale, distribution synergies, and cash management.

Last week Amazon.com announced that it would issue Amazon credit cards to its 13 million customers. The natural progression is clear. Amazon.com is about becoming the ultimate one-stop-shop. It may overstretch itself, it may be just too ambitious to pull it all off. But that’s the strategy and to me it makes an awful lot of sense.

Amazon.com is losing money by the bucket so as to wrap its digital arms around as many customers as it possibly can before the sleeping giant competitors in the industrial age landscape wake up and smell the Amazon.com coffee.

Gerry McGovern

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Amazon.com is losing money by the bucket so as to wrap its digital arms around as many customers as it possibly can.