I think this is the secret of Amazon’s success

When talking about e-books Friday, I mentioned that Amazon is making deals with authors directly, cutting traditional publishers out of the loop. And then my wife asked a good question: How does Amazon think of stuff like that?

I think it’s because Amazon isn’t hung up about last year. Let me explain.

Everyone thinks of Amazon as an online bookseller. But I don’t think Amazon does. At one time, that’s all Amazon was, and that Amazon wasn’t profitable. In the late 1990s, the typical business plan was to take any wacky idea, attach an e to it, register the domain name, and wait for millions of dollars to just pour in. The most ridiculous example I ever saw was evacationbibleschoolstudies.com, which, I promise you, I’m not making up. Someone who made more money than I did really, honestly thought somebody was going to type that into a web browser.

I’m not sure that anybody did. And around the turn of the century, these high-flying e-commerce companies that sold one thing online started going bust. Webvan (online groceries), etoys (online toys), and CDnow (online music) come to mind, but they’re far from the only ones. And everyone assumed that unprofitable Amazon.com was going to be one of them too, because nobody really knew if the problem was e-commerce or reliance on a single product category. Then, in 2002, Amazon had its first profitable year. And everyone was shocked.

Between the time that other dot-coms started dying and Amazon posted a profit, Amazon was making changes. They diversified beyond just selling books. More importantly (in my opinion), they started allowing third parties to sell used books on the site. That, certainly, cut sales of new books, but it was a nice, passive side business. Amazon just collected the money when the third party sold a book. And in the meantime, they didn’t have to deal with warehousing, shipping, or any of those other things.

I don’t think it’s coincidence that Amazon started allowing third-party sales in November 2000 and posted its first quarterly profit about a year later, in Q4 2001. I think that passive income was one of the things that put them over the hump.

And they didn’t worry about that new business competing with the business that made them a household name. I think that’s the secret of their success.

I don’t know if Jeff Bezos, Amazon’s founder and CEO, is deliberately trying to do the opposite of what IBM did in the 1980s. But he was old enough and interested enough to observe IBM’s entry into the PC business and its rise and fall, and he was smart enough to probably understand what was happening. IBM entered the personal computer business in 1981, brought it legitimacy, and its product became much more popular than IBM ever expected it to. But in less than 10 years, IBM was struggling in the market it legitimized.

In the 1980s, IBM famously had a policy of not competing with itself. Whatever it was you wanted to do, IBM had exactly one product that was up to the job. So in 1985, when Intel released its hot new CPU, the 80386, it was too good for IBM. A PC based on the 386 would have been just as fast and powerful as other computers IBM was already selling, while costing thousands less. So IBM ignored the new chip.

That was the beginning of the end. Compaq, with no higher-end business to protect, saw the 386 as an opportunity and built a machine around it. From that time on, Compaq was the innovator in the PC market, not IBM. IBM’s attempts to take the torch back from Compaq all failed, and the only reason IBM is still around today is because it spent the past 20 years completely re-inventing itself.

That’s the mistake Amazon isn’t making. Amazon doesn’t let this year’s business model stand in the way of chasing next year’s opportunity.

Selling used books was the start, but not the finish. MP3 sales cut into CD sales, but Amazon got into that business anyway. E-books cut into all print book sales, but Amazon got into that business anyway, and early. Now Amazon is going to become a publisher? That wasn’t the first thing Amazon did that probably annoyed the traditional book publishers, so why should Amazon stop now?

Amazon, unlike many older companies, realizes that what paid the biggest chunk of the bills in 2010 may not do the same in 2012 and beyond. And they’re fine with that. Google and Apple have the same tendencies, which is what makes those three companies so disruptive.

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