Why does Amazon please Wall Street so much? The company treats shareholders with a disregard that borders on contempt. (CEO Jeff Bezos is “willing to be misunderstood” which means he really doesn’t care if investors understand the business, as we’ll see.) Yet when it announced that profits last quarter fell 45% year-over-year, the stock price saw a healthy bump. Meanwhile, many tech companies, like Apple, which had a high-profit, high-margin quarter, found their stocks punished. Perhaps this is a sign that Wall Street is finally embracing the idea that, for tech companies, growth comes first, even at the expense of profit.
If that’s what’s going on then the Street has started to adopt the ethos of the Valley, specifically of one its most prominent sages: Harvard Business School professor Clay Christensen. The godfather of disruptive innovation, Christensen is often quoted chapter and verse by technology company founders and venture capitalists alike. Christensen studies how established, high-flying technology companies like Amazon and Apple conduct business, to determine if they are ripe for attack from low-margin, startup competitors. His thinking can help shed light on why the market loves Amazon, which is, after all, a barely profitable conglomerate of loosely related businesses that is growing at a bonkers rate. But basically, his theories all comes down to profit margins, and how companies spend their money.
Amazon’s razor-thin margins — just 1.9% for all of 2012 — are, according to Christensen’s theories (and some other Amazon watchers), the company’s key weapon defense against disruptive competition. Not just in defending itself from whatever competitors exist today, but also from competitors that might exist tomorrow. Christensen writes in his seminal book, The Innovator’s Dilemma, that disruptive companies generally start at the low-end of the market, serving customers with cheap, low-margin products that established companies have neglected, in their endless quest to move upmarket, increase profit margins, and please investors.
Despite years of massive growth, Amazon seems to have decided that, in order to remain alive, it must remain a permanent disruptor. In fact, Amazon, it seems, may never optimize for profits over growth. It would surely be tempting for CEO Jeff Bezos to reward himself and shareholders with a couple of blowout profit quarters. A few tweaks in the CFO’s office, and that is probably an achievable goal, and one that would press firmly on Wall Street’s Pavlovian lever of reward. But by taking that tack, Bezos would be forsaking two values he built the business on: a customer-first mentality, and an ethic of permanent disruption. And, to keep its stock healthy, Amazon would have to exceed each blowout quarter with another. And another. Why would Bezos ever play that game?
Instead, the company looks well beyond the short term. On the surface, It made no sense for the world’s largest bookseller to cannibalize its business by promoting ebooks, let alone to build an entire software and hardware platform for them, but that’s what Amazon did with Kindle several years ago. This allowed Amazon strengthen its already huge advantage over traditional retail booksellers — today it’s got a sleek $99 Kindle that might just be the epitome of the form, something unthinkable when it released its first slow, expensive readers years ago. And as overall print book sales keep falling, Amazon continues to grab a larger and larger share of the ebook pie.