This CEO is Nuts, and I can Prove It!
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I can prove it because, although I've never met Mr. Bezos, nor heard nor seen a recording of him speaking, I do have his printed words right in front of me, and although Mr. Bezos is the CEO of Amazon.com (NASDAQ: AMZN) his words are not those of a man who is thinking clearly. Following the press conference for the launch of the new Kindles last week, Mr. Bezos gave an interview to Tricia Duryee of All Things Digital, available here, in which he had this to say, regarding the pricing and (lack of) profitability of the Kindles:
"We do not like the razor and razor blade model, where you lose money up front and then somehow make it up on the backend. We also do not like the other model, where you make a lot of money on the device, because it doesn’t follow our approach."
But during the press conference preceding the interview with Ms. Duryee, Mr. Bezos had also said this:
"We want to make money when people use our devices, not when they buy our devices."
These two quotes, read in conjunction, suggest to me that Mr. Bezos is suffering from cognitive dissonance, or the ability to believe two mutually exclusive things at the same time. On the one hand, he wants to make money from the Kindles after they have been purchased, and not on the Kindles themselves. On the other hand he does not want to make money after the Kindles are sold, either, because he doesn't like the razor blade model, where Amazon would make money off the backend. We do know that he is succeeding in his desire not to make money off the Kindles as hardware. We know this because he said so, further on in his interview with Ms. Duryee, in this exchange:
"How long-term are you thinking for the Kindle?"
Bezos: "This one is pretty straightforward. We don’t want to lose a lot of money on the device."
"Are you losing any money?"
Bezos: "We don’t disclose the exact bill and materials, so I can’t answer that. But we don’t want to lose a lot of money on the device because then we’d really hate it if you put it in the desk drawer. On the other hand, if you make a lot of money on the device, I believe you haven’t earned your money on it yet, and then you’ve incentivized them (the customers) to stay on the upgrade treadmill that I mentioned today."
Mr. Bezos is the head of a major American corporation, and I'm sure he sees himself as the head of a major American corporation. And yet, with his studied indifference to or even avoidance of making money, he seems to see himself as the head of a major American non-profit corporation. Only one of these can be the case. So which is it? Investors in Amazon no doubt believe that it is a for-profit corporation. Only, they don't make a profit, or not much of a profit: one cent per share last quarter, and a forecasted loss this quarter. That makes Amazon, in fact, for now at least, a non-profit corporation. But Mr. Bezos has investors who don't seem to care. And, even better, or perhaps a condition precedent to investors who are indifferent to profit: financial journalists who actively cheer the lack of profit. Check out this quote from this story in Business Insider:
"Bravo to Jeff Bezos for this [indifferent to profit] attitude.” Unlike Apple [Apple (NASDAQ: AAPL)] which makes obscene amounts of money, Bezos is willing to leave some money on the table to win take [sic] market share and win over consumers. It also pushes Amazon to figure out new ways to make money on its other services. This works as a both a business plan and a marketing stunt."
Let me suggest that this works neither as a business plan nor as a marketing stunt. Amazon is now five years into the Kindle experiment. With that in mind, read this further exchange between Ms. Duryee and Mr. Bezos:
"In a previous interview, you said it takes five to seven years for a new business to either break even or become profitable. And you are now in year five of the Kindle."
Bezos: "True story. Typically, of course, they vary a bit. We are in year five, but actually you could say we are in year eight because we worked on the device — the Kindle one — three years before we launched it."
"Then, that must mean you are making money?"
Bezos: "Again, we don’t disclose that, but you’re good — you’re really good [at asking questions]!!"
Five years into your business plan, it is time to start making money, not engaging in a "marketing stunt." And how about that "business plan"? Does it make sense? No. Losing money or not making money is not a business plan. Instead it is a plan to go out of business.
So how is Amazon doing, compared to its main competitors, “obscene" money-maker Apple, respectable money-maker Google (NASDAQ: GOOG), and old standby money-maker Wal-Mart (NYSE: WMT)? The chart tells the story:
I have said it before and I will say it again: you can't buy your customers by giving away your product. That is not a sustainable business model. The mere fact that Amazon presently has investors, analysts, and journalists who are willing to ignore the lack of profitability does not mean that it will always be that way. We could phrase the question thus: Why can't Amazon be the first post-profit corporation, neither fish nor fowl, profit nor non-profit, just cool?
The answer is that, without a profit, they will never be able to return any money to shareholders. "Aha!" You say, "the share price has gone up so much that any shareholder who wants profit can just sell and take his profit that way!" Yes, but, . . . the problem is, they can't sell if there is no one there to buy. "But of course there will be someone there to buy! Look how much the price has gone up!" Yes, but, at some point you will run out of new investors to buy out the people who got in earlier, because you will run out of investors in the world, because the world has a finite population. In other words, a corporation without profit becomes, invariably, inevitably, that certain investment creature that starts with a "P," and ends with "O-N-Z-I."
But I don't mean to be too hard on Mr. Bezos. I like Mr. Bezos. I mean, how can you not? He is a self-made man, and seems like a very nice guy, to boot. But he may be too nice. Consider this quote, also from his interview with Ms. Duryee:
"[i]n my view, you set up the business in a way that is aligned with the customer."
Sounds nice. But two things immediately jump out at me. One, your interest in making money and the customers' interests are not mutually exclusive, since after all, Apple, Google, and Wal-Mart all make money and have happy customers; and two, you can't, absolutely can't, let your customers dictate to you what the terms of their "alignment" with you is, because "alignment" almost always translates to "money," and you can't buy your customers, forever, because there's no future in it. It is an unsustainable model. The reason for that is that there is no customer loyalty -- you align with my needs by giving me your products at cost, and I will align with you and hang around exactly as long as it takes for someone else to come up with something better. And then what will sustain you when the lean times come? A company can't simply be liberated from the profit motive. At some point, you have to make money. And that means making a P-R-O-F-I-T.
boriskabinov is short Amazon.com via long-dated puts. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.