Amazon Is Under Attack Like Never Before (AMZN)

Jillian D'Onfro

Amazon is one of the most brutal  companies to compete against. 

With founder and CEO Jeff Bezos at the helm, Amazon forgoes profits, endures slim margins, and relentlessly prioritizes customers. Bezos snuffs out competition with low prices, and takes a hardline in negotiations companies that want to sell products on Amazon. This has led to Amazon taking vastly more ecommerce sales than anyone else. However, as it has started tackling more and more product categories, other companies both big and small have started to attack Amazon more than ever before. 

Amazon started as a site to buy books online, but today it sells everything. It's expected to do ~$91 billion in sales this year. 

In a 2013 blog post on competing with Amazon, Andreessen Horowitz investor Jeff Jordan included the following chart, noting, "Amazon is larger than the next dozen largest e-tailers—COMBINED!  Its resulting scale advantages are staggering."

Benedict Evans, an analyst at Andreessen Horowitz, recently wrote a big analysis of Amazon. In it, he included the following chart that shows Amazon's willingness to give up on profits.

Now, it's important to note that it's not like Amazon can't make money. It's that it chooses not to make money. As Evans puts it Amazon has someone at the company whose job it is to make sure that net income gets to zero. 

Amazon takes nearly every dollar of cash that it generates and pumps it right back into the company, which you can see represented here by the growth in capital expenditures:

Amazon's willingness to reinvest its money makes it an intimidating company. It's run like a startup, not a 20 year old mainstream company. 

"We won't invest in a company unless they can tell us why they won't get steamrolled by Amazon," Jordan once told Fast Company

But recently, it feels like something has changed. As Amazon expands into more verticals, its sheer number of competitors has exploded, and they're attacking Amazon in ways that are both big and small. Amazon remains a strong company, but it suddenly seems at risk of stretching itself too thin, exposing itself to too many competitors. 

The startups that could disrupt Amazon

For instance, Andreessen Horowitz just invested $44 million in Instacart, a grocery delivery service. Instacart hires people to drive their own cars to grocery stores to pick up stuff that users order through their smartphone. This is a direct competitor to AmazonFresh, which also delivers groceries, but in fewer markets around the country than Instacart does.

Mobile apps are changing shopping (mobile commerce grew three times faster than e-commerce year-over-year overall in Q2). But, until its recent release of the Fire phone, Amazon had done hardly anything to make its mobile experience distinct from its desktop experience. It basically just ported its website into an app. With the Fire phone, Amazon went hard in the opposite direction. Part of the reason why the Fire phone hasn't done well, is that it feels like the phone exists mainly as a portal to the Amazon ecosystem.

Besides providing a better gateway to instant gratification, many e-commerce apps also offer a more personalized shopping experience. Amazon may be the "everything store," but it isn't great at pointing you towards things you weren't specifically looking for. 

As Kevin Roose put it in a recent New York Magazine piece, Amazon has issues with "discovery." Startups like Spring, Fancy, and One Kings Lane, to name a few, are all beautifying the e-commerce process while giving customers new ways to browse. 

Lee Hnetinka, founder and CEO of New York City-based startup WunWun thinks his company undercuts Amazon in several different ways. WunWun is a delivery service app that lets customers purchase goods from local stores and then delivers them within an hour for free, and Hnetinka says that operating without warehouses and inventory makes it much more nimble than Amazon. 

The other reason the Instacart story is important is that it only competes with Amazon because Amazon is doing everything now. If Apple is famous for its focus, Amazon should be famous for its lack of focus.

The "everything" store

In the last nine months, Amazon has made three new forays into hardware, with a TV streaming box, the Fire smartphone (which was largely seen as a bit of a flop), and its Square-killer, Local Register. Amazon also launched a local services marketplace, an unlimited e-book subscription serviceAmazon Pantry for grocery delivery (and an accompanying barcode scanner), its own in-house delivery system for same-day and grocery services, and a music-streaming offering, while also continuing its experimentation with drones and pouring millions into its original video content.

Plus, it owns Zappos, Diapers.com, and IMDB. There's a lot more, that's just a taste. There are few, if any, other companies trying to do as much all at once as Amazon.

Another thing that makes this this period of competition different han the others is that Amazon itself has trained its newest competitors. 

For instance, Flipkart, an India-based e-commerce company built by two Amazon alumni, just raised $1 billion. After they announced their raise, Amazon said it would go spend $2 billion in India. 

Then there's Jet, a soon-to-be-launched e-commerce startup from Marc Lore. Lore knows Amazon's brutal tactics as well as anyone. Prior to starting Jet, he co-founded Quidsi, which was the parent company of Diapers.com. In 2010, BusinessWeek called Diapers.com "What Amazon Fears Most."

Diapers.com was shipping hundreds of millions of Diapers annually, making a dent in Amazon's business. To compete, Amazon went nuclear on Diapers.com,drastically lowering pricesforcingQuidsi to sell to Amazon for  $540 million.

When he announced his new company, Lore said, "At Jet we will make use of the latest advancements in technology to create a new shopping experience that will empower customers like never before. Jet will bring unprecedented transparency and efficiencies to the overall e-commerce market, and as a result, will transform the customer experience in a way that, until now, has not been possible."

Lore raised $55 million for his new venture, and although he doesn't specifically call out Amazon, his ambitions are clearly big. 

The giant companies that want to disrupt Amazon

Amazon isn't under attack from just startups, though. There are big companies with deep pockets ready to challenge Amazon, too.

Chinese e-commerce giant, Alibaba is about to IPO. It's hoping to raise $21 billion in the biggest IPO in history, giving Alibaba billions in cash to try to crack into the U.S. market.  

Then, there's Google, which has ramped up its inclusion of paid product listings. These listings show products right in Google searches. Amazon-Google is one of the most underreported, but important, rivalries in tech. 

Google makes its money when people do commercial searches for products. As Amazon grows in power and ubiquity, consumers are going straight to Amazon.com to do searches for stuff instead of Google. To fight back, Google has tried to improve its shopping results. As these results improve, Amazon is hurt. 

The companies compete in many other ways. Amazon just launched a new mobile ad network that could threaten Google. Google is testing Shopping Express, a delivery service that goes right at the heart of Amazon's e-commerce business. Google partners with local stores, and if you order something through Google, it will deliver it that day. 

Google and Microsoft are both taking on Amazon Web Services, which is one of Amazon's biggest businesses (Amazon CEO Jeff Bezos has even said that he expects AWS to eventually be Amazon's biggest business). From tiny startups, to big companies like Netflix, AWS powers a lot of the services you use on the web.

Google and Microsoft have slashed their own cloud computing prices to compete with Amazon's. Although the Amazon doesn't break out its AWS business in its earnings, you can parse through the report to see that the revenue growth of its "other" category — which is mainly AWS — slowed, from 60% growth year-over-year first quarter, to only 38% growth year-over-year in Q2.

Here's the chart Microsoft (Azure) and Google are trying hard to change:

"People still think of Amazon as a retailer," says SunTrust analyst Robert Peck, "But when you think about all of its investments, it has expanded into many new areas."

Whether it's expanding too much, spending too heavily, and losing its focus are a crucial questions. When Amazon revealed it expects to lose a whopping $410 to $810 million in Q3, investors panicked, and the stock tanked more than 10%. Overall this year, it's down nearly 20%. 

Scott Tilghman, from B. Riley & Co., said that although the firm is used to Amazon's slim profits or even losses, it downgraded its estimates because "we are finding no end to the company's spending this time around."

Amazon's view: This is only day one

Peck, however, believes that CEO Jeff Bezos and Amazon are making a series of well-calculated decisions, even if they don't "bat a thousand." In fact, he thinks that bold moves outside of are the strategy du jour. 

"There are four or five tech titans have expanded outside their core, and are now stepping into each others' core businesses and competing for the future, the new opportunities. It's a really unique time." he says. "I think where Amazon is going makes a ton of sense." 

Amazon's strategy has always been to focus on the long-term and make bold decisions and investments that it thinks will help it gain market leadership. 

"Some of these investments will pay off, others will not," Bezos wrote in his original letter to shareholders, "And we will have learned another valuable lesson in either case." 

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