Every year, Amazon's annual report is briefly interrupted to re-publish a portion of the company's 1997 shareholder letter. That missive includes the following: "We will ... make investment decisions in light of long-term market leadership considerations rather than ... short-term Wall Street reactions. We will continue to measure our programs [and] jettison those that do not provide acceptable returns... We will continue to learn from both our successes and our failures." So here's a question for CEO Jeff Bezos and Company: What exactly has it learned from Lab126, the company's consumer-electronics division that's responsible for the Kindle Fire and other hardware?
A report at Fast Company details the bloated mess that the division has become, growing to 3,000 employees, with separate teams responsible for each product: the ill-fated Fire Phone, the Fire TV, the recent Kindle Voyager e-reader, etc. Including product development costs and the personnel at Lab126, Amazon is now spending well in excess of half a billion dollars to achieve the following:
Fire Phone: When Amazon announced it's foray into smartphones earlier this year, I didn't get it. It seemed like a pointless entry into the crowded smartphone market that wouldn't make anyone want to switch from an iPhone or one of the many excellent Android options out there. Consumers agreed and within months, Amazon was writing off $170 million in inventory. Bezos seems insistent on trying again, he told Henry Blodget at the Ignition conference. This is learning from failure? No one was asking for an Android-like phone that can't access the Google Play store before and they aren't now.
Kindle Fire tablets: Before Apple's iPad hit the wall on growth, the story no one cared much about was that Amazon's Kindle Fire line was already in decline a year ago. But perhaps more importantly, the Fire tablets have never made any real impact outside of the holiday quarter where they were already being outsold more than 2:1 by Samsung last year (and 5:1 by Apple). What's especially noteworthy is that in the back-to-school period, Amazon isn't even a top-five tablet vendor globally, according to IDC. There is scant evidence that the company's total tablet sales for the year are more than 10 million. While that sounds substantial -- perhaps accounting for $2 billion in revenues -- it's not at all clear that there's any margin being made after accounting for all costs.
Fire TV: Amazon has a competitor to the Roku and AppleTV that ensures its Prime Instant Video will be available on TVs. Of course, Amazon's video service is on Roku and can be streamed to AppleTV over AirPlay. (If Amazon wasn't in the tablet business, or perhaps if it just asked nicely, it could almost certainly be on the AppleTV too.) This box has provides no special features or lock-in effects, making it similar to the tablets in that regard.
Beyond those, Lab126 has also brought the world the Echo, an always-on speaker that's mostly creepy albeit intriguing, and Dash, a scanner to allow you to quickly add items to your Amazon cart. Both are good experiments, neither is close to a game changer that will wind up in the home of most Amazon customers. Which gets us back to where we started: It seems like Amazon isn't learning much here other than how to lose money at consumer electronics and how to waste management bandwidth in the process.
The company has built two powerhouse businesses since that 1997 letter. One is the e-commerce giant. Between 1999 and 2013, e-commerce has grown 10.6x while Amazon's core business has soared 43x. Even as online selling has grown to represent 30% of all purchasing in the U.S. outside of food and autos, Amazon has managed to capture a bigger slice of the pie consistently. The other business, Amazon Web Services (AWS), is a juggernaut in providing cloud computing to others. It's less than a decade old and still small as a portion of Amazon's revenues. But the $4+ billion in public cloud computing revenue makes it the industry leader .
Realistically, the challenges in building either of those optimally would be enough for any management team. Bezos is clearly brilliant, but he's also not blessed with infinite time in the day. Apple recently came under some criticism for having let software quality slip and that company is notorious for choosing not to be involved in too many different things at once. Yet Amazon is seemingly involved in almost everything.
Consider that the e-commerce business is nearly always involved in constructing new distribution facilities, building sophisticated new centers to better sort packages, adding automation in the form of robots, expanding to Sunday and same-day delivery, and experimenting with drones. The successes in building some of those capabilities might give Amazon access to more of the food market, an area where it already has a small geographic presence with Amazon Fresh to delivery groceries.
AWS, meanwhile, is in a battle royal with Google and Microsoft for corporate customers who are expecting highly reliable cloud computing to replace or augment internal IT departments over the next several years.
The hardware markets have a lot of sex appeal versus sticking to what Amazon is actually good at, but they have little actual appeal. Smartphones have been a graveyard not just for successful electronics makers (Sony), but even for those with temporary success in the segment (HTC). Even long-running players like Nokia and Motorola exited after years of profitless sales. Amazon has no real chance to make money selling phones and no strategic reason to do so. But as long as it dabbles, both Google and Apple have reasons to consider it a rival and to make it more difficult for Amazon apps to succeed. There'll be no compromise on Kindle book buying inside the iOS app so long as Amazon sells phones and tablets.
Speaking of which, the Fire tablets are surely the albatross Bezos finds it difficult to shed. The illusion of success makes it difficult to just stop selling them, but again the reality is there is no important opportunity for Amazon to pursue. Tablet sales aren't likely to grow robustly again anytime soon, especially among U.S. and U.K. consumers, who represent nearly all Kindle Fire buyers. And there is nothing about owning a Fire tablet that is especially compelling for an Amazon customer such that they'll switch from an iPad. It's a nice product with some clever features that Apple might be wise to copy, but like the Fire Phone, Amazon's tablets haven't proved they have any reason to exist.
Lab126 used to own just the Kindle e-reader back when Amazon did have a reason to make hardware: It wanted to build an e-reader and push books into an electronic form that it could own and control. It worked, up to a point. E-books have captured about 1/4 of the book market, though their growth, too, has nearly stopped. These days, the Kindle apps on iOS, Android, et al. are far more important than Kindle e-readers in helping Amazon maintain a grip on that market, but the grip is strong either way.
Elsewhere, the grip is a tenuous hold for relevance at best. And that's after spending three years trying. With Amazon's two big, real businesses under attack from many comers, the distraction seems like one the company can no longer afford. Will it learn that lesson in time?
