Attack of the Amazon drones?

By Katherine Rushton

Will the internet giant evolve into the biggest retailer in the world? Katherine Rushton looks at what the future holds for the Seattle-based company.

An image showing the Prime Air Unmanned Aircraft being worked on in Amazon's research and development labs. Photo / AP
An image showing the Prime Air Unmanned Aircraft being worked on in Amazon's research and development labs. Photo / AP

Jeff Bezos' 2014 did not begin well. In the first week of the new year, the Amazon founder, who turned 50 a week later, had his cruise of the Galapagos Islands interrupted by kidney stones. He had to be whisked home to America to recover.

Happily, though, this dramatic exit happened after Bezos saw in the new year in the archipelago where Charles Darwin began developing his theory of evolution. And evolve is exactly what Amazon, which did not exist until 1995, has done, by proving itself fitter than rivals.

Unsurprisingly, Amazon has garnered nearly as many enemies as fans. The Seattle giant has driven down prices, but often by turning local shops into an endangered species or making them extinct.

Early on, when the online retailer dedicated itself to selling books, most of the conventional industry was dismissive of this US upstart. Old-guard bookshops were confident customers would want to feel books before buying. Amazon lost money, quarter after quarter, helpfully backing their thesis.

In the late 1990s, people wondered how the company could survive. Amazon didn't turn a profit until the fourth quarter of 2001, when it moved US$5 million (NZ$5.9 million) into the black. Even now, it hovers around the break-even line, alternating occasional profits with regular small losses. In the third quarter, its sales rose by nearly a quarter to US$17.1 billon, but the company lost US$41 million.

Bezos does not appear particularly bothered by this. Amazon is a low-margin business, which makes sense only if he builds massive scale. He believes losses now are a fair price to pay to secure its long-term future. He has done a good job of convincing Amazon shareholders - rivals such as Apple and Google are punished or celebrated on a quarterly basis for any sign of an acceleration or a slowdown in profit growth. "Apple's shareholders are looking for healthy profits - it has to keep on knocking it out of the park - but Amazon is a bit more like an annuity," says Brad Stone, author of The Everything Store, a book about Bezos and his company. "Founder-driven companies are given a lot more leeway by Wall Street to grow and take risks. And because Amazon is a very low-margin business, every sector looks like a rich opportunity."

Stone says Amazon is not just playing for longevity. "The long-term mission for Bezos is to build the biggest retailer in the world, and maybe the biggest company. Bezos would say [he is motivated by] building something lasting. I would say it is by winning. They're out to prove that they're the smartest guys in the room."

It is hard to say where that drive comes from. As a child, Bezos demonstrated a flair for mechanics, reportedly dismantling his cot as a toddler and rigging an electric alarm to keep his siblings out of his room. He was born Jeffrey Jorgensen, in Albuquerque, New Mexico, when his mother was a teenager. Her marriage to his father was short-lived, but when Bezos was four, she remarried and the family moved to Houston, Texas. Bezos's stepfather, an engineer for Exxon Mobil, legally adopted him.

Later, Bezos went to Princeton to study physics, although he quickly switched to electrical engineering and computer science. There, he became president of the university's society for the "exploration and development of space", declaring his ambition to build colonies orbiting Earth.

Amazon doesn't do space trips yet, but its reach is certainly broad. It has expanded into many different types of retail, selling electronics and clothing alongside food and even fine art. It has also moved into hardware, launching the first mainstream e-reader, the Kindle, in 2007. Kindle users are more or less obliged to buy ebooks from Amazon, helping it establish a market share. Amazon has used the success of its e-reader as a springboard into other areas - in 2009, it set up its own book publishing unit.

Last year, it began selling advertising on other people's websites, using the extensive information it has harvested about users. It also started producing TV shows to offer alongside movies on its download service, which competes with Netflix.

Meanwhile, away from retail, Amazon has invested in cloud technology. Andy Jassy, who heads the division, says it could become the largest part of the Amazon business.

Indeed, some analysts argue Amazon is effectively trying to "own" the internet.

But while 2014 is unlikely to hail any major revolutions for Amazon, it will be an important year of evolution. "You will see the continuation of forces already in motion," says Stone. "A good way to gauge the emphasis of the company is to watch what they promote on the homepage."

Grocery business AmazonFresh, which offers same-day delivery, operates in just three cities: Los Angeles, San Francisco and Seattle. It is eventually expected to offer the same service in London, though there is no date set for the launch. If Amazon gets its food offering right, it could really become the "everything store" of Stone's book title.

Amazon has a reputation for slick logistics, and as it becomes ever-larger, keeping up with demand is an ever-present issue. Last month it announced it was working on airborne "delivery drones". Reaction ranged from derision to outrage from those who objected to a dystopian vision of thousands of drones darkening the sky. However, analysts take it very seriously. In the US, people are already ordering all their basic household items from Amazon, often one at a time if they pay the annual fee for unlimited speedy deliveries through Amazon Prime.

Over the next year, Amazon-watchers anticipate more hardware, including a set-top box and even a smartphone. "They understand better than anyone that you have a better chance of owning the customer when you sell them the device," says Stone.

"I think we will see Amazon experiment with new ways to get into physical retail. At the end of last year, it was experimenting with pop-up stores, and now [there is talk of] Kindle vending machines. It might make sense for Amazon to open showrooms."

For many, this will be the last straw. Much of Britain already holds Amazon responsible for eating into the high street, so watching Amazon build stores where many have closed will simply rub salt in the wound. But for the overwhelming majority, the allure of price and convenience helps to dampen any moral misgivings. "Survival of the fittest" is as true in the jungle of retail as it is for animals on the Galapagos Islands.

- Daily Telegraph UK

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