BrainTrust Query: Are we finally seeing Amazon's 'free cash flow' period?
As I thought about the "earnings surprise" reported by online retailer Amazon on Tuesday, a different angle to the story occurred to me. We have talked a lot about how the expanding network and the proliferation of broadband internet connections will help online retailers. But there is another aspect to the technology development curve that may have an even larger impact.
Just as Microsoft has experienced soft sales of Vista and Office 2007, there reaches a point where the technology is simply "good enough." At such a point, the additional benefit to be achieved from further investment in technology is far smaller than the cost of developing it. This is the position many Microsoft users have reached with their word processing and spreadsheet applications. They simply don't see the additional benefits to be achieved from the cost and hassle of learning a new system.
In the case of Amazon, their spending on "Fixed Assets," which includes the purchase of software packages and internal website development, dropped eight percent for the twelve months ending March 31. One aspect of an online business is that it requires a significant investment upfront to develop the solution and then significantly less expense to maintain, even as customer traffic and revenue increases. This is the period of "free cash flow" described in many internet-based business plans.
But the period of free cash flow often proves elusive as newer "disruptive" technologies create the need for shifts in the business model. RFID, for example, is a disruptive technology expected to change the retail supply chain. How will online and multi-channel retailers be forced to adapt because of it?
Discussion Questions: Could it be that Amazon and other online retailers are beginning to see the benefits of the infrastructure they have put in place? Will RFID or other technologies on the horizon disrupt the Amazon model?
[Author's commentary] In their comments on the results, Amazon also mentions the success of Amazon Prime. Amazon Prime seems to address one of the major weaknesses of online shopping … the delay between the purchase decision and the receipt of the product. Amazon Prime is a club membership that guarantees overnight delivery if ordered by 6:30 PM eastern time. The membership fee is $79 per year.
Amazon Prime is an example of how innovation can be applied without new technology. Amazon has also demonstrated its belief that a good portion of our economy is moving away from physical goods to virtual goods by offering online downloads for DVDs, music and books.
The multi-channel retailer has to recognize the potential for their online channel and merge it with their physical presence. RFID (or the serialization of containers) is a new technology that will have a huge impact on how we distribute products in the future. It is going to make it possible to allocate specific units to customer orders. This means manufacturers will be able to ship product to public warehouses that distribute directly to end consumers. The delivery can be guaranteed based on the serial number of the container. Multi-channel retailers need to think about how they can remain relevant when overnight delivery becomes commonplace.