BrainTrust Query: Are we finally seeing Amazon’s ‘free cash flow’ period?

Discussion
Apr 26, 2007

By Bill Bittner, President, BWH Consulting

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.

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4 Comments on "BrainTrust Query: Are we finally seeing Amazon’s ‘free cash flow’ period?"


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Roger Selbert, Ph.D.
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Roger Selbert, Ph.D.
15 years 25 days ago

The pace of technological change is indeed daunting. Disruptive technologies now seem to rise with regularity. In a very short time, what was once revolutionary becomes commonplace.

And yet we are just at the start of this. The model we are heading toward is “always on, always connected,” where everything businesses provide will be available everywhere, anywhere, anytime, all in real time. Consumers will come to expect it.

“Multi-channel retailers need to think about how they can remain relevant when overnight delivery becomes commonplace.” I should say so. But there are many ways to do so. For starters, in-store technology (such as web kiosks), in-store pick-up of items ordered online, and excellent CMR. The right combination of customer experience, personal service AND appropriate technological applications will determine success.

Mark Lilien
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15 years 25 days ago

Amazon’s operating cash flow rose by $2 million a year compared to last year. The free cash flow rose by $20 million a year. In comparison, the foreign exchange rate change in the most recent quarter was $84 million. The company’s sales were $3 billion in the most recent quarter. So it seems that the cash flow increases aren’t significant.

Even if Amazon slows down their technology innovation, the cost of maintaining what they have is enormous because it’s so complicated and so much of it is custom-made.

There’s no doubt that sometimes technology is “good enough”. Even more extreme: sometimes updated technology is perceived as so complicated or inconvenient that it’s considered inferior. Go into a Best Buy or Comp USA or Circuit City and ask the folks who work there how many people want their computers to have Windows XP reloaded and Vista uninstalled.

Camille P. Schuster, Ph.D.
Guest
15 years 25 days ago

The critical thing is not the technology, it is what the technology does and whether it serves any useful purpose (from either the company’s or the consumer’s perspective). Adding technology for the sake of technology makes money for no one. Adding technology that allows the company to do something better for the consumer or adding technology that makes life easier for the consumer is a great idea. Monitoring the environment for changes in technology that could be disruptive and provide even better service is critical. Using technology in different ways to help the company serve the consumer better (e.g., kiosks) or in ways that make life easier for the consumer (e.e.g, kiosks) is also an important innovation. Management at Amazon has been able to do that in the past, in part, by staying in close touch with their consumers. How closely has Microsoft stayed in touch with the consumers who are asking to have Vista removed from their computers?

Race Cowgill
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Race Cowgill
15 years 25 days ago

I won’t even attempt to predict what the future holds for Amazon’s revenue/expense ratios; prediction is not something I feel anyone is awfully good at. However, I agree that new technologies now appear to have a downside that impacts adoption; this is not surprising to me, given the real-world characteristics of how those technologies perform. It may be surprising, however, because of the peculiar mindset of our business world, where technology seems to be the pathway to better service, better revenues, better everything–as if technology could overcome weak business practices.

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