Something Is Wrong With Amazon
While Amazon's quarterly earnings may appear fine, a few things about the company have turned unsettling to me.
At least based on the most recent quarterly earnings report, Amazon appears to be doing fine. People are buying more goods through Prime, the company’s digital advertising business contains plenty of promise, and AWS has no obvious flaws. However, a few things about Amazon have turned unsettling to me. Amazon’s retail customer service has become downright atrocious while its Alexa ecosystem of devices is proving to be more of a hindrance than asset when thinking of where computing is headed. Risk factors such as these represent a threat to Amazon’s grip on consumers that management needs to address.
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Big Tech Is Winning Over Wall Street
While Wall Street remains fully engrossed by NVIDIA, there is a story to be told that is flying under the radar.
While Wall Street remains fully engrossed by NVIDIA, there is a story to be told that is flying under the radar. With several key macro headwinds now in the rearview mirror, Wall Street has turned decidedly more optimistic on Big Tech (a bucket that I have long defined as including Apple, Alphabet, Meta, Amazon, Microsoft). Big Tech as a group is up 28% in 2024 while the S&P 500 is up 15%.
Here are Big Tech market caps, with NVIDIA added in for good measure:
Microsoft: $3.3T
Apple: $3.2T
NVIDIA: $3.0T
Alphabet: $2.3T
Amazon: $2.0T
Meta: $1.3T
A couple things jump out at me about those totals.
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The Uncomfortable Truth With Big Tech’s Expense Bloat
In the second half of the 2010s, Big Tech looked unstoppable from a financial perspective. Revenue growth rates were through the roof. The biggest problem found with hiring was finding enough office space. New headquarters were the rage. Under the hood, ambitions knew no limits with most of Big Tech looking well beyond their core competencies for future growth opportunities.
Then the pandemic hit. Instead of putting an end to the growth boon, the pandemic dialed everything up a few notches. With little to nothing to do outside the home, competition for our attention (and cash) plummeted, leading to even stronger revenue growth for Big Tech. The work from home movement then gave management teams a way around office space constraints, leading to even more hiring.
A trend that has begun to materialize over the past two to three earnings cycles in Big Tech is that expense bloat is a genuine problem.
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Amazon’s iRobot Deal Isn’t About Vacuums
This past Friday, Amazon announced its intention to buy iRobot, best known for its Roomba vacuum cleaner, for $1.7 billion. In describing the deal, Amazon’s hardware chief applauded iRobot’s “ability to reinvent how people clean with products that are incredibly practical and inventive…” This may make some people think that Amazon wants to go after Dyson for having the best vacuum cleaner on the market. There’s much more to the story. The iRobot deal is the latest evidence pointing to Amazon’s grand vision: digitizing our homes.
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An Advertising Pivot Is Beginning
In just the last week, there were two high-level and noteworthy departures at the giants:
Meta’s advertising head (who served as COO)
Amazon’s consumer retail chief
Earlier in the year, two noteworthy departures were found among smaller companies striving to one day become giants:
Spotify’s chief architect of its podcasting strategy
Roku’s head of platform business
At first, the four departures may seem unrelated to each other.
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Funding the Next Big Thing in Tech
One takeaway from the just concluded earnings season in tech land is that the giants are not alike. Each is facing its own set of business and financial challenges – both macro and micro. Despite the challenges, each of the giants is determined to fund the next big thing. What had been periodic jitters about ballooning costs and expenses has turned into full-fledged anxiety and concerns on Wall Street.
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The Absurdity Known as the Digital Markets Act
For the past two years, the European Commission has been formulating a series of regulations aimed at curtailing the tech giants in its 27 member states. Last week, the Digital Markets Act reached a finalized draft stage. While additional steps are needed before the end is reached, we are at a point where the major points of contention have been determined with implementation set to begin later this year. We are seeing the equivalent of the tech giants being taken hostage and told to both open their platforms to perfectly capable competitors and ensure that these same competitors don’t abuse their opportunities to harm consumers. It’s absurdity. There is no other way to describe what we are seeing. Customers in the EU don’t stand to benefit from the regulations. And as we will discuss shortly, a good argument can be made that the giants will be able to navigate the legislation without losing much, if any, momentum in the impacted countries.
At the heart of the issue is EU officials viewing the giants, or so called “gatekeepers,” as blocking or preventing smaller competitors from getting a fair shake.
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Why Amazon 4-Star Stores Failed
One of the clearest trends unfolding in tech has been the gradual shift from brick and mortar to e-commerce. However, there is one question associated with the shift that Amazon appears to be struggling to answer. What happens to brick and mortar in an e-commerce world? Some of the world’s largest retailers (Target, Walmart, and Costco) consider their web of physical stores to be an asset when competing with Amazon. Given its own flirtation with brick and mortar, Amazon appears to agree with such an assessment.
This is why news from last week that Amazon pulled the plug on dozens of its 4-star stores along with its traditional bookstores caught my attention. The move was announced as part of a broader shift that will see Amazon concentrate its brick and mortar bets on grocery and clothing. In assessing the chances of success for such a shift, we need to see what went wrong with Amazon’s 4-star stores.
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The Spotify and Roku Squeeze
Spotify and Roku have a lot more in common than meets the eye (and ear). Both companies are fascinated with advertising-driven business models in which listener and viewer time and engagement is monetized via delivering ads. Roku is much further along in its advertising pursuit. Nearly 90% of Roku’s revenue is generated by ads while just 10% of Spotify revenue is from ads. However, both companies have signaled that advertising is where their growth and momentum will be found.
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Tech’s Day of Reckoning Is Being Oversold
Whenever a new calendar year begins, there is an urge to press reset on the news cycle and existing strategies and plans. This doesn’t make much sense considering how, excluding new laws and taxes that may go into effect on January 1, the new year doesn’t usher in changes in marketplace conditions. Nevertheless, there is a psychological benefit found with using the new year to remove oneself from all of the noise and assess the big picture.
In looking back over 2021 to assess the major stories in tech, one topic quickly jumps out at me as having been all-encompassing. It was a very good year for the tech giants when it came to navigating the regulatory and legal landscape. Consider the following developments:
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The Pivot to Screens and Cameras
In the mid-2010s, the tech industry thought it was onto something. The maturing supply chain from the smartphone revolution had made it easier (and cheaper) than ever to produce small, stand-alone speakers that could be placed in the home. Instead of playing music or talk radio, these speakers would be transformational due to their delivery of digital voice assistants that was made possible by years of cloud and machine learning investments.
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Amazon’s Secret Weapon
The shift from brick and mortar to e-commerce has been one of the more pronounced tech developments to impact society. After years of on-again and off-again rumors, it increasingly looks like Amazon will expand its move into brick and mortar in a big way. It’s a move that traditional retailers need to monitor closely.
Amazon’s strategy for retail dominance hasn’t exactly been a secret.
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Streaming Video’s Ongoing Revolution
There continues to be something that I call the “iPhone mentality” in tech. A singular product or service is positioned as quickly transforming a market or industry. A byproduct of this thinking is the tendency for consensus to prematurely declare that first movers are winners.
Netflix was declared the winner in paid video streaming back in 2018.
Spotify was declared the winner in music streaming in 2015.
Tesla was declared the winner in electric vehicles in 2017.
In each example, a winner was declared before we even knew what it meant to win in that respective industry.
New data out from Nielsen suggests that streaming video remains in a different place than what consensus assumes.
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The Future of Digital Tracking
A retailer (Amazon), social media company (Facebook), and information services company (Google) now capture more than half of all advertising spending in the U.S. The Inside Orchard essay “The Advertising Triopoly” focused on how the three were able to reach such a milestone: establish formidable ecosystems powered by not only software, but also customer data. As to where tracking will go from here, change is in the air.
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The Pandemic Isn’t Fueling Tech
With the 1Q21 earnings season coming to a close, we have a good view of how the world’s largest companies performed during the first three months of 2021. Impressive would be the word. Consider the following year-over-year revenue growth figures:
Apple: 53%
Facebook: 48%
Amazon: 44%
Alphabet: 34%
Microsoft: 19%
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The Advertising Triopoly
(The following essay has been made available for all to read. You can share this essay far and wide.)
The press has come to rely on a very wide net when describing “tech” companies. Some of this is to be expected as tech continues to invade new industries. However, there is something wrong found with using “tech” to describe any company making money one way or another from software and data. My stance on “tech” is that it has lost much of its descriptive meaning when it comes to business models and product strategies.
Instead of lumping today’s corporate giants into one massive “tech” bucket, a different categorization based around advertising is more valuable. For the first time, a retailer, social media company, and information services company are grabbing more than half of all advertising spending in the U.S. The pandemic was the catalyst responsible for pushing the three over the 50% mark.
Wall Street doesn’t see any end in sight when it comes to Amazon, Facebook, and Google and their advertising prowess. Accordingly, the press has taken it upon themselves to be the last remaining force of resistance to the three. It is not a coincidence that massive media campaigns have been waged against Amazon, Facebook, and Google. All three have awful narratives and perceptions if going by press coverage. From my position, much of the press outcry and criticism has become too stretched to be any good. The press made one giant mistake in their quest to go after these advertising giants. By turning every little thing into a massive crisis that supposedly was going to bring their downfall, the press cried wolf too much. The end result was valid criticism being watered down to such a degree that readers and listeners became tired with it all. In a way, the press’ attacks have helped strengthen Facebook, Google, and Amazon.
That’s not to say that there isn’t controversy found with the advertising triopoly. Instead, few are able to correctly point out the actual issues. Another way of describing the advertising triopoly is the data triopoly. Consumer-friendly services, most of which are free, are offered with the goal of grabbing consumers’ attention, and by extension, their data. This data is then used to both enhance the underlying services, which results in better and stronger engagement, and attract brands, which have a never-ending craving to get in front of consumers.
There is nothing inherently wrong with the triopoly giving away services (email accounts, cloud storage, video streaming, music streaming, messaging, reviews, business solutions) for free just as there is nothing wrong or evil found with leveraging customer data to enhance or better the service over time. However, there are two primary problems found with the dynamic:
Companies are not being clear and up front with their customers as to what kind of data is being collected and how the collection process works. The average consumer would be shocked to learn how much of their data is actually being collected. It is no longer good enough to collect data about what consumers’ are doing on your own online property. The goal is now to track customers while they are on other online properties.
Companies are building detailed customer profiles in an effort to better compete against other companies.
A good argument can be made that the two preceding problems end up being byproducts of giving services away for free. If services weren’t free but instead paid, the companies offering such services wouldn’t be in as much of a need to build detailed customer profiles or hide their true data collection intentions. However, this view comes across to me as being a bit too cynical. We have not seen what would happen if the advertiser triopoly was actually up front with customers about data collection while making a concerted effort to curtail data collection in an attempt to enhance customer privacy. It is not a guarantee that their advertising grip would actually weaken in such a scenario. Instead, we are left with a company like Apple, sensing no viable solution to the two preceding problems, taking it upon themselves to address the underlying issues.
As for who stands to be the largest business losers from the advertising triopoly, industries that have essentially become commoditized are high on the list. The demise of local newspapers has been well telegraphed. Less focus has been put on how the advertising triopoly holds complete and total responsibility for its destruction and broader problems found with the entire news industry. It is ironic that two of the three advertising companies that make up the triopoly have been trying to “save” the news industry by throwing money at publishers. Unfortunately, such efforts are too little and too late. The simple presence of the advertising triopoly leaves little to no room for a news industry long supported by advertising. (We are going to see continued consolidation in the news industry, including the online space, which should leave enough room for a pretty decent niche publication scene.)
The music industry has similarly come under pressure from the advertising triopoly, not due to declining revenues from streaming but rather from the art form being used and taken advantage of in pursuit of building up ecosystems. Fears of podcasting and video not being too far behind music are valid. There are then niche industries, or at least industries that would seem to be niche, such as restaurant and product reviews, that have been decimated by the advertising triopoly. While an enduring entrepreneur can take a swing or two at these troubled industries, it will likely take massive capital in an effort to grab users and only then would consolidation seem like the inevitable conclusion.
Turning to the government for help with taming the advertising triopoly is easier said than done. The regulatory issue isn’t actually found with what companies are doing with customer data once it is collected, but rather it’s found with the collection of the data in the first place. Examining data collection practices would then unveil a systemic problem found throughout the corporate world with very few exceptions. Breaking up the advertising giants won’t accomplish as much as regulators think. Instead, competition can be intensified by giving customers more control over their data and the collection process. Focusing on the data itself will end up being the best way of equalizing the situation as it was data that gave power to today’s advertising triopoly.
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Carving Up Retail
Kmart was at one time the second-largest retailer in the U.S. After two bankruptcies, one as a Sears subsidiary, and a growing number of store closures, the big box department store finds itself on a gradual slide into liquidation.
After 43 years in the same location, a local Kmart closed its doors at the end of 2019. The 45,000-sq foot store – far too small of a store footprint for Walmart or Target but too large for most other retailers - anchored the town’s most visited shopping plaza. Its closure led many to fear that another small town had fallen victim to e-commerce.
Such fears ended up being misplaced.
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Online Product Reviews Are Broken
The premise behind a site like The Wirecutter, bought by the New York Times for $30 million in 2016, may make complete sense on paper. Have an “expert,” who apparently knows everything there is to know about a product category, test out an arbitrary number of products spanning the price and feature spectrums in that product category. Relying on experience and perspective, the expert issues a verdict as to the “best” product to buy - the product that everyone should use without fear of regret or disappointment.
In practice, Wirecutter is wholly disappointing.
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Introducing Inside Orchard
I would like to introduce something that I’ve been building. It’s called Inside Orchard.
Ten years ago, technology was a defined sector with recognizable barriers. Ten years from now, there will be little to no delineation between technology and society as the two become intertwined. Inside Orchard (@InsideOrchard) will be home to my unique perspective on technology and its growing influence on society.
The name “Inside Orchard” is a play on the fruit orchards that eventually became Silicon Valley. Given the ease of focusing too much on any one tree in an orchard, “Inside Orchard” also refers to successfully navigating the noise found in the tech news cycle to focus on the big picture.
It’s getting increasingly difficult to find articles about technology that I feel a connection to and enjoy. Inside Orchard is my outlet for publishing ideas and perspectives that I believe in. I’m confident others will also find immense value in the essays and podcast.
Inside Orchard’s business model will be subscriber based. I want to make the site as accessible to as many people as possible while keeping it sustainable for decades. A subscription is just $10/month or $100/year and includes exclusive early access to written essays as well as access to an exclusive podcast. The first 200 subscribers will receive the distinction of being “Founding Subscribers.”
Inside Orchard will sit next to Above Avalon as a home for my perspective and analysis. While Above Avalon will continue to be dedicated to offering the most comprehensive and accurate analysis of the most influential company in tech (Apple), Inside Orchard will be dedicated to the big picture. A bundle consisting of subscriptions for both Inside Orchard and Above Avalon is available here. Above Avalon members receive a 50% discount on Inside Orchard (just $5/month or $50/year).
A big thank you goes out to my wife Jennifer (@jennifercybart) who drew all of the artwork featured on Inside Orchard. Another thank you goes out to Above Avalon members. Above Avalon success is providing the foundation for Inside Orchard. It’s never been a better time to analyze Apple, and the same applies to the broader technology landscape.
Neil Cybart (@neilcybart)
Founder and Author
Inside Orchard