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Network affects make online retail giant Amazon so successful, says fund manager

Tuesday, March 28, 2017 9:33
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(Before It's News)

On the day Inc (NASDAQ:AMZN)  confirmed it was buying – the Middle East’s largest online retailer, marking its move into the new region it seems appropriate to analyse in a little more the company and its ascent to dizzying heights over the last decade.

With that in mind, the below is a section of a feature penned by an anonymous fund manager from what many would call one of the “big players” in UK fund management, managing money for most of the last decade.

I’m ashamed to say I’d never read the now-famous 1997 letter to shareholders penned by Amazon (NASDAQ:AMZN) chief executive Jeff Bezos, so I read it over the weekend.

This was written when the internet was only just getting started, and Amazon was a fraction of the size of today, achieving US$150mln of revenues compared with the US $136bn it generated in 2016.

What struck me was how Amazon saw the future potential of being the leading marketplace so early, and how Mr Bezos zeroed in on exactly what was required to achieve it, namely a long-term perspective and an obsessive focus on the customer.

My favourite section from the missive is…

“We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position.

“The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity and correspondingly stronger returns on invested capital.”

“We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”

“When forced to choose between optimising the appearance of our GAAP accounting and maximising the present value of future cash flows, we’ll take the cash flows.”

“Though we are optimistic, we must remain vigilant and maintain a sense of urgency.”

The final two quotes are especially interesting.

The first is an acknowledgement of the shortcomings most businesses face as they work to satisfy shareholders, who are often focused on quarterly performance.

The second gives an insight into a corporate culture that has held onto the urgency felt in its entrepreneurial beginnings to continue raising the bar in terms of delivery and service.

The importance of network effects

One of the main factors that make Amazon successful is its network effects. Having the scale of offering and customer experience attracts the customers.

Having the customers attracts the retailers, which further attracts the customers, and so on in a virtuous circle.

Once there are a significant number of retailers and customers, Amazon can refine its intelligent algorithms to connect customers with more of what they want, allowing greater sales for retailers and higher consumer surplus from customers who need to spend less time searching for what they want.

These network effects are powerful and reinforcing.

* buoyed by Middle East deal


Story by ProactiveInvestors


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