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Photo: Nigel Parry, Wired 1. Low-Margin Wizard When he started out selling books online, Jeff Bezos focused on building a profitable business in a low-margin world from scratch. Facebook and Google are all very valuable businesses making a lot of money, but given their penetration in relative numbers, they aren’t exactly making a lot of […]

by JERRY SILVER // Twitter, Facebook, Instagram
Digital PR specialist and CEO at Spin Factory

Photo: Nigel Parry, Wired

1. Low-Margin Wizard

When he started out selling books online, Jeff Bezos focused on building a profitable business in a low-margin world from scratch. Facebook and Google are all very valuable businesses making a lot of money, but given their penetration in relative numbers, they aren’t exactly making a lot of money from their vast user bases.

2. Future-Proofed

Let me get back to being effective in a low-margin world; in the foreseeable future, e-commerce will be all about long-tail and making sure many small margins fall on your side of the track. We all sing the praise of Apple and Steve Jobs, but the paradox here is that over 90% of Apple’s revenue comes from their hardware.

3. Sales-Driven

I love Apple for many reasons, but it’s a dying technology. All proprietary systems, like empires, will fall. Instead, Jeff Bezos and Amazon.com are focusing on content and all hardware solutions, like the Kindle Fire for example, are simply made solely for easy access to content at a competitive prize point. And content, whether virtual or analogue, will never go out of style.

4. Building Slow From The Ground Up

When it comes to hardware, Amazon.com is mainly focusing on buying server infrastructure, capacity and storage, much like Google. But where Google only has their advertising strategy (advertising, really?) to fall back on, Jeff Bezos is slowly building an e-commerce infrastructure where money is actually shifting hands.

5. Building A Long-Term Business Model

App Store (iOS) is genius, but it’s not long-term. When Amazon.com has single-sale successes, they make money from literature, how-to knowledge, inspiration and tech gadgets. When App Store has success, we see novelties like Angry Birds taking over the world. That’s fine, but it’s not built to last.

6. His Future Is Ahead Of Him

Alongside titans like Bill Gates, Sergey Brin, Larry Page, Mark Zuckerberg and  Steve Jobs, Jeff Bezos is much more anonymous. But, Bezos is as nerdy as Gates, as big-picture visionary as Brin, as intelligent as Page, as machiavellian as Zuckerberg and as focused on details as Jobs. And while we probably have seen the height of their accomplishments from the rest of them, Bezos probably has his biggest impacts in front him as long as he’s ready to not going for the proprietary strategy long-term.

7. Stands Strong

Google is struggling to get social without destroying their flagship, the search engine. Facebook’s IPO gave me serious chills and now they offer the general public to override their EdgeRank by paying for fake penetration onto other users’ walls. Apple killed all support for the original iPad and don’t present any next generations for either MacBook Pro or iMac. Google, with all of their data and all of their money, they can’t come up with anything better than Google+ and several iterations later, it’s no better than the first version. And Microsoft is lurking in the shadows, probably hoping for Android OS to help them piggyback into the spotlight again. Amazon.com? As e-commerce becomes more and more important and governments starts to realize that free shipping will grow their economies, they will be in pole position.

8. Managed To Stay Close To The Top For A Long Time

Jeff Bezos survived the IT crash and it didn’t stop him.

9. Makes Social Work For Him

Amazon.com is today the e-commerce platform that best understands social; it leverages user behavior data to predict what you want to purchase. Powerful user reviews ranked by the users themselves. Creative user-generated shopping lists. Driving much of the ebook revolution. In the future, my bet is that you’d rather have Amazon hosting your multimedia content because they can make their low-margins work without forcing you into scary terms and conditions.

10. A Nice Guy

Jeff Bezos actually seems to be a nice guy and a cool person to work for. While some of the more notorious titans of the industry are known to be eccentrics, asocials or just plain assholes, Bezos seems to be able to combine long-term business sense with grand visions and a positive outlook on future innovations.

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Behind the keyboard:

Jerry Silver is the author of Doctor Spin, a PR blog that's been around for 15+ years. Via his agency Spin Factory, Jerry is advising brands on how to adapt to a 'digital first' world. In 2016, Cision Scandinavia named him "PR Influencer of the Year". Jerry lives in Stockholm, Sweden with his wife Lisah, news anchor and television host, and their three-year-old son, Jack.

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Jerry Silfwer

Got some reactions on Twitter as to why I think Apple’s a dying technology. 
 
Here’s why:
 
Apple’s success is closely tied to their proprietary strategy. By making their iOS sleek and simple and intuitive in a way that’s been light-years ahead of their competitors and combining this with elegant software and hardware design, they managed to grab big chunks of several markets. But, they won’t be able to held on to the consumers within their systems forever. App Store opens up for third party developers and iTunes sells third-party content, but Apple is dictating all the rules. For now, they are ahead of the curve, but long-term they can’t be.
 
And hence the real problem; when Apple is forced to be more open to the world around them in order to compete, so much of what’s good with Apple today will deteriorate. And what’s left might get squished by the low margins of the general internet economy. I think Apple will be around, that they will continue to be innovative, but to keep the market positions they have today for so many different technologies? I see it as a nearly impossible challenge.

Reply
bjornjeffery

@Jerry Silfwer
Although I agree that Amazon is a great company, I think your reasoning here is flawed on several accounts. In short, you are comparing companies that have nothing in common other than having a component of their business on the internet. Unsurprisingly, the comparison comes up strange and speaks to Amazon’s advantage since you are using them as the base.
 
I thought we had left the stage where “internet companies” were bulked into one category. There are subsets that are relevant to compare – e-commerce for instance – but when not broken down it is as strange as comparing a car dealer with a food store – simply because they both have physical sales area.
 
In further detail (and since I started this rant, I might as well finish it :) – here are some things that I think are faulty in your arguments – point by point:
 
 
1. Facebook and Google are primarily advertising companies. Amazon is e-commerce. Not a relevant comparison.
 
2. Saying that 90% of Apple’s revenue comes from hardware is not surprising, or strange, since Apple is a hardware company. Anyone that thinks otherwise and tries to compare them to software companies has got it fundamentally wrong. And yes – there is a future for hardware companies too.
 
3. Proprietary tend to have a hard time – yes. But both the Kindle, and Kindle Fire, are proprietary, so this point is completely wrong.
 
4. Saying that advertising per se isn’t viable as a business model is radical statement that I couldn’t possibly sign my name too.
 
5. Amazon does not make money from literature – publishers do. Amazon makes money from the sales and fulfillment of sold products. Sometimes it’s media, sometimes not.
 
6. Bezos is a low key guy – agree :)
 
7. Again, however bad the FB IPO was, or Google’s social efforts, the comparison is irrelevant. These companies can work in parallel and when e-commerce takes off that does not mean all other companies will fail. Quite the opposite, especially if you’re in…. advertising! ;)
 
8. But it was a very, very close call. There’s a good written case study about it from HBS.
 
9. Agree – they are good at leveraging user data into clever recommendations.
 
10. I don’t know they guy, but sure – there seem to be slightly fewer bad stories there.
 
Finally – your last comment about “the low margins of the general internet economy”. This, I think, is wrong on two accounts. Partly, as you said yourself, Apple is not in the internet economy as such – they are a hardware company. The margins there vary, as Apple has proven. But digital margins in general, why would they necessarily be low?
 
On the contrary – digital business models are among the few that can actually fully utilize economies of scale in such a way that they can reach a profit margin of 99%. Just because they don’t, doesn’t mean they can’t. The structures are in place to be able to create truly global, scalable, high-margin products – and it is all due to the “internet economy” that you write off as “low margin”.
 
Okay – that was it! The daily rant has come to an end :)
 
/Björn

Jacqueline Kothbauer

 @bjornjeffery Your counter strike ;-) was precise and accurate. doktorspinn I deeply respect you as a communication wizard, but you’re taking on the whole world in this post. Apple, Amazon and Facebook are three completely different things as Björn points out. They have two important thing in common, scale economy and tech ahead mentality. The bare fact that they keep up their speed AND innovative edge makes it very difficult for anyone else to threaten their position. It will take the Nokia syndrome, leadership implosion, to bring them down at this stage. And that can happy any day ;-) 

Jerry Silfwer

 @Jacqueline Kothbauer Thanks, Jacqueline. I like taking on the world and thinking big. And i do think that just one guy with a blog in a small country somewhere can have ideas that are contradictory to the mainstream. And, for the record, I’ve been right before at times where popular opinion pointed in the other direction.
 
For instance, if the music/media industry had listened to me a decade ago, they would have been much better off than they are today. In this case, Jeff Bezos is building a very different kind of new media empire on a solid base of low margin incomes and cloud infrastructure.
 
However, don’t just read Björn’s interpretation of what I’m saying, since it’s somewhat skewed. For instance, I’m saying that proprietary systems will fall, not all the mentioned companies. What I’m saying is that as when the shift keeps shifting, we’ll be surprised at how well-positioned Jeff Bezos is.
 
As for comparing different companies:
 
I’m not comparing them as opposing each other, I’m comparing how they as separate entities are prepared for the future. They are all huge cultural influencers driving innovation and change in our time, as are their leaders. From there to having me say that they will all die tomorrow is quite the leap!

Jerry Silfwer

 @bjornjeffery Will do! My first couple of blogs are long gone online and the very first one I posted on a portal I think was called Yahoo Tripod with MS Frontpage. But I’ve been arguing for a new kind of economical thinking for a long time, so I’ll be pulling together a post on this with some references and link it back here.
 
It’s not very known, but I have somewhat of an active background in these questions and actually left the piracy movement a couple of years ago, but when I was active, my old ideas on new business models was the thing closest to my heart.

bjornjeffery

 @Jerry Silfwer  You say “For instance, if the music/media industry had listened to me a decade ago, they would have been much better off than they are today. ”
 
Please – and this is a sincere request – post your decade old, complete strategies for music and media companies here so that we can read them. It would be very interesting to see. 

Jerry Silfwer

 @bjornjeffery Thanks for the rant, i know the feeling exactly! You read something, you disagree, you feel that “hey, I know this!” and you start putting together a response and before you know it, you’ve gone through each argument. Happens to me all the time!
 
Obviously, we disagree on several points and I think that has to do with our different outlooks. But with that said, I truly appreciate you bringing a different perspective, since I think we speak for two basic opposite views on what’s going on.
 
But I do want to address one of your final points since it’s both so interesting and so crucial to both our arguments. Why is the future internet economy a low margin race?
 
Let’s say an ebook costs $5K to produce. You can of course then duplicate it virtually with no cost how many times you want, but it will have no effect on your profit margins. Digital duplication has no real stock value. If you sell the book for $10, the trick to get a 90% margin is of course to manage to sell a heck of a lot of copies of the book. Especially if you account for hosting, distribution, customer service and marketing per unit.
 
In effect, for “economy of scale” to work, demand must also scale. But here’s the kicker; consumers will be less and less interested in picking up the tab for high profit margins, especially if they are helping in spreading the word. Simply put, if it scales very easily, what consumers are ready to pay per unit will decrease quite significantly. Especially if it’s so easy for the seller to duplicate the specific product, what’s to stop them for duplicating it themselves?
 
This is a very strange paradigm to get used to; a reality where popular products will cost less than unpopular products. It do poses problems for classic economical theories of supply and demand and hiding behind proprietary walls will only work during a transition period as we’re getting used to this fundamental economical shift.

Jerry Silfwer

 @andersabrahamsson I hear you. I used Disqus for quite some time, but I think I’m in love with what @livefyre aims to be, rather than what it is. My biggest problem right now is that my WP is hosted on .se but redirected to .com, which makes pulling in social network reactions pretty unpredictable. But I’ll make sure to do a post promoting LF when I get everything to work!

Jerry Silfwer

 @andersabrahamsson Makes me think of Fight Club:
 
“On a long enough timeline, the survival  rate for everyone drops to zero.”

andersabrahamsson

 @Jerry Silfwer Just a shortie. I have two Pomodoros left – a k a “tjugofemminuters virtuell äggklocka på svenska” ;) – before 1500 hrs … to complete (irrelevant background fact ;). #IntresseklubbenNoterar. To the point!
 
_-_-_I paraphrase J M Keynes: “In the long run, we’re all going to be open”.Split into three: – “In the long run, Open will overtake Closed” – “Open Systems are more resilient than Closed Systems”
– “The Degrees of Openness can vary on different System Abstraction Levels” … and THERE I stop. Since extending the reasoning beyond this point leads to a macroblog.I will extend the reasoning more succinct over time through my write-ups in the essay writing related to #TheFlowSociety – and I will ping you back when I got a generic post together. Or even before, through the category “rants, raves, reveiws and responses” through my own blog haven. Either-or, the ping will be felt through the Open Source System Wordpress as the core.End. Of. Short, … Somewhat …? Eh. NOT! :), Response!Take care of the day and your life. Since:”In the long run, we’re all dead.”/John Maynard Keynes -_-_- 

andersabrahamsson

 PS. I realize that livefyre is not there yet. I had fixed breaks in this that disappeared. I’ll stick to Disqus some time more. DS.

Jerry Silfwer

 @bjornjeffery  I didn’t intend to lecture you on how comments work, I simply explained that I myself also have an habit of leaving extensively long comments from time to time. 
 
And what Jacqueline brought up based on your comment was that I was driving the point that the mentioned companies will go under (which I don’t think) and that my main point is the comparison of the companies (which is not what I was going for).
 
The obvious example you ask for should be the music industry. As music went from CD to MP3, we saw a decrease in how much consumers were willing to pay for music in general. 
 
Regarding economy of scale; I’m simply saying that maintaining high margins will prove to be difficult. Yes, I chose to illustrate this on a single product scale, but from an holistic standpoint, I would’ve ended up with the same conclusion. From such a standpoint, i would explain it like this:
 
If you have overall margins today, tomorrow you’ll need to share those margins with those who promotes your product. I think that upcoming companies like Kiosked.com for example gives us an hint of how revenue sharing and spread will work closely together for content in the future.

Jerry Silfwer

 @bjornjeffery I would agree with your argument if the business also could sell what is scaled. And demand will be dictated by a lot of things besides scalability, but in my argument difficulties to maintain rights and proprietary systems will favor the consumer looking for popular digital products.
 
And as production costs closes in on zero, the margin in relation to demand, given that the company manages to create the volumes needed for such levels, increases the profit margin at company level. But I’m saying it won’t help, because factors as digital duplication and competitive offerings will turn the digital into a low margin type of race, because that is what you have left to compete with, and I gave Kiosked as one example to illustrate that point.
 
Regarding the music industry, l always prefer to focus on what consumers thinks that they are buying, because that’s what matters most. They buy music and as supply shoots to the roof, demand affects willingness to pay.
 
As for my reasoning not making any sense at all to you—all I can say is that I’m sorry about that. I would suggest to take it on faith that I at least have one or two interesting ideas about the digital field, because I’m not trying to convince you, but to offer a perspective that differs from yours.

Jerry Silfwer

 @bjornjeffery  Cool. And in all honestly, I do have opinions on when and why and how; it’s just extremely difficult to cover every aspect of a complex and almost evolutionary process as we go back and forth in comments covering scaling, proprietary systems, margins and concrete examples. But allow me to compile a post this summer on my personal view on disruptive business models and scalability. I’d love to have a fresh discussion on those terms; this was just too many different angles all at once, I think.
 
But for the record, and for whatever it’s worth, I just wanted to say that I really enjoyed the discussion! I’m often times a “passion blogger”; swinging left and right as I did in the Bezos post, but it’s questioning/comments like yours that reminds me to better explain/deepen/prove my arguments in future posts! :)

bjornjeffery

 @Jerry Silfwer Yes, I do know this actually – but thanks for telling me how comments work ;)
 
I’m letting my previous points stand as my position hasn’t changed there. But please note that my “skewed” interpretation that you referred to does not claim anything that you imply in the response to @Jacqueline Kothbauer  – that choice of rhetoric was strange, and a little dishonest.
 
Additionally, your take on profit margins in on a single product basis. I am talking about the profit margins of a business – and thus looking at the combined sales and the margin on that. A very different figure. And yes, obviously an economy of scale needs the demand to scale – but who has said anything other than that? No one.
 
You say “if it scales very easily, what consumers are ready to pay per unit will decrease quite significantly.” – could we see some examples where this has been true, please? Because this statement is hanging in mid air here.
 
I think it is a mistake to draw this very broad reasoning across multiple product categories. The real shift is how different business models work with digital products and physical products respectively. Looking at the two independently will clearly show the difference in potential regarding profit margins and sustainable scalability. But they are both in the “internet economy”.

bjornjeffery

@Jerry Silfwer
Again – margins on individual products are something _completely and _entirely different than margins of company. In a pure digital economy the margin on each product is almost irrelevant as the costs of scaling to more customers is so low that the margin – as a total – just becomes better all the time. Your line of reasoning makes no sense at all in an economy with sales of digital products.
 
Over to the music industry then. There is nothing that says that it was the scalability in itself that lowered the willing to pay – which was what you were saying. The music industry was selling another product (CD/MP3) and therefore the expected price changed. Many factors came into play there.
 
Finally, sharing revenue for leads is nothing new – and if anything amplifies my point above. Paying for leads or commission lowers your margins on individual products, yes. But as a whole – the sales increase, and since the cost of scaling a digital product is close to zero the overall margin of the business will still increase.
 

bjornjeffery

@Jerry Silfwer Fair enough – I don’t think we’re getting much further here anyway :) And I never said (or meant) that you don’t have interesting ideas about digital – it was just this line of reasoning that didn’t make sense. As for saying that margins will go down – that is not a particularly risky bet to make without specifying when, and how much. It’s a bit like saying that China will gain influence, or that newspaper circulation will drop to extinction. In time, it will be true. But when, where and how is more interesting, IMHO.

pauspling

@bjornjeffery Ooo, where?

Reply
bjornjeffery

@pauspling As a comment!

pauspling

@bjornjeffery Duh!

Trendymagnus

@bjornjeffery things only tweeted when drunk: “here are some things I think is wrong with your argument – point by point”

Reply
bjornjeffery

@Trendymagnus It would have been even longer if I was drunk!

Trendymagnus

@bjornjeffery James Joyce – the first drunk teeeter

sliceonline

@DoktorSpinn And I responded. Meta. Hope you get me …

Reply
GeorgeBerglund

I totally agree that it is great; effctiveness & efficiency. But I think perhaps that the comparisons are on the side, maybe it’s interesting because they have an interesting person behind the success. To understand how good Bezos managed, we can instead compare with Boo.com. It started as Bokus, a small, small “Amazon”. If the company / people had worked in the same way as Bezos did, they might have been able to succeed, but just maybe. I had the misfortune to analyze the market for them, and the market did not exist at all then, not with their conditions. It was certainly not about money, they managed to pour a few billions down the drain. I think Bezos instead would have poured money in the right place and would  have come out with 10 times the value, in the medium term. You have to know what to do, and it’s always the market that decides, but you must be smart enough to listen to and influence the market.  And there is narrow margins that separates the smart from the stupid from the start, one is nose over the water, the other below.

Reply
Jerry Silfwer

 @GeorgeBerglund Agreed, let’s focus on strategy rather on whether or not the companies as such are comparable or not. And I agree, listening (i.e. in-depth behavioral analysis) to capture even the tiniest little margin will be the way forward. 
 
In this Wired article, Jeff Bezos talks about his strategy with low margins. Just scroll past the beginning where he is promoting the Kindle Fire: http://www.wired.com/magazine/2011/11/ff_bezos/all/1

GeorgeBerglund

 @Jerry Silfwer In the position they are in right now: pricing! And regarding margins that have been discussed here, the margins must always be based on business and market, nothing strange at all.

GeorgeBerglund

@DoktorSpinn So did I.
http://t.co/TRAjcUoS

Reply
stroemberg

@bjornjeffery Hade läst. Håller med dig.

Reply
lyreskog

Very interesting post, Jerry! But I think we have to keep in mind that Amazon is anything but a cash machine. Durning the first quarter this year, Amazon reached 90 billion SEK in renewal, but only 900 million SEK in profit. That’s a 1 percent profit margin…
 
Source: http://www.nytimes.com/2012/04/27/technology/amazon-profit-dropped-35-percent.html?_r=1 

Reply
Jerry Silfwer

 @lyreskog Exactly. Here’s how I see it: right now the internet economy, in a lack of better word, is like Klondyke. But what I see is that Amazon is doing business differently And my point here is that the economics of making profits online will look like how it looks for Amazon and ebooks for example as the gold rush settles. @bjornjeffery would push me to be more specific here, because saying that the economic climate will be tougher is like saying it will rain; eventually it does.
 
But my basic premise here is that I think companies selling online will have to find ways to make ends work with lower profit margins than they might have thought. Because either they’ll have to cut their margins to keep prices as low as they can, or they will have to entertain a community and probably produce original content themselves, resources which I believe also will have to come from the high margins of digital scalability.
 
I should say that I also see the “leasing economy” as an alternative model. Where you pay for library access but you never really own digital content, you just get to enjoy it when you need to. But this will be no walk in the park either; you might have extremely high margins on each person who, let’s say, subscribes monthly for the access, but then again you’ll need to reinvest a lot of those profits in adding to what content they get to access, if not to keep your community entertained and coming back, but to stay ahead of fierce competitors.
 
So, here’s a ballsy prediction; I think now is the time to buy Amazon stocks! :)

lyreskog

@Jerry Silfwer
I totally agree. Reinvesting the money in product development instead of make a huge dividend payment to the shareholders is probably a good idea, and a tactical move that companies may have to get used to at this “Klondyke” situation. 
 
But still, I have to admit I hear some alarming bells ringing when a company like Amazon only reaches 1 percent profit margin. But I guess that might be the “buy stocks” bells ringing :)
 

GeorgeBerglund

 @lyreskog Do not count percentage, count the money and think of the possibilities of such a position.
 
The phrase “only” is not entirely appropriate here?

lyreskog

@GeorgeBerglund
Hehe, indeed :)
 

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