Perhaps no other company is better known for thinking big than Amazon.com (NASDAQ:AMZN). Not only has the e-commerce giant revolutionized retail, but it has pioneered industries from e-books to cloud computing, invented gadgets like the Alexa and Echo, and experimented with ideas like drone delivery.
The company's success has come from a willingness to take risks, but with those risks have come plenty of failures. Founder and CEO Jeff Bezos has always embraced risk-taking and failure, telling investors back in 1997, "We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case."
With Amazon making moves into the logistics industry, looking back on the company's recent failures may shed some light on what can work and what doesn't for Amazon.
The Fire phone
Amazon's best-known product flop may be the Fire phone. After establishing a strong position in e-readers and tablets, Amazon wanted consumer to own devices that would facilitate shopping on its website and consuming its e-books and video entertainment.
Amazon ended up taking a $170 million writedown on the Fire phone. The device was intended to be a competitor to the iPhone, but Amazon's brand has always been associated with value, not top-of-the-line quality. Its $50 Kindle Fire tablet, for example, provides a clunkier experience than the iPad, but is much cheaper.
Not only did the price not match the brand, but Amazon was late to the party. Introduced in 2014, the phone arrived when the smartphone market had matured. Apple and Samsung owned the high-end market, while there were plenty of cheap Android phones to choose from for budget-minded consumers. For an iPhone owner, there was little reason to take a chance on a similarly priced Amazon phone, and those who did purchase one rated it poorly.
For a company known for futuristic innovations, launching an in-house brand of diapers seems surprisingly old-fashioned. After being unveiled in late 2014, the experiment lasted just two months, after which customers complained about the product and Amazon pulled it to make design improvements.
Diapers may be seem like an odd aspiration for Amazon, but it makes sense in a way. Since the item is both a recurring purchase and only bought by parents with small children, it's become a sort of way gateway product for Amazon. New parents are often grateful to be able to order such a product online and get quick delivery -- but like smartphones the diaper market is well-defined, with brands like Pampers, Huggies, and Luvs dominating. It's also the kind of low-tech product that Amazon has no core competency in, especially compared to heavyweights like Procter & Gamble and Kimberly-Clark. Historically, Amazon's success has come from selling things at a low price, not from manufacturing low-cost products.
On paper, online travel may seem like another area that Amazon could excel at. The company has a huge data mine, and millions of customer relationships built on it being a trustworthy low-cost provider. However, Amazon Destinations lasted just about six months before the company pulled the plug last October.
Like its experience in smartphones and diapers, Amazon jumped into a mature market here. By this point, Expedia had consolidated 75% of the domestic online travel market after taking over sites like Orbitz and Travelocity, making it more difficult for a new entrant than it would have been five or ten years ago. Other than its customer base, Amazon brought no distinct competitive advantage, and the established OTAs had already built relationships with hotels, airlines, and rental car agencies. Amazon did not provide a precise reason why it ditched its Destinations page; likely, the e-commerce giant thought it could make a bigger splash in the industry than it did.
In all three these experiments, Amazon was going up against entrenched industry leaders and had little competitive advantage of its own to leverage against them.
Its most successful innovations, like the Kindle, Amazon Marketplace, and AWS, come from pioneering new industries and leveraging its strengths.
The success of AWS, for example, mirrors the e-commerce site's scale and cost-savings commitment. Amazon Web Service was originally born as a solution to Amazon's infrastructure needs, one that could be sold to outside businesses. The Kindle was a natural outgrowth of Amazon's dominance of the book business, and a demonstration of its willingness to disrupt itself. Ideas like Amazon Marketplace, opening up the site to third-party vendors, and Prime were perfect complements to its leadership in e-commerce and helped strengthen that position.
Amazon's move into logistics looks like the company's next big project. For the first time ever, it listed fulfillment and logistics services under competitors in its 10-K filing this year, and evidence of Amazon's investments in trucks, jets, and cargo ships has slowly been emerging. Amazon has insisted it does not seek to compete with UPS (NYSE:UPS) or FedEx (NYSE:FDX), only to supplement their services, but the development of a logistics network resembles the origins of AWS. With both services, Amazon would be the principal customer; but once the network is established, it makes sense to sell the service to other companies. Amazon's need for package delivery is greater than any other company's on earth, and the company has a vast data trove to mine for a logistics service. Depending on either UPS or FedEx or the notoriously low-tech post office for delivery may also not be the best strategy for a company that prides itself on convenience.
In delivery, Amazon will face entrenched competition, but it seems natural for the company to vertically integrate this way. Unlike, say, smartphones, an in-house logistics system could provide ample benefits for the company. It's still early in the game, but don't be surprised if Amazon becomes a major force in package delivery over the next five or ten years.
Jeremy Bowman owns shares of Apple. The Motley Fool owns shares of and recommends Amazon.com and Apple. The Motley Fool recommends FedEx, Kimberly-Clark, Procter & Gamble, and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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