Amazon: The site's journey meanders as much as the river's

Perhaps the biggest concern about Amazon is, paradoxically, a consequence of its long-term vision. It is hard to compete with a company whose shareholders do not expect it to make a profit.

Twenty years ago, when Jeff Bezos left his job in finance and moved to Seattle to start a new firm, he rented a house with a garage, because that was where the likes of Apple and HP had been born. Although he started selling books, he called the firm Amazon because a giant river reflected the scale of his ambitions. 

This past week, the world’s leading e-commerce company unveiled its first smartphone, which Amazon treats less as a communication device than as an ingenious shopping platform and a way of gathering data about people in order to make even more accurate product recommendations. 

The smartphone is typical of Amazon. There is the remorseless expansion – if you can deliver books and washing machines, why not a telephone? There is the ability to switch between the real world of atoms and the digital world of bits: Amazon has one of the world’s most impressive physical-distribution systems, even as it has branched out into cloud computing, e-books, video streaming and music downloads. There is the drive for market share over immediate profits, and there is the slightly creepy feeling that Amazon knows too much about its users already. 

So far its insatiable appetite has helped consumers. As it grows in size and power, however, the danger is that it will go too far. 

For the moment, admiration should count for more than fear. Many things the world now takes for granted were introduced by Bezos. Typing your credit-card number into a Web browser once was considered a sign of insanity until Amazon showed how easy and safe buying things online could be. Once people had bought a book, they tried other things. Today the global e-commerce market is worth $1.5 trillion. 

Amazon also fostered the emergence of customer reviews. From the start it let buyers rate and review books. This still irks some professional critics, and some of the most fulsome five-star ratings may be from the spouses of authors. Overall, though, they provide valuable advice to buyers. Today everything from apps to hotel rooms to garden hoses can be rated online, and retail Web sites seem incomplete without customer reviews. 

Then there are the industries it has upended. Books came first: Amazon has changed publishing twice, first by making any book in the world quickly available and then by making e-books mainstream. Before Amazon launched the Kindle in 2007, e-readers were bug-ridden gadgets that few people used.

The Kindle was easy to use, worked anywhere and allowed instant delivery straight to the device, rather than via a PC. 

Amazon also pioneered a new model for cloud computing. In 2006 it began renting out computer capacity by the hour. The option to rent computing power, rather than to buy it, greatly reduced the cost and complexity of launching a new company. Since then Amazon’s cloud services have been used by start-ups including Airbnb, Instagram, Netflix, Pinterest and Spotify, and have spawned a whole new industry. 

Apple-the innovator

Apple may be better known as an innovator, but Amazon may have had an equally big impact on the workings of the digital world. It keeps on experimenting. Unconstrained by a self-image as a company that does a particular thing, Amazon has dabbled in areas from Internet search to robotics to film-and-television development. Indeed, if your glasses are particularly rose-tinted, Amazon seems to have put the “long term” back into Anglo-Saxon capitalism.

At a time when Wall Street is obsessed by quarterly results and share buybacks, Amazon has made it clear to shareholders that, given a choice between making a profit and investing in new areas, it always will choose the latter. While other technology giants sit on record piles of cash, Amazon still has plenty of ideas about where to invest and innovate, and investors seem happy with it: Amazon’s price-to-earnings ratio has exceeded 3,500 at times. It aligns top executives’ interests with those of shareholders by paying them largely in stock: Its highest salary is $175,000 a year. 

The problem is that many of these virtues come with accompanying vices. Amazon stands accused of unfair competition, of being a lousy employer, of dodging taxes and of bullying its rivals. 

Amazon says that median pay in its American warehouses is 30 percent higher than in large retail stores. On taxes, however, the picture is more nuanced. The main reason its American tax bill is so low is that it does not make profits, but Amazon also has been extremely aggressive in legally booking its profits to low-tax countries. Having campaigned against sales taxes for online transactions for many years, it lately has changed its tune and now collects sales taxes in a growing number of American states. 

As for bullying competitors, most of this is simply the savage magic of capitalism. Amazon has crushed local book stores, but only in the same way that Tesco and Wal-Mart have crushed grocers: by providing a cheaper, easier way to shop. However, antitrust regulators must ensure, on a case-by-case basis, that it is not abusing its market power. For instance, Amazon’s current dispute with Hachette, a large publisher, may largely be a standard tussle between retailer and supplier. When the dominant seller of e-books removes pre-order buttons and makes delivery times longer for Hachette books, however, that hardly squares with Bezos’ professed emphasis on customer service. 

Perhaps the biggest concern about Amazon is, paradoxically, a consequence of its long-term vision. It is hard to compete with a company whose shareholders do not expect it to make a profit. Its vast scale and willingness to operate at zero or negative margins represent high barriers to entry for potential competitors. 

This cannot go on for ever. The concern is that Amazon is merely waiting for rivals to go out of business before raising its prices. If that happens, regulators should jump on it hard. That would provide an opportunity for another firm – China’s Alibaba, say – and some investors might rue the Amazon earnings that never came. Consumers would once again win, though, as indeed they generally have done as Bezos’ scrappy start-up has expanded its reach into so many aspects of everyday life.