The Gambles of Jeff Bezos

Here's another post originating from my news writing class. Although it's not about jobs and unemployment directly, the continued success of the US high-tech sector and those employed there will hinge on the possibly bold or foolish decisions of companies like Amazon. 

“How affordable is Kindle Fire?” Jeff Bezos asked at a press conference in Manhattan last month for the release of Amazon.com’s incursion into the tablet market.

Looking to stun his audience with the answer itself, he flatly answered, “it’s a hundred and ninety-nine dollars.”   

This announcement raised eyebrows amongst some industry followers who believe the online retailer will lose money each time a customer places a Fire in their digital cart.

Dan Geiman, an analyst for the brokerage firm McAdams Wright Ragen, predicted a fifty-dollar loss per unit, while IHS forecasted a less-extreme ten-dollar loss.  At least one authority, however, thinks Amazon will end up in the black. UBM TechInsights sees Fire’s production costs at one hundred and fifty dollars.

But gambling on big ideas and low margins is nothing new for Bezos, the CEO and chairman, who turned away from a promising career on Wall Street to start the internet retailer at a time when most consumers didn’t understand what the world-wide-web was

At Amazon’s helm, Bezos has repeatedly shown his willingness to aim for market share over short-term earnings despite investor grumblings.  In 2007, for example, he inaugurated Amazon’s expansion into digital hardware with the release of the first generation Kindle e-reader.  More than just adding to the bottom line through direct purchases, however, Bezos saw the Kindle as a way to facilitate the growth of its electronic book revenues. 

He set the price of e-books at a flat rate of nine dollars and ninety-nine cents, well below the cost of their paper-bound alternatives, but also notably below the price Amazon paid to publishers for certain best-sellers. 

Now, with the release of the Kindle Fire, Bezos finds himself guiding Amazon into the intensely competitive tablet market. Depending on which cost analysis is correct, Bezos’ fortunes may rely on the Fire increasing e-book sales and subscriptions to Amazon’s seventy-nine dollar-a-year video-streaming service.

Bill Stueber, a wireless telecom equity analyst for Telecom Partners Group, believes the plan will pay off over the long-term.  “It’s razors and razor blades,” he says, relating to the classic business model of pricing razors at a loss in order to sell blades at a higher than normal sticker price.  Additionally, he adds it is not a new theme in the high-tech industry.  Cell phone companies follow this model regularly.

“When you buy an iPhone for ninety-nine dollars, it costs AT&T three hundred and ninety-nine,” he said.

Additionally Jeff Bezos may have another profit-making trick up his sleeve. The Fire’s web browser, called Silk, directs its users’ internet traffic through Amazon’s servers. According to a recent New York Times report, Amazon can then track its users’ clicks and gain valuable information on consumer buying habits.

But, as would be expected with a technology that informs a retail company of consumer tendencies, privacy concerns have been expressed.  Representative Edward Markey of Massachusetts, for example, is worried Silk will give Amazon too much access to the details of customers buying practices. 

In an email to Jeff Bezos he explained, “I am concerned that such a combination (Silk and Fire) will allow Amazon to extract and utilize an extraordinary amount of information about its users’ surfing and buying habits.”  He requested a response from Bezos before November 4^th outlining the ways Amazon will use this information.

The development of the Kindle Fire is just the latest risky move for Jeff Bezos and Amazon.com.  To an unknowing outsider, he may be a hardnosed and calculating CEO. 

But to Peter Owen, an old co-worker who knew him during his Wall Street days at Bankers Trust in Manhattan, he was just the guy with the “characteristic laugh.”