Loss Leaders

Why shuttering Amazon's Devices group may be a mistake

Loss Leaders
Multiple generations of Amazon's Kindle devices

Why shuttering Amazon's Devices group may be a mistake

Welcome back. It's been a busy few months for me, albeit not a busy few months on the newsletter. I got married! Do you have any idea how much work it is to plan a wedding? Because I did not. I had no plan for that much planning. My then-fiancée/now-wife is great at it. I struggled to keep my head above water. But it's over now, and we're delighted with how it turned out. And since part of our courtship was her subscription to and reading of this newsletter at its old home on Substack — yes, including the one where I posted a photo of my giant hand that I captioned "Ladies" — it seems only fitting that I return to it.

Yesterday, the New York Times confirmed an earlier report by the Wall Street Journal that Amazon is planning to lay off approximately 10,000 employees, making deep cuts in its devices group, as well as retail and HR. The mandate from CEO Andy Jassy is to boost overall profits by cutting in divisions that are unprofitable.

There's a certain logic to this, but it's not a very Amazonian one. From its beginnings, Amazon made big bets on long plays, willing to sacrifice immediate profitability to boost its overall position in blue ocean markets. When Amazon's had to play catch-up, it largely hasn't worked: the Kindle Phone is maybe the most high-profile mistake/missed opportunity, just to name one. It's hard to deny that this loss-leader approach has been key to Amazon's success, although it often made the company a mystery to Wall Street. This would signify a huge shift, totally aside from the 3% of employees who will likely leave the company.

Hacking away at the Devices and R&D divisions is the most perplexing to me. These are the sources of Amazon's most signature successes, with the Kindle, Alexa/Echo, and Fire TV. They're what hook customers when they're still kids, and that customers above all associate with the company, even as they help ensure loyalty and drive their share of media purchases and retail revenue. The Kindle, like the Echo and the Fire Stick, was always supposed to be a loss leader: you sell the razor at close to cost and make your money back selling the blades. How many books has Amazon sold because of the Kindle? How many Prime subscriptions? How many impulse purchases do people make on their Echos and Fires?

Evaluating the profitability of the Devices group just by summing up the prices of devices sold and subtracting the costs seems so foolish that I can't quite believe Amazon would do it. They have to have data on how these devices are being used — or rather, how they're not being used. If Kindle owners keep their devices for years and years and read the same dozen books over and over again, that's bad. If Alexa users only talk to the machine to check the weather and turn their lights on and off, that's very bad. If Amazon is swamped with hard-to-process returns and customer complaints because somebody's kid accidentally ordered hundreds of pounds of Silly Putty (do kids still use Silly Putty? Strike and insert your favorite silly kids' toy here), that might be a worse possible outcome than them never buying an Amazon device at all.

Someone — preferably, many stakeholders throughout the company — has to have done the minimax calculation on all of this. It's not a business like AWD or retail. It requires a fundamentally more complex kind of accounting. But it's only because Amazon manufactured all of these devices that it has enough data to make that calculation to begin with.

This is why I'd still argue that Amazon closing its devices and R&D shops is short-sighted. Yes, you can still sell e-books and movies and stream Rings of Power to other devices. Amazon's always been pragmatic about this: except for a long standoff with Apple, it's been willing to sell those razor blades to anybody who wants to by them, no razor required.

But if you give up your devices, you're at the mercy of someone else's platform. Your best customers are stuck paying a skim to Apple or Roku or whoever sold them their machine. The rules could change and make it even more hostile to third-party digital media companies. The drawbridges are going up, and you've just handed all of your competitors a tremendous advantage. You're not Microsoft, and this isn't the PC — your software doesn't let you dominate any more. Software and services tightly coupled with slick hardware does.

Besides, there's another solution to this. Amazon is a tech company. They could design and manufacture their devices like the most popular tech companies! If the problem is that Kindles and Echos aren't profitable enough, even when you factor in the extra purchases they drive, then make them more profitable! Either charge more money for them or find a way to cut their costs. Get out of the middle of the road — sell one premium e-reader and one that's dirt cheap, plus maybe one with good parental controls for kids. And make the premium feel premium and don't let the cheap cost you so much money. Does this feel familiar? Because this is what Apple does. Is Apple tossing its R&D division to the curb? I don't think it will.

The trouble is that you can't do either of these things if you get rid of all of your staff. You need designers and manufacturing experts and everything you've worked so hard to build from scratch beginning with the first Kindle fifteen years ago. You're trashing your hard-won reputation as not just a retailer, but a serious technology company. And for what? To save how much money on a full accounting? To appease investors you've never catered to, in the middle of a tech and retail downturn, and who probably aren't going to be especially impressed? To win a quarter or two by embracing a kind of thinking that's grossly foreign to the company's identity?

I get it, but I don't get it, you know? If Amazon can't support its loss leaders any more, or figure out another way to make and sell razors and blades, then who can?

WSJ News Exclusive | Amazon, in Broad Cost-Cutting Review, Weighs Changes at Alexa and Other Unprofitable Units

Review includes the devices unit, which includes Alexa and where documents show operating losses of $5 billion annually in recent years

Publishers' Note: Some of you may be wondering about the future of this newsletter, since 1) I haven't been especially active and 2) Revue is reportedly shutting down before the end of the year. Nothing at Twitter is guaranteed to stick around or keep working — I couldn't even log into Revue yesterday because the two-factor authentication was borked.

Long story short: the newsletter will probably become something else somewhere else, and I will let all of you know as soon as I do. In the meantime, thanks for reading. And if any ex-Amazon employees want someone to talk to about their experience and what they build there, let me know.