Why Amazon Is Bucking the Trend

Jeff Bezos, when he was peddling the new Kindle on Charlie Rose the other night, kept using the word “seamless.” He wasn’t talking about the device itself, of course, but the experience of the customer that uses it. Whatever you think about the Kindle, Bezos’ choice of that word goes right to the heart of Amazon’s own strategy, and the reason why the company, its operations and its stock have held up so well in the past few months. Everyone knows that Amazon’s e-commerce site succeeded because its interface was intuitive to the point of being completely natural. What isn’t discussed as much is the ethic behind that success: Simplicity is hard. Just as Amazon went to great lengths and expense to make the Kindle experience seamless, it has gone to a considerable amount of trouble to adhere to what is a very simple corporate strategy: Make it easy for the customer, and make it cheap.

What’s hard about that approach is sticking to it over year after year, even when technology is changing quickly and, more importantly, markets are extremely volatile. The success of such an approach could be found in another piece of news out of Amazon this week that didn’t get as much attention as the Kindle but as far as the company’s long-term outlook goes, could prove more important. It’s about to become almost debt-free.

amazon_com_debt_vs_cashBy March 27, Amazon plans to redeem the outstanding principal on its convertible subordinated notes due next year. Amazon offered the notes in 2000, and they accounted for $335 million of the company’s long-term debt at the end of 2008. After the notes are redeemed, Amazon will have only $133 million in long-term debt outstanding. That’s a far cry from the $2.8 billion in debt it held six years earlier.

There are a couple of things to note about this. The first is that, in a market in which companies are in need of new financing and yet unable to find it, Amazon is using cash to escape from debt. Few companies’ operations are that healthy, and the ones that are will likely emerge from the recession much stronger than their peers.

Second, Amazon’s balance sheet has made a dramatic, 180-degree turnaround from the last recession. Remember when there were predictions of Amazon’s demise and rumors of its bankruptcy? As recently as 2005, some were calling for Bezos’ head because his unorthodox approach of favoring revenue growth over profit margin was so unpopular with investors.

Amazon’s hard-line adherence to its basic strategy — keep the prices low, and the experience easy — cost it a lot of debt early on and a lot of short-term profit ever since. But now the company’s debt is being paid off and the cash on hand is growing. And investors patient with Bezos’ approach are left with a stock up 26 percent this year, one of the 10 best performers in the S&P 500.

The recession is far from over, and like all companies, Amazon faces its share of challenges. But there is emerging in the company’s short history an important lesson for tech companies: Find a clear vision and, not matter how fast things change or how impatient others become, stick with it. It’s a very hard road to take. But at least it’s simple.

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