What is Amazon Trying to Become?

(MoneyWatch)  Most companies start their existences in a general direction and then keep moving that way. But sometimes a company takes an unexpected turn, which might be hidden corporate DNA, a stroke of genius, or a mistake borne of managerial ego. Amazon's behavior suggests a major business model change is already underway.

Although Amazon is associated with online retail success, it has moved into other areas recently:

• cloud computing
• print on demand production
• programming service brokering
• product design and manufacturing

The more I look at the changes the company makes, the more convinced I am that the retailing aspect has become almost a sham -- not economically, but strategically. For example, the Kindle is starting to smell like more than finding a new way to text. Had Jeff Bezos only wanted to sell e-books, he could have partnered with Sony or some other consumer electronics company.

Instead, he's brought design talent in-house (although, according to frog design, Amazon hired not one of its designers, but "several"). That isn't the sign of a casual interest, but rather of an effort to build a real product company. Amazon is hiring a wireless handset engineer experienced in high speed wireless data protocols that would allow faster transfer of large blocks of data. It doesn't take a lot of imagination to see how that might connect with developer and architect positions for ordering and delivery of digital media, including software and videogames. Could the Kindle be aimed at eventually becoming a mobile entertainment and information? Perhaps.

Other glimpses from the hiring front show that Amazon's S3 is becoming "the gateway" for Amazon Web Services (AWS). (AWS is having a road show to sell the concept to entrepreneurs, VCs, and developers in the US, Canada, and Europe.) Then there is the company's desire "to scale our targeting and ad serving capabilities to millions of consumers" and "to build and operate the Internet's largest-scale fully-automated sponsored links management system." That certainly sounds more ambitious than something sitting only on Amazon's own, admittedly extensive, web sites.

The problem that has faced Amazon in its traditional business is relatively low margins. The 2007 annual report lists net sales of $14.8 billion in 2007 and net income of $476 million, or about 3 percent. In comparison, Google's 2007 fiscal year revenue was about $16.6 billion with net income of $4.2 billion, or 25.3 percent.

That's a whole lot of difference, and neatly shows how a service business well run can have much higher profitability than a similarly-sized product-based company. What puts Amazon into even a tighter financial picture is that the bulk of its revenue, over 97 percent, comes from media, electronics, and other general merchandise, which at this point of time still means stuff. Resellers simply don't see higher percentages of net income because they have to buy from someone else, who also needs a profit. For a comparison, look at the fiscal year 2008 numbers for retail chain Macy's, Inc. On $26.3 billion of revenue, net income of $893 million translates into 3.4 percent.

In other words, although Amazon is often thought of as a technology company, it's actually a big store. If nothing changed, the form of business would limit its earning potential. But Bezos is far more ambitious than that, hence the shift. Because Amazon has so many engineers, why not branch out into its own products and services, where margins can run higher and investors rest happier?