How Apple Pay innovates on top of the US payments stack

One of the difficulties of building innovative payment services in the US is that we're a nation that loves our credit cards. We may totally overvalue the random rewards and points and other benefits the credit card companies give us, but since the merchants often cover a lot of the cost of those benefits, we'll take all the rewards we can get, as financially irrational as that may be.

[Aside: Some cards have annual fees, and the credit card users that carry a balance each month subsidize other users who pay off their balance in full each month, but many credit card rewards would be acquired more cheaply just by paying for them directly. A free lunch remains a rare thing.]

This presents a cost problem for payment startups: if you build a payment service that leverages your users' credit cards, you have to pay companies like Mastercard, Visa, American Express, and so on their fees. But if you charge merchants an additional markup on top of this fee when one of your users pays with your service, merchants have very little incentive to accept your payment method.

You could just pass through the fee, but then you have to make your profit elsewhere. Or you could be bold and charge less than the credit card fees, but then your entire business is a loss leader. The more you sell, the more you lose. Ask Square how that model has worked out from a cash flow perspective. Paypal was able to reverse the bleeding by making it near impossible for its users to pay with a credit card instead of with an eCheck or any Paypal balance they might be carrying. I know this because I tried to switch to using a credit card when logged into Paypal once and ended up in this strange endless loop where I kept adding a credit card to use and then not being able to find it. I tried several more times in a row until I decided to just take a rock and hit myself in the head repeatedly because it was less painful and frustrating.

An echeck costs Paypal some negligible amount, I recall it being something like $0.01 from my time at Amazon, and using the Paypal balance costs Paypal nothing, of course. That means whatever Paypal charges the merchant on that transaction becomes profit. It's not easy to get all the way there, though. You have to encourage enough usage for users to want to give you their checking account information so they can withdraw any balances they might have. Once you have that, you can enable money to flow the other direction, as an eCheck, too.

Payments, as a multi-sided market, will always present entrepreneurs with this chicken-egg conundrum. To get merchant adoption, you need a huge number of consumers carrying your payment method, but to get consumers to want to use your payment method over their beloved credit cards, you need a ton of merchants to accept that payment method.

Which brings me to Apple Pay, which launched today. I didn't realize today was the public launch until I was at Whole Foods buying breakfast this morning and saw this at the checkout counter on the payment terminal:

I hadn't downloaded the iOS 8.1 update yet or added any credit cards to Apple Pay on my phone, so I didn't use it just then, but I went back later after I had added a credit card and tried it out, and it was painless. Held my phone up to the terminal, Apple Pay popped up on my screen and asked me to verify with Touch ID, and that was it.

There are many reasons to think Apple Pay might succeed where so many other alternative payment methods have failed.

First, Apple is building off of the existing credit card system rather than fighting customer inertia. As noted above, so many US consumers love their credit cards and the rewards they get from them. Apple Pay doesn't ask them to give that up.

Another thing about credit cards: most consumers find them easy to use, not that much of a hassle to bring out and use. To surpass them, an alternative has to be as easy or easier to use or magnitudes for the consumer or much cheaper for the merchant. Apple Pay fulfills the first of those requirements once you've added the cards to Apple Pay on your phone, something that can be done as easily as snapping a photo of the credit card. Touch ID has finally reached an acceptable level of reliability, so the overall user experience is simple and solid.

Perhaps most importantly, Apple Pay starts on day one with a good whack at both the chicken and the egg. On the merchant side, Apple managed to corral an impressive number of partners, from credit card companies (the big 3 of Visa, Mastercard, and American Express) to banks (all the biggest like Bank of America, Chase, Citi, Wells Fargo). On the merchant front, Apple Pay's marketing page claims over 220,000 stores which actually makes this the weakest link of these three groups but still a decent starting point for day 1. That will be the hardest nut to crack, but more on this point later.

On the consumer side, whether that's the chicken or the egg, Apple has a massive and growing installed base of iOS and iPhone users who can use this system. The only other technology company I can think of who could tackle this space is Amazon given their huge database of consumer credit cards, but they lack the device or app installed base to fulfill on a good user experience for enough users.

Apple Pay offers some additional benefits, like added privacy, something Apple has been touting across the board as one of their key consumer benefits, though I'm still not sold it's a huge selling point for most average consumers. Still, it's worth noting that Apple doesn't keep records of your transactions, and you don't have to hand over your credit card to some waiter or clerk who then has access to the card number, expiration, and security code. Again, I think this is of minor psychological comfort for the vast majority of consumers, but it's at least not a negative.

But more than anything, my excitement for Apple Pay stemmed from this post by Uber:

The beauty of Apple Pay is that it simplifies Uber’s signup process to a single tap. If you have an eligible credit card already added to Apple Pay, you don’t need to enter it again to ride with Uber. Instead, merely place your finger on the Touch ID sensor of your iPhone 6 or iPhone 6 Plus, and your Uber is on its way. No forms, no fuss. We’re calling this new Uber feature Ride Now, and it’s the product of a close collaboration between Uber and Apple over the past few months.

How it works:

  1. Open the Uber app and tap Ride Now.
  2. Tap Set Pickup Location, enter your destination, and confirm your request.
  3. Place your finger on Touch ID to confirm payment, and your Uber is en route!

The rest of the Uber experience remains exactly the same. A receipt for your ride, with the fare breakdown and trip route, is sent to the email you have for Apple Pay; riders rate their drivers at the end of each trip. Existing Uber users are unaffected and can continue using Uber as before.

Innovation in payments in the US has been difficult because of the entrenched incumbent stack, but Apple has just moved up the stack and innovated above it all. What they've done here is abstracted away the credit card number entirely. Extrapolate out into the rosiest future, and perhaps someday the only time you might have to remember your credit card number is when you get it in the mail and input it into Apple Pay. Who really cares what the number, expiration date, and security code are. If you can prove you are who you say you are with Touch ID, that's a more efficient way to prove your identity and grant authorization for the payment.

But we're a long ways away from that day, and for now, 220,000 stores is actually not close to a majority of merchants. The Uber example, though, demonstrates the near-term potential.

I long ago memorized all my credit card numbers and security codes just so I wouldn't have to deal with the hassle of pulling the cards out every time I had to punch the number in for an online transaction. Still, it's a hassle, especially on my phone, to have to either enter my credit card details or to go round trip to 1Password to remember my crazy long, random, difficult-to-memorize iTunes password.

Apple Pay reduces that pain by a lot. A whole lot.

Even if its near term impact is restricted to making payments in apps on my phone, that's a big deal, and perhaps sufficient incentive to me to actually upgrade to one of the new iPads with Touch ID.

When Amazon first received its 1-click patent, one of the first and only companies to license the patent was Apple. It paid off for both sides. For Amazon, Apple's license strengthened the patent, allowing them to enforce it against companies like Barnes & Noble (for the record, I don't believe in software patents like these, but that's a topic for another day). For Apple, the 1-click license allowed them to enable users to purchase songs off of iTunes with 1-click, one part of a superior experience that spanned iPods and the iTunes music store that catapulted them to the digital music throne. Can you imagine the painful it would have been to go through multiple steps to purchase each single?

What Apple has done with Apple Pay is extend 1-click purchasing to the mobile app world and many real world stores as well. Or maybe we should call it 1-touch purchasing.

Years later when we look back on WWDC 2014, I suspect Apple Pay will be the most important announcement by a wide margin.

Cities are superlinear, companies are not

But unlike animals, cities do not slow down as they get bigger. They speed up with size! The bigger the city, the faster people walk and the faster they innovate. All the productivity-related numbers increase with size---wages, patents, colleges, crimes, AIDS cases---and their ratio is superlinear. It's 1.15/1. With each increase in size, cities get a value-added of 15 percent. Agglomerating people, evidently, increases their efficiency and productivity.

Does that go on forever? Cities create problems as they grow, but they create solutions to those problems even faster, so their growth and potential lifespan is in theory unbounded.

...

Are corporations more like animals or more like cities? They want to be like cities, with ever increasing productivity as they grow and potentially unbounded lifespans. Unfortunately, West et al.'s research on 22,000 companies shows that as they increase in size from 100 to 1,000,000 employees, their net income and assets (and 23 other metrics) per person increase only at a 4/5 ratio. Like animals and cities they do grow more efficient with size, but unlike cities, their innovation cannot keep pace as their systems gradually decay, requiring ever more costly repair until a fluctuation sinks them. Like animals, companies are sublinear and doomed to die.
 

From a Stewart Brand summary of research by Geoffrey West.

From a long conversation with West at Edge:

Let me tell you the interpretation. Again, this is still speculative.

The great thing about cities, the thing that is amazing about cities is that as they grow, so to speak, their dimensionality increases. That is, the space of opportunity, the space of functions, the space of jobs just continually increases. And the data shows that. If you look at job categories, it continually increases. I'll use the word "dimensionality."  It opens up. And in fact, one of the great things about cities is that it supports crazy people. You walk down Fifth Avenue, you see crazy people, and there are always crazy people. Well, that's good. It is tolerant of extraordinary diversity.

This is in complete contrast to companies, with the exception of companies maybe at the beginning (think of the image of the Google boys in the back garage, with ideas of the search engine no doubt promoting all kinds of crazy ideas and having maybe even crazy people around them).

Well, Google is a bit of an exception because it still tolerates some of that. But most companies start out probably with some of that buzz. But the data indicates that at about 50 employees to a hundred, that buzz starts to stop. And a company that was more multi dimensional, more evolved becomes one-dimensional. It closes down.

Indeed, if you go to General Motors or you go to American Airlines or you go to Goldman Sachs, you don't see crazy people. Crazy people are fired. Well, to speak of crazy people is taking the extreme. But maverick people are often fired.

It's not surprising to learn that when manufacturing companies are on a down turn, they decrease research and development, and in fact in some cases, do actually get rid of it, thinking "oh, we can get that back, in two years we'll be back on track."

Well, this kind of thinking kills them. This is part of the killing, and this is part of the change from super linear to sublinear, namely companies allow themselves to be dominated by bureaucracy and administration over creativity and innovation, and unfortunately, it's necessary. You cannot run a company without administrative. Someone has got to take care of the taxes and the bills and the cleaning the floors and the maintenance of the building and all the rest of that stuff. You need it. And the question is, “can you do it without it dominating the company?” The data suggests that you can't.
 

Lastly, from an article about West and his research in the NYTimes.

The mathematical equations that West and his colleagues devised were inspired by the earlier findings of Max Kleiber. In the early 1930s, when Kleiber was a biologist working in the animal-husbandry department at the University of California, Davis, he noticed that the sprawlingly diverse animal kingdom could be characterized by a simple mathematical relationship, in which the metabolic rate of a creature is equal to its mass taken to the three-fourths power. This ubiquitous principle had some significant implications, because it showed that larger species need less energy per pound of flesh than smaller ones. For instance, while an elephant is 10,000 times the size of a guinea pig, it needs only 1,000 times as much energy. Other scientists soon found more than 70 such related laws, defined by what are known as “sublinear” equations. It doesn’t matter what the animal looks like or where it lives or how it evolved — the math almost always works.

West’s insight was that these strange patterns are caused by our internal infrastructure — the plumbing that makes life possible. By translating these biological designs into mathematics, West and his co-authors were able to explain the existence of Kleiber’s scaling laws. “I can’t tell you how satisfying this was,” West says. “Sometimes, I look out at nature and I think, Everything here is obeying my conjecture. It’s a wonderfully narcissistic feeling.”
 

The pace of technology has already shifted some of the old company scaling constraints in the past two decades. When I first joined Amazon, one of the first analyses I performed was a study of the fastest growing companies in history. Perhaps it was Jeff, perhaps it was Joy (our brilliant CFO at the time), but someone had in their mind that we could be the fastest growing company in history as measured by revenue. Back in 1997, no search engine gave good results for the question "what is the fastest growing company in history."

Some clear candidates emerged, like Wal-Mart and Sam's Club or Costco. I looked at technology giants like IBM and Microsoft. Two things were clear: most every company had some low revenue childhood years when they were finding their footing before they achieved the exponential growth they became famous for. Second, and this was most interesting to us, many companies seemed to suffer some distress right around $1B in revenue.

This was very curious, and a deeper examination revealed that many companies went through some growing pains right around that milestone because smaller company processes, systems, and personnel that worked fine until that point broke down at that volume of business. This was a classic scaling problem, and around $1B or just before it, many companies hit that wall, like the fabled 20 mile wall in a marathon.

Being as competitive as we were, we quickly turned our gaze inward to see which of our own systems and processes might break down as we approached our first billion in revenue (by early 1998 it was already clear to us that we were going to hit that in 1999).

Among other things, it led us to the year of GOHIO. Reminiscent of how, in David Foster Wallace's Infinite Jest, each year in the future had a corporate sponsor, each year at Amazon we had a theme that tied our key company goals into a memorable saying or rubric. One year it was Get Big Fast Baby because we were trying to achieve scale ahead of our competitors. GOHIO stood for Getting Our House In Order.

In finance, we made projections for all aspects of our business at $1B+ in revenue: orders, customer service contacts, shipments out of our distribution centers, website traffic, everything. In the year of GOHIO, the job of each division was to examine their processes, systems, and people and ensure they could support those volumes. If they couldn't, they had to get them ready to do so within that year.

Just a decade later, the $1B scaling wall seems like a distant memory. Coincidentally, Amazon has helped to tear down that barrier with Amazon Web Services (AWS) which makes it much easier for technology companies to scale their costs and infrastructure linearly with customer and revenue growth. GroupOn came along and vaulted to $1B in revenue faster than any company in history.

[Yes, I realize Groupon revenue is built off of what consumers pay for a deal and that Groupon only keeps a portion of that, but no company takes home 100% of its revenue. I also realize Groupon has since run into issues, but those are not ones of scaling as much as inherent business model problems.]

Companies like Instagram and WhatsApp now routinely can scale to hundreds of millions of users with hardly a hiccup and with many fewer employees than companies in the past. Unlike biological constraints like the circulation of blood, oxygen, or nutrients, technology has pushed some of the business scaling constraints out.

Now we look to companies like Google, Amazon, and Facebook, companies that seem to want to compete in a multitude of businesses, to study what the new scaling constraints might be. Technology has not removed all of them: government regulation, bureaucracy or other forms of coordination costs, and employee churn or hiring problems remain some of the common scaling constraints that put the brakes on growth.

The instant-on computer

A long time ago, when I was at Amazon, someone asked Jeff Bezos during an employee meeting what he thought would be the single thing that would most transform Amazon's business.

Bezos replied, "An instant-on computer." He went on to explain that he meant a computer that when you hit a button would instantly be ready to use. Desktops and laptops in those days, and still even today, had a really long bootup process. Even when I try to wake my Macbook Pro from sleep, the delay is bothersome.

Bezos imagined that people with computers which were on with the snap of a finger would cause people to use them more frequently, and the more people were online, the more they'd shop from Amazon. It's like the oft-cited Google strategy of just getting more people online since it's likely they'd run across an ad from Google somewhere given its vast reach.

We now live in that age, though it's not the desktops and laptops but our tablets and smart phones that are the instant-on computers. Whether it's transformed Amazon's business, I can't say; they have plenty going for them. But it's certainly changed our usage of computers generally. I only ever turn off my iPad or iPhone if something has gone wrong and I need to reboot them or if I'm low on battery power and need to speed up recharging.

In this next age, anything that cannot turn on instantly and isn't connected to the internet at all times will feel deficient.

Big data and price discrimination

Adam Ozimek speculates that Big Data might bring about more price discrimination.  First degree price discrimination has always been a sort of business holy grail, but it was too difficult to get enough information on the shape of the price-demand curve to make it so.

For some time now, though, this has no longer been the case for many companies, and in fact one company did try to capitalize on this: Amazon.com. I know because I was there, and the reason that was a short-lived experiment is a real world case study of how the internet both enables and then kneecaps this type of price discrimination.

Amazon, until then, had one price for all customers on books, CDs, DVDs (this was the age before those products had been digitized for retail sale). A test was undertaken to vary the discount on hot DVDs for each customer visiting the website. By varying the discount from 10% up to, say, 40%, then tracking purchase volume, you could theoretically draw the price-demand curve with beautiful empirical accuracy. 

Just one catch: some customers noticed. At that time, DVDs were immensely popular, selling like hotcakes, and the most dedicated of DVD shoppers perused all the online retail sites religiously for the best deals, posting links to hot deals on forums. One customer posted a great deal on a hot DVD on such a forum, and immediately some other respondents replied saying they weren't seeing the discount.

The internet giveth, the internet taketh away. The resulting PR firestorm resulted in the experiment being cancelled right away. Theoretically, the additional margin you could make over such price discrimination is attractive. But the idea that different customers would be charged different prices would cause such distrust in Amazon's low price promise that any such margin gains would more than offset by the volume of customers hesitating to hit the buy button.

Ozimek notes this: "The headwind leaning against this trend is fairness norms." What's key to this is that the internet is the world's most efficient transmitter of information, and while it enables a greater degree of measurement that might enable first degree price discrimination, it also enables consumers to more easily share prices with each other. This greater transparency rewards the single low price strategy.

It's not a coincidence, in my mind, that Apple fought for a standard $0.99 per track pricing scheme with the music labels while Amazon fought the publishers for a standard $9.99 pricing for Kindle ebooks. Neither Amazon or Apple was trying to profit on the actual ebooks or digital music retail sales (in fact many were likely sold at break-even or a loss), they were building businesses off of the sale of complementary goods. In the case of Amazon, which is always thinking of the very long game, there are plenty of products it does make a healthy profit off of when customers come to its site, and getting users to invest heavily into building a Kindle library acted as a mild form of system lock-in. In the case of Apple, it was profiting off of iPod sales.

In the meantime, second and third order price discrimination continues to exist and thrive even with the advent of the internet so it's not as if the pricing playbook has dried up.

A skeptic might counter: didn't Ron Johnson get fired from J. C. Penney for switching them over to an everyday low price model? Didn't their customers revolt against the switch from sales and coupons and deals you had to hunt down? 

Yes, but everyday low pricing isn't a one-size-fits-all pricing panacea (as I wrote about in reference to the Johnson pricing debate at J.C. Penney). For one thing, there is path dependence. Once you go with a regular discount/deal scheme, customers create a mental price anchor that centers on that discount percentage and absolute price. It's hard to lift an anchor.

J. C. Penney was trying to go from a heavy sale-driven pricing scheme to an everyday low pricing model, and that's an uphill, unmarked path. Only the reverse path is paved. It's not clear whether the switch would have worked in the long run. Johnson ran out of runway from his Board soon after he made the switch and revenues declined. 

Everyday low pricing tends to work best when you're selling commodities since those items are ones your customers can purchase many places online. At Amazon we were far more interested in dominating one crucial bit of mental math: what website do I load up first if I want to buy something? We were obsessed with being the site of first resort in a consumer's mind, it was the core reason we were obsessed with being the world's most customer-centric company. Anything that might stand in the way of someone making a purchase, whether it be prices, return policy, shipping fees, speed of delivery, was an obstacle we assaulted with a relentless focus. On each of those dimensions, I don't think you'll find a company that is as customer-friendly as Amazon.com.

Ultimately, customers have a hard time figuring out intrinsic value of products, they're constantly using cues to establish a sense of what fair value is. Companies can choose to play the pricing game any number of ways, but I highly doubt Netflix and Amazon will choose to make their stand on the first order price discrimination game. There are many other ways they can win that are more suited to their brand and temperament.

Still, the peanut gallery loves to speculate that Amazon's long term plan is to take out all of its competitors and then to start jacking up prices. A flurry of speculation that the price hikes had begun spun up in July this year after an article in the NYTimes: As Competition Wanes, Amazon Cuts Back Discounts. After the NYTimes article hit, many jumped on the bandwagon with articles with titles like  Monopoly Achieved: An invincible Amazon begins raising prices.

If you read the NYTimes article, however, the author admits "It is difficult to comprehensively track the movement of prices on Amazon, so the evidence is anecdotal and fragmentary." But the article proceeds onward anyhow using exactly such anecdotal and fragmentary evidence to support its much more certain headline. 

Even back when I was at Amazon years ago we had some longer tail items discounted less heavily than bestsellers. However, pricing the long tail of books efficiently is not as easy as it sounds, there are millions of book titles, and most of the bandwidth the team had for managing prices was spent on frontlist titles where there was the most competitive pressure. All the titles listed in the NYTimes article sound to me like examples of long tail titles that were discounted too aggressively for a long period due to limited pricing management bandwidth and are finally being priced based on the real market price of such books. Where in the real world can you find scholarly titles at much of a discount?

The irony is that the authors cited in the article complain their titles aren't discounted enough, while publishers ended up in court with Amazon over Amazon discounting Kindle titles too much. This is to say nothing of the bizarre nature of book pricing in general, in which books seem to be assigned retail prices all over the map, with the most tenuous ties to any intuitive intrinsic value. The publishers set the retail price, then Amazon sets a price off of the retail price. If the publishers wants the discount on their books to be greater they could just increase the retail price and voila! The discount would be larger.

To take another category of products, DVDs, soon after we first launched the DVD store, long tail title like Criterion Collection DVDs were reduced from a 30% discount to a 10% to 15% discount. But just now, I checked Amazon, and most of its Criterion DVDs are discounted 25% or more. If I'd taken just that sample set I could easily write an article saying Amazon had generously decided to discount more heavily as part of its continued drive to return value from its supply chain to customers.

Could the net prices on Amazon be increasing across the board? I suppose it's possible, but I highly doubt that Amazon would pursue such a strategy, and any article that wanted to convince me that Amazon was seeking to boost its gross margins through systematic price hikes would need to cite more than just a few anecdotes from authors of really long tail books. 

It will remain a tempting narrative, however, because most observers think it's the only way for Amazon to turn a profit in the long run.

However, that's not to say big data hasn't benefitted them both in extraordinary ways. Companies like Amazon and Netflix know far more about each of its customers than any traditional retailer, especially offline ones, because their customers transact with them on an authenticated basis, with credit cards. Based on their customers' purchase and viewing habits, both companies recommend, better than their competitors, products their customers will want.

Offline retailers now all want the same type of data on their customers, so everyone from your local drugstore or grocery store to clothing retailers and furniture stores try to get you to sign up for an account of some sort, often by offering discounts if you carry a free membership card of some sort.

Cyclone 4006

Via Maria Popova, this humorous review of the Cyclone 4006 - Ultra High Pressure Hard Surface Cleaner, 40,000 psi water with Full Recovery:

It used to take me 1 1/2 hours to get to work in the morning. It takes me less than 15 minutes now and that includes stopping to get an Egg McMuffin!

My secret? Easy. I bought a Cyclone 4006. Now, if there is anyone in front of me on the road, I beep my air horn once or twice. If they don't get out of my way, I turn on the "juice". If 40,000 psi water pressure (with full recovery) is strong enough to blast off concrete curing compound from asphalt, you won't believe what it does to a Toyota Corolla! Woo hoo! Beep beep! Wooooooosh!

OK, it's a little difficult to parallel park and it doesn't go faster than 30 mph. I'll give you that. But, trust me, when you are behind the wheel of a bright yellow Cyclone 4006, these things don't really matter.

PS. It comes with an "optional remote walk-behind head." If you figure out what this is, please let me know.

To really appreciate the review, you need to see a photo of one.

The Cyclone 4006 looks like a truck wearing a gas mask

The Cyclone 4006 looks like a truck wearing a gas mask

Sadly, the Cyclone 4006 is out of stock. Some days when I have to drive to work down the 101 I could really use one of these. I wonder how much it cost? I'm going to guess it wasn't available for free two-day shipping via Amazon Prime.

Amazon Prime Air

In a promo spot for tonight's episode of 60 Minutes, Jeff Bezos promised to drop a big surprise. Well, he delivered (according to Twitter since those of us here on the West Coast haven't seen the episode yet).

Announcing Amazon Prime Air, delivery by drone. 

We're excited to share Prime Air — something the team has been working on in our next generation R&D lab.

The goal of this new delivery system is to get packages into customers' hands in 30 minutes or less using unmanned aerial vehicles.

Putting Prime Air into commercial use will take some number of years as we advance the technology and wait for the necessary FAA rules and regulations.

Watch the video of a recent test flight.

I mean, really. Tacocopter was ahead of its time.

Give the gift of Amazon Prime

You can now give Amazon Prime as a gift. I can think of few greater ways for you to help the global economy, and I already plan to give out many of these to people I know who haven't gotten on the bandwagon yet. Every time they order a package from Amazon, they'll think of you with a smile, it's truly a gift that keeps on giving.

If you're not sure if it's for you, learn more here and sign up for a 30-day trial. 

Taking stock

My piece on Amazon last weekend elicited a lot of email and comments, many of which were about Amazon's stock price. People who are bullish on Amazon were reassured by my piece, but many more comments and emails were from Amazon bears who thought I was deluded. It's worth reiterating for new readers: nothing I ever write here should be read as investment advice on Amazon, whether pro or con. 

Amazon's stock price (or company stock prices in general) is a topic that doesn't really interest me, and I'm going to disappoint those hoping for me to come up with some long-term valuation model for Amazon. I believe Amazon's business model is often misunderstood, but as to whether it's current stock price is fair or not, I can't claim any more insight than the average armchair analyst. Honestly, I don't even know what Amazon's share price is right now. I could find out without moving my mouse cursor more than a few inches, but I decided long ago that I didn't find stock picking very fulfilling.

This might seem disingenuous coming from someone who still owns some Amazon stock, but I'm sure I'm not the only former employee of a company who kept a small equity stake. It's difficult to be more familiar with the people, processes,  and business of a company than the one you worked at for so many years, and there is not some small amount of sentimental value in my Amazon stake.

If you want my serious investment advice, though, buying individual stocks, especially those as volatile as technology stocks, is not a game the average investor should be playing. When people ask me for advice in playing individual stocks, I tell them to only invest with money they're comfortable losing entirely, the same advice I give to people wondering how much to take to the blackjack table in Vegas.

For most everyone I know, I recommend diversifying your portfolio across a set of low-cost index funds, rebalancing occasionally, and spending the time you save stressing about the stock market on doing something more enjoyable and productive. That's how I manage my own finances, with a small play fund set aside for a few individual stocks including Amazon.

I'm far more interested in the strategic questions surrounding Amazon, Apple, and other technology companies than what their stock prices are. For entrepreneurs, investors, or other people working in technology, there's more to learn from how those companies create value and defend their businesses than the vagaries of the stock market. In only a few cases does a company's stock price hold interest for me: when it impacts their ability to retain employees, when they can use stock to purchase other companies, or if I'm thinking of working there and I'm negotiating my compensation.

While my last two pieces on Amazon, spread across a year, highlight some strengths of their business model, I certainly don't think Amazon is perfect. I view companies as networks, and you can tell a lot about a company's strengths and weaknesses purely from their outputs. From the Amazon bears, I'd love to hear more analyses as to why Amazon's business might fail and fewer discussions of what the proper P/E ratio is. GAAP earnings may have a strict definition, but within that definition companies can willfully manipulate their earnings up or down, moving them in or out, depending on their strategic goals.