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Amazon is reportedly planning to open hundreds of bookstores. Here's why.

In November, Amazon opened its first bookstore, and reports from the CEO of one of America's largest shopping mall operators Tuesday afternoon suggest that the company is prepared to open several hundred new ones across the country. This prompted many to ask why the company that destroyed the physical bookstore industry would possibly want to operate a physical bookstore.

Part of the answer is that, as the announcement of the original store location said, "At Amazon Books, you can also test drive Amazon’s devices," meaning Kindles, Echos, Fire TVs, and Fire Tablets "are available for you to explore, and Amazon device experts will be on hand to answer questions and to show the products in action." Apple has physical retail stores for its digital devices, as do (albeit less successfully) Microsoft, Sony, and Samsung. Since Amazon makes Amazon-branded devices, why shouldn't it have a store too?

But the bookstore framing is no coincidence, and the reality is that something bigger and more profound is happening than a simple desire to let people window shop for Fire TV sticks. Amazon is interested in bookstores for two big reasons:

  1. It has the ability to open bookstores.
  2. It is driven by a relentless desire to conquer everything in its path, and brick-and-mortar retail is a thing.

For years now, Amazon has been the most terrifying competitor on the planet. And a possible move into physical retail should be taken as a reminder that no business of any kind should view itself as protected from Jeff Bezos's plan for global domination.

Amazon started making money

Large American technology companies like Apple, Google, Facebook, and Microsoft are ridiculously profitable and, indeed, infamous for the lengths to which they go to avoid paying corporate income tax on their gargantuan profits. Since Amazon is also a large American technology company, it is easy to assume that it, too, must be ridiculously profitable. But this is not the case. The retail industry has traditionally been a very low-margin matter, and Amazon has outcompeted traditional retailers in part by offering even lower margins.

But that's recently changed. In the most recent two quarters, Amazon has earned meaningful profits — profits driven by the success of Amazon Web Services, an enormously popular technology infrastructure company that enjoys tech-like economics rather than retail-like ones. That means 25 percent profit margins on a business that does $2 billion in revenue a quarter and is growing at a 70 percent annual rate.

As the technology industry analyst Ben Thompson put it, Amazon became profitable because "AWS is simply spinning off more cash than Amazon knows what to do with."

Amazon doesn't want to make money

The key to understanding Amazon as a business is that earning a profit is antithetical to its corporate culture and mission. Rather than increasing the value of Amazon stock by pushing out cash to shareholders, Bezos's strategy is to increase the value of Amazon by literally making the company bigger. Each year, Amazon owns more warehouses, more customer data, more intellectual property, wider distribution channels, etc., and therefore becomes a more valuable enterprise than it was before.

On occasion, Amazon will turn a profit either to prove to Wall Street that it can, or else because (as with AWS recently) a particular venture simply proves more lucrative than expected.

But that AWS revenue was never going to sit around in the corporate treasury or be paid out as dividends. A surge in revenue needs to be met by a surge in new expenses. Recently prestige video content (Bezos says he wants to win an Oscar) and an effort to create a two-hour delivery service called Amazon Now have been soaking up the extra money. Brick-and-mortar retail is both another potential money sink and also a possible launching pad for Amazon Now services, which are obviously going to require some kind of logistical infrastructure.

Today books, tomorrow the world

So why brick-and-mortar retail? Most likely because Amazon's long-term strategy is simple: It wants everyone, everywhere to buy everything from Amazon.

And it's clear that whatever the struggles of some major big-box retail chains lately, people do in fact continue to buy things in stores. For some people, some of the time, a physical store is where they want to shop. These days you probably could buy everything you need online, but almost nobody actually does. Which means nobody buys everything from Amazon. Which is unacceptable.

So why bookstores? For the same reason was originally an online bookstore. You've got to start somewhere, and the book industry is a relatively soft target. Since Amazon's already basically crushed the national bookstore chains, nobody can really stop the company from getting a foot in the door of this niche.

Ultimately, it might be a total dead end. But even if the effort to establish stores fails, it will be a potentially valuable learning experience. Amazon prides itself on a value it calls "customer obsession," but lacking a physical presence means the company ends up with a somewhat limited view of what its customers look like and how they behave. A retail presence can help change that.

A store can be a same-day delivery hub

The bigger, less irony-laden thing that Amazon is working on right now is same-day delivery for Amazon Prime members. Currently, same-day delivery is sporadically available — for some products, in some cities, some of the time. It feels kind of like magic when it works, but it's not nearly predictable enough right now to be a real driver of business rather than an impressive occasional delight for customers.

Amazon's long-term aspirations in this field appear to involve fleets of driverless trucks and even flying delivery drones.

But in the human-powered present (and perhaps even in the drone-full future) same-day delivery requires stockpiles of merchandise that are more numerous and located more directly adjacent to population and transportation hubs than the company's existing warehouses. The geography of same-day delivery depots, in other words, looks a lot like the geography of classic big-box stores. You wouldn't have just one Borders serve an entire region. Instead, a given metro area would feature one or more downtown locations plus a bunch of mall spots in the surrounding suburbs. The goal was to ensure that nobody who bought books regularly was ever all that far from a Borders.

Essentially replicating this structure but combining it with Amazon's logistics infrastructure, immense supply-chain bargaining power, vast stockpile of consumer knowledge, and the Prime subscription revenue model is at least a plausible vision of the future. And if the depots can serve as showrooms for Amazon hardware and help get traditional brick-and-mortar shoppers into the Amazon lifestyle, then why not?

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