bearlegend.com

In two decades of e-commerce in the US, we have produced only two standalone e-commerce companies of meaningful enterprise value: Amazon and eBay. One went public in 1997, the other in 1998. We haven’t had an IPO of an e-commerce company that has gotten to a two billion of market cap in fifteen years, let alone double digit billions.

Yet Marc Andreessen is predicting the death of traditional retail as e-commerce “eats the world.”

What gives?

The problem with e-commerce is that the joy of the consumer experience, extraordinary top-line growth, and market share theft are not yet met by strong business fundamentals for standalone e-commerce players.

If you’re selling other people’s brands, you are competing not via a local group of competitors but with everyone. In this type of market, you might imagine having one large national winner. You might imagine that winner is ruthless about scale and cost, and is run by a visionary leader who with an extreme long-term focus. Such a company might not make real money for a long time — but when it does — it will be incredibly powerful.

Such a company might also be smart about acquiring competitors who, when they reach scale, become a threat. Such a company might leverage an exceptional loyalty program to further share of wallet with customers, taking advantage of operating leverage in distribution. Such a company can be expected to move from vertical to vertical, leveraging that growing share of wallet, to become the nation’s biggest store.

Such a company exists.

It is called Amazon. Its loyalty program is called Amazon Prime where you pay to spend more with Amazon. It has moved over two decades from books to hard goods to soft lines. It has diversified into a technology business, Amazon Web Services, to further the moat around its core e-commerce asset. I’m not a stock picker, but I’m long Amazon, very long, and believe that it’s inevitable that as e-commerce steals share from traditional retail, Amazon will pass Wal-Mart as our nation’s biggest retailer.

Only two start-ups have properly challenged Amazon over the past decade: Zappos and Diapers. Amazon, shrewdly, acquired them both. Both companies faced long roads to generating profits in the ferocious low-cost game of competing with Amazon, and both decided if you can’t beat ‘em, join ‘em.

Having spent time with Tony Hsieh and Alfred Lin, the leadership duo who built Zappos, and Marc Lore and Vinit Bharara, the founders of Diapers, I can tell you: these are intense competitors who recognized the best outcome was to join forces with the industry leader.

So if Amazon is the low cost winner of selling brands online, if they are acquiring their best competitors, and if their everyday low prices are available to the entire country via a mechanical turk algorithm which is guaranteed to beat you, how do you compete?

eBay competes by being the leading peer-to-peer selling site, which is a different business than Amazon’s, and by having made a very, very smart (and lucky?) acquisition called PayPal.

For everyone else, the answer is you don’t compete with Amazon in the low-cost selling of third-party brands, because you can’t. The downward pressure on your gross margin combined with operating at a fraction of Amazon’s scale means you won’t get past being niche.

Said differently, if your business is standalone e-commerce selling third-party brands, good luck. You can’t generate enough operating profit to scale beyond getting noticed, counter-attacked, and at best acquired. You are forced into stay right where you are.

I couldn’t sleep last night in advance of an early flight out of Stockholm, so I did something I often do when I can’t: I watched videos of grizzly bear attacks on YouTube. I love how fierce grizzlies are, and how fearless they can be. When a grizzly sinks its teeth into you it shakes you, mercilessly, until you’re subdued. See this video, not for the faint of heart.When it knows your dying, it stops and conserves energy while you die so it can relax before feeding.

I don’t love Amazon the way I love grizzly bears and other apex predators, but I sure do respect them. There is much to admire about the company: the tenacity to go for it all, Grove-like paranoia about competition, the discipline to thoughtfully time when they push the frontier, and sheer ferociousness as competitors. They put firms out of business, old-school style. Outside of not showing a little more leadership on the inevitable erosion of their sales tax advantage, I admire them.

Bezos endured ridicule in the early innings from Wall Street. Now he is at the helm of what could become the world’s biggest retailer. Amazon is the kind of company that could have a century-long run. While I often hear people complaining about Amazon, I think it is instructive that it is rarely consumers who are doing the complaining.

With the grizzly bear in the room, what should everyone else do: give up?

Hell no, this is America. We’re capitalists and we’re fighters, and today’s David is tomorrow’s Goliath.

Who is it going to be?