Amazon Is Now Worth More Than Google, and the Fear of It Has Spread to Every Industry

Every time Amazon enters a new field, the share prices of its potential rivals drop on cue.

Amazon has hit a new milestone. On Wednesday its market value reached $768 billion, making it the second-most-valuable company in the world.

Google had held second place for about four years. A year ago Amazon was worth only around 70% of Google and ranked fifth.

Not long before that, Jeff Bezos became the richest man in the world on the Forbes list, and the position has since held.

A pair of photos from last year sums up how Bezos has changed. On the left, the 1998 Bezos looks every inch the bookseller: brown pullover, lips pressed into a small smile for the camera. On the right, the 2017 Bezos wears aviator sunglasses, the muscles in both arms filling out a black T-shirt, striding toward you at full power.

Someone added a caption — 1998: "I sell books." 2017: "I sell whatever the f*** I want."

From books to general merchandise, then hardware, cloud computing, movies, speakers, physical supermarkets, health insurance, finance — Amazon has walked into one new field after another and grown astonishingly in each. It has also left the companies already in those fields more and more frightened.

Every time Amazon enters an industry — even on a rumor — the stocks of the companies there fall hard

In September 2016, Amazon said it would launch a food delivery service in London. Shares of the British food delivery company Just Eat fell at once. That same month, when Amazon announced its photo printing service, Prints, the photo-sharing site Shutterfly dropped 13.6%. A year later, when news broke that Amazon had started selling meal kits, the mere fact that Amazon had registered a meal-kit trademark knocked 10% off the only listed company in that business, taking it to its lowest price since going public.

A big company enters a new industry and the small ones get crushed. That is normal.

But over the past two years, with Amazon, it has become a whole industry crushed at once. Companies that had held solid ground for years lose hundreds of millions of dollars in market value on a single piece of Amazon news.

In June 2017, Amazon said it would buy Whole Foods, the health-focused grocery chain. American supermarkets large and small fell on the announcement: the three giants — Walmart, Kroger and Target — dropped 7.1%, 16.7% and 12.4%. The worst hit was United Natural Foods, down 25.7%, losing $570 million of market value in a single day. The whole food retail sector shed at least $40.9 billion that day.

Buying Whole Foods at least touched retail, the business Amazon is already in. The panic that followed its move into healthcare came from nothing but the name Amazon.

On January 30, 2018, Amazon, the investment bank JPMorgan Chase and Warren Buffett's Berkshire Hathaway jointly announced a not-for-profit healthcare company to provide coverage for their more than 500,000 U.S. employees and their families. They gave no plan and named no budget. More than 30 health insurers fell together on the news, losing over $30 billion between them — including UnitedHealth Group, worth $218.7 billion and the largest health insurer in the world by revenue.

The new company would only cover the staff of three firms, and no details existed yet. Everything the healthcare industry felt that day came from the word Amazon.

By 2017, other companies could no longer hide how afraid of Amazon they were.

The data firm CB Insights counted which companies were named on the 2017 earnings calls of U.S. listed companies. Amazon came up 3,000 times, roughly five times the combined total for Apple, Google and Facebook. The words that came up alongside it were groceries, apparel, physical stores, cloud computing, logistics — everything Amazon has been doing in recent years.

There was a Microsoft panic once, but not on this scale

In technology, Microsoft was once the company everyone feared. From the first version of Windows in 1985, it took less than a decade to corner both the operating system and the office software markets.

Several first-generation internet companies, including the earliest portal, Yahoo, stayed out of software and started as websites instead, because they were worried about Microsoft.

Part of the fear was fear of how Microsoft competed. There is even a term for it: "FUD" — fear, uncertainty and doubt.

In the late 1990s, for instance, open-source Linux threatened Microsoft's server operating system business. One internal Microsoft document proposed using marketing channels to cast doubt on Linux's reliability and security. For more than a decade afterward, Microsoft carried that strategy through everything from the CEO's public speeches to its advertising and its sales pitches.

But the industries Microsoft went into were still the ones tied to personal computers and software. Even its entertainment ventures stayed hitched to Windows.

And in the past few years that kind of panic has faded.

When Microsoft launched its own tablet, Surface, on June 18, 2012, many analysts read it as a move against Apple: PC makers such as HP and Dell could not keep their products in step with Microsoft's software releases, so Microsoft would build the hardware itself. On launch day, with the S&P index up, HP fell more than 3% and Lenovo fell 1%.

But a year later, when Microsoft bought Nokia's mobile division for $7.1 billion, only Samsung and HTC moved much, falling 2.2% and 6.7%. They were among the few manufacturers still supporting Windows Phone. The news did nothing to the real powers in phones, Apple and Google.

Apple has also hurt an established industry by launching a product. On September 9, 2014, it unveiled the Apple Watch without giving a price or a release date. The next day Swatch Group, owner of Swatch, Omega and Breguet, fell 1.6%.

The panic rests on Amazon actually pulling off several of these moves

Amazon began selling books in 1995. Its first new market came three years after it went live.

In 1998, a report from Amazon's marketing department found that a sizable share of people would never use the site at all, because they had no interest in reading. The bad news excited Bezos: it was time to widen the store. If they would not buy books, sell them something else.

That nearly bankrupted Amazon.

Expanding categories was not smooth. From the start, Amazon built fulfillment centers around the world.

A warehouse network brings inventory and payment-term pressure with it. When the internet bubble burst in 2000, Wall Street analysts accused Amazon of expanding recklessly. A bond analyst at Lehman Brothers thought Amazon might not last to the end of the year. Amazon outlived Lehman Brothers.

Amazon borrowed the money that saved it just before the bubble fully collapsed, cut its losses through layoffs and tighter operations, turned a small profit in 2001, and came through.

The rest is familiar: Amazon became the world's largest direct e-commerce company. In 2015 it passed Walmart to become the biggest retailer in the United States, and today it is worth three times Walmart, leaving far behind the company that once remade American society.

But that is still retail. Two successes outside retail are the main reason the fear of Amazon spread to other industries.

One was the Fire Phone, which Amazon built and released in 2014. The phone — dismissed by most of the press as "boring" — carried Amazon's hardware ambitions. It had glasses-free 3D and a camera that could recognize 100 million products.

The experiment failed. The year after launch, the entire Fire Phone engineering group was laid off.

But Amazon's broad spending on hardware paid off later, in the Echo smart speaker. Today Google and Apple are both building smart speakers along the lines Amazon drew, chasing it.

Then there is the bigger one, cloud computing. The earnings report that sent Amazon's stock up and its market value past Walmart's in 2015 did not turn on retail at all.

It was the first time Amazon broke out cloud computing (AWS) as its own segment: growth had stayed above 50% for three years. In fact, cloud computing had become the business paying for everything else the company was burning cash on.

AWS is now worth far more than $5 billion. Amazon holds 47.1% of the entire cloud market, and in the most recent quarter AWS revenue alone passed $5 billion, still growing above 45%.

Cloud computing can be read as the next stage of the enterprise server market — once home ground for IBM, Microsoft and Google. Today those three companies' shares added together are still smaller than Amazon's alone. As early as 2013, AWS already held more of the cloud market than Salesforce, Google, IBM and Microsoft combined.

Retail and cloud computing made Amazon the company that upended both Walmart and IBM. Both were among Buffett's 10 largest holdings. From September 2016 he sold down his $900 million Walmart stake to nothing; in February 2017 he sold a third of his IBM shares, and told that year's shareholder meeting that he had underestimated Amazon.

The fear outside, and the hostility it produced, changed how Amazon and Bezos himself talk to the public.

For Amazon's first twenty years, Bezos kept a low profile apart from his annual letter to shareholders. At least part of the reason was that he thought it was better for the business, since it kept him out of public affairs and social occasions.

That held until August 2015, when a long piece in The New York Times said Amazon was changing the world by wringing its employees dry. The article set off an enormous argument across the country, and Bezos answered it himself.

After that, Amazon and Bezos set about rebuilding their public image.

Bezos sent his first tweet in August 2015. He turned up at the Golden Globes, donated to nonprofits with his wife, and sat for an hour-long public interview at the Recode conference — all things he had spent twenty years avoiding.

The New York Times recently interviewed more than 30 people who know Bezos. They said he has realized Amazon faces more and more opposition, and that he has accepted the prospect of tighter government scrutiny.

Bezos has gone from the slight bookseller of the early years to a "monopolist" who needs philanthropy and an active social media account to dilute the label. Online, people have begun urging one another not to shop at Amazon, and setting photographs of Bezos beside the Terminator and beside Superman's old enemy Lex Luthor.

Alibaba and Tencent have entered plenty of new industries too, but the market reacts in exactly the opposite way

Alibaba and Tencent are worth, or have been worth, more than $500 billion. Both sell directly to consumers, both command enormous traffic, and both are buying their way into every industry.

But where American investors dump the incumbents first, Chinese investors like to buy not only the companies Alibaba and Tencent invest in, but the other companies in the same industry as well.

On February 17, 2017, Bailian Group's Lianhua Supermarket jumped 13.78% in Hong Kong, and Sun Art Retail Group, parent of RT-Mart, rose 6.49%. They rose because the market guessed that one of them was Alibaba's partner in new retail. Sun Art denied it that same day and still closed up 6.68%.

When Alibaba began promoting its cashierless supermarket at one event after another, companies up and down the supply chain rose with it. In July 2017, Invengo, Huina Technology, Kelan Software and others all gained more than 20% in five days, because Alibaba was going to open a cashierless café at the Taobao Maker Festival.

If the American investor's logic is that Amazon has entered this industry, so everyone else in it is finished, the Chinese investor thinks the opposite: Alibaba and Tencent have entered this industry, so this industry is about to take off. Which does not, of course, mean the companies in it gain anything.

If there is any reasoning here at all, the word for it is probably gambling.

The short-term speculator, holding more information than most, puts a large sum into a company while its stock is still cheap, pushes the price up, draws in crowds of retail investors, pushes it higher again, then pulls the money out with no warning, takes the spread and walks away. Whether the company actually makes money interests almost nobody.

China's market is dominated by retail investors. According to the weekly reports from China Securities Depository and Clearing, as of March 2018 retail investors made up close to 100% of both the new accounts opened that week and the accounts already open, and most of them held less than 100,000 yuan of stock. They usually have neither the time nor the methods to analyze a stock. They decide by watching the market and the people around them, which produces lagging information and a herd effect: I do what everyone else does, and I am always half a step behind the people who know.

In the United States, by contrast, retail investors are only 4% of the market. Most individuals hand their money to professional institutions, which have better information and better methods, and which respond more calmly when risk arrives.

The difference shows in how long the two sets of investors hold a stock. According to the investment research firm NDR (Ned Davis Search), the average American stock is sold 8.3 months after it is bought — and this is already the U.S. market at its most restless.

For investors on the Shanghai and Shenzhen exchanges, the same figure is 1.73 months and 1.47 months.

The internet giants on each side used to expand in different ways

Part of why Tencent and Alibaba get called China's Amazon is that the Chinese and American giants have long expanded along visibly different lines.

Over decades, Alibaba, Tencent and Baidu have tried every kind of business, whether or not they could make it work. Apple, Microsoft, Google and Facebook have stayed fairly close to their core businesses.

Apple made $20 billion in net profit last quarter and holds more than $200 billion in cash, yet its largest acquisition to date is only $3 billion, and the companies it has bought are mostly tied directly to its hardware. Facebook's largest was WhatsApp, for $16 billion, bought because WhatsApp competed directly with Facebook itself.

Google's parent, Alphabet, runs a wider spread of businesses, but nearly all of them incubate new technology; even when it moves into cars and transport, education or healthcare, it starts from one specific technology it owns.

Amazon's rate of entering new markets over the past two years, though, looks more like a Chinese giant's. It built AWS to compete with Microsoft, Alexa to compete with Google, a video arm to compete with Netflix, and launched its own brands in underwear, apparel and furniture, categories already crowded with established names. At the same time it is assembling a healthcare company, investing in food delivery, and opening physical stores — and every few weeks another report says Amazon is considering toys, or pharmacies.

All of them are looking early for the next source of growth, for the day the main business runs out of room.

By 2016, 889 million people were using WeChat every month, in a country with 731 million internet users. Everyone in China was already on WeChat, which meant Tencent's user growth in its main market had topped out.

Tencent's recent 2017 annual results show revenue growth slowing in its core gaming and social businesses. That is exactly when a new source of growth matters most: over the past few months Tencent has taken stakes in Yonghui Superstores, Carrefour, Wanda, HLA and Better Life, one after another.

Tencent has never been a retailer, but retail that joins the online and the offline could be its next story after games, social advertising and subscriptions.

Amazon is telling the same story.

Electronics and groceries are Amazon's main source of revenue, 81.3% of the total in 2016. But a survey by the consumer products research firm TABS Analytics found that in 2017 only 4.5% of shoppers bought groceries online often — barely above the 4.2% of four years earlier.

AWS and the voice assistant both count as growth outside e-commerce, and they are still not enough.

Amazon buying Whole Foods to get into physical stores follows much the same logic as Alibaba and Tencent buying into supermarket chains.

Different roads, same destination.

Cover image from Wikipedia; long cover image from Unsplash