Lei Jun, the renowned Internet tycoon and CEO of Xiaomi, had a lot to say in the recent Global Internet Mobile Conference, where he shared his thoughts on a number of topics.
For example, Mr. Lei claims that traditional business logic does not apply to the Internet. There is certainly some truth to that. Focusing on monetization instead of product and growth is almost certainly the best way to stop the momentum.
However, to lose money in the beginning is nothing out of the ordinary. In fact, Silicon Valley’s recent failed bid to disrupt the energy sector shows that, if anything, it’s the technology people that usually expect to spend a little in the beginning and make a lot (think Google), whereas traditional businesses know that they have to spend money to make money.
This doesn’t mean losing money a good sign. In his definitive account of the Internet Bubble in the 1990s, John Cassidy, one of America’s leading financial journalists and a staff writer at the New Yorker, showed that the primary folly of many startup companies of that era was to believe that losing money is always a good thing, since it foretells the fortunes to come. Of course, what these naïve (and cynical) people did not realize or say is that sometimes losing money is sheer bad business, plain and simple.
Of course, one of the companies that Cassidy once disparaged is Amazon, a company that not only survived its early losses but also went on to become one of the greatest technology firms of our generation and the future. Though in its early days it bled a huge amount of money due to Jeff Bezos’ insistence on take massive amount of losses to gain market share. Founded in 1995, Amazon didn’t make a profit till 2002.
As the man at the helm of Amazon, Jeff Bezos has always emphasized the long game. From early e-commerce to the cloud computing, Bezos has always maintained his focus on market share and long term benefit instead of instant profit.
This is the point that Mr. Lei also raises. He points out that Sina, Sohu, and Netease thrived after burning through cash in their early stages. It is Lei’s view that this is the unique character of the Internet era, and this is also how things will turn out in China’s e-commerce war, as whoever has the deepest pocket will be the last one standing and reap the benefit accordingly.
What Lei forgets, though, is that Amazon is the exception rather than the rule. Jeff Bezos may be the premier technologist in America. Like Steve Jobs, another technological visionary, Jeff Bezos has view of where we are headed that is both profound and nuanced.
For example, while Lei believes Amazon’s main strength is its monopolistic position in e-commerce, which allows the company to set prices higher and have higher margins, which is fundamentally different from Bezos’ vision.
The Amazon CEO believes that “there are two ways to build a successful company. One is to work very, very hard to convince customers to pay high margins. The other is to work very, very hard to be able to afford to offer customers low margins.” As such, Amazon prefers “a very large customer base and low margins than a smaller customer base and higher margins”. Therefore, Amazon’s size is an advantage because it allows the company to be more efficient instead of charge a higher price.
I don’t think Mr. Lei or any of China’s e-commerce CEOs has Bezos’ version. Therefore, even Amazon succeeded by following the “if you spend it, they will come” strategy, it may not work as well for those lacking in similar vision, value, and execution.
At this point, it should also be pointed out that Sina, Sohu, and Netease’s “spend and build” strategy almost didn’t work except for the fortuitous turn of event that saved them. Even today, some of them make most of their money as game providers instead of as news portals. Like having Bezos’ skills, this is also something you shouldn’t count on.