Let's not bugger it up

MICHAEL O'DONNELL
Last updated 05:00 14/12/2013

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OPINION: Consistent with its proud history of disruptive innovation, Jeff Bezos and the Amazon crowd managed to nicely hijack cyber Monday two weeks ago.

As the big US e-tailers were crafting media statements about the colossal numbers they had seen, Amazon gave TV show 60 Minutes a scoop on plans for "Amazon Prime Air".

This new service will employ unpiloted drones to deliver purchases from Amazon to your home.

The 60 Minutes piece showed footage of a happy punter having his morning purchase delivered to his porch by an aerial drone.

Amazon grand poobah Jeff Bezos suggested that these GPS-directed mini helicopters would soon be delivering five-pound packages to locations within 10 miles of a distribution centre.

It's an audacious idea from a company whose audacity drove criticism aplenty during Amazon's formative years. Founded in 1994, Amazon's website went live in 1995.

While it's pricing and commitment to delighting customers was revolutionary, there was considerable speculation it wouldn't survive. In those early days it retailed goods at prices that many stores couldn't source them for.

With such wafer-thin margins, and stubborn commitment to grow the physical infrastructure long before customer demand was proven, many observers expected Amazon to join the death count of the dot.bomb crash in 1998.

It avoided that, but still managed to lose $2.8 billion over the first six years of operation.

It wasn't until January 2002 that it went into the black, posting a $5 million quarterly profit off $3.1 billion of sales.

Do the math and it comes down to a 0.16 per cent margin. Over the ensuing years, revenue and profit continued to grow, but at a puckering rate.

For its most recent trading year Amazon delivered earnings of $378 million off revenues of $61 billion - less than a 1 per cent return.

Does that make Amazon a dodgy investment? Certainly not. By taking a bootstrapping approach, Amazon now owns eCommerce in the US in a way others can only dream of.

The disruptive Amazon experience provides some interesting insights into the rise and rise of a local sharemarket darling. Xero makes delectable accounting software and delivers the service out of the cloud.

It's often referred to as the "Apple of accounting", and that's a useful way to think of it, although founder Rod Drury has more in common with Richard Branson or Iggy Pop than Steve Jobs.

After successfully selling his previous venture Aftermail - a way to turn your emails into an active database - for $55 million, Drury started up Xero in 2006.

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Together with his accountant Hamish Edwards, the two market anarchists set up shop above a Wellington cafe with a desire to disrupt the software accounting market, particularly for SMEs.

A handful of habitual investors put in some coin and the company listed on NZX a year later with an IPO strike price of $1.

The infant terrible initially traded at a discount but started to slowly track up, aided by the buy-in of high profile investors including MYOB's Craig Winkler in 2009 and PayPal's Peter Thiel in 2010.

Over the last year, the share price really started to take off. It started the year at $7.50, which priced the company just under $1 billion - a pretty good price given it is yet to deliver positive earnings, or even provide a date when that might be on the cards.

It then started scudding northwards, reaching $16 mid-year, albeit off thin trading volumes. At this stage I lost my nerve, selling half the IPO shares I'd bought and dearly showing my own ineptitude at stock picking.

A couple of months later, Peter Thiel and Matrix Partners bought $180m of stock at $18.15. Since then the share price has gone ballistic.

At the time of writing it's sitting around $34 having eased back from its $40 highs, valuing Xero at over $4 billion.

Every couple of months a new valuation comes out which seems to justify the latest price. I'm no analyst, but it seems to me that punters are betting on two possible outcomes.

The first is that some of the incumbents - think MYOB or Oracle - will simply choose to gobble up this upstart and stand in the market at a premium to trading price. And every day they wait, that choice gets more expensive.

The second is that Xero is set to become the Amazon of accounting, happy to suffer years of losses in the interests of gaining raving fans and building market share, but with the long-term result of simply owning the market.

Let's just hope they don't lose their mojo on the way, or their focus on irresistible functionality.

A few years back I spent a year working at Gareth Morgan Investments in the fund management game.

Morgan had a big sign on the wall that simply said "Don't lose the bloody stuff", which served as a salient reminder to staff about the duty they owed investors.

To keep his staff focused on delivering irresistible functionality to Xero users as the tightly held stock goes stratospheric, I wonder if Drury might have a similar but different sign "Let's not bugger it up".

Mike "MOD" O'Donnell is a professional director and eCommerce manager. He enjoys taunting Rod Drury about his slides. Disclosure of interest: MOD owns shares in Xero, but sadly not as many as he used to.

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