
Amazon's profits  - barista
http://ben-evans.com/benedictevans/2013/8/8/amazons-profits
======
nostromo
Of all the big internet giants, I think Amazon will be the hardest to disrupt.

Androind could eat away at Apple. Google's search could in theory be
disrupted. Facebook seems more vulnerable by the day. Microsoft is a dead man
walking.

But Amazon has this entire subsystem of distribution centers filled with
inventory risk. People focus on the website, but I think the real magic is
everything that happens behind the scenes. The barriers to entry are enormous.

I once created a comparison shopping service. When we talked with users, we
heard over and over, "I just go to Amazon. I trust them. I don't shop around
online." Or, "I have Prime, so I'll save money on shipping anyway." It made
the entire space seem pointless.

An internal Amazon company motto is, "it's still day 1." That's their view --
that it's still the early days of the internet. That's why they reinvest so
heavily, because it's still early days.

~~~
bane
I recently went to two malls in my area that, when I last visited them a
decade ago were bustling with shoppers.

In one mall, I walked through a Macy's that may have had only 5 shoppers (I'm
reserving "customers" as we weren't one until we actually bought something) in
the entire store. The tile floor of the store was crumbling, wallpaper was
peeling, everything felt old and ancient. I didn't want to be there.

In one mall, there was an entire wing of the mall that was almost completely
abandoned and probably 30-40% of the mall was vacant store fronts. The food
court I used to spend hours in consisted of a McDonald's and a Chinese fast
food place. I remember years ago when it hosted a dozen different places, all
with long lines. Getting a table to eat at required a friend to go reserve a
table for you. These days? 3 people eat big macs in an empty large echoy room.
It used to be the social center for the town, today it's nearly abandoned.

Amazon and other online shopping venues _decimated_ these brick and mortar
shopping venues. And it's not clear that it's generating the same amount of
raw revenue in return either. It's _definitely_ annihilating retail jobs in a
way that Walmart could never hope to approach, yet it's rarely if ever
discussed. At best, retail Macy's jobs are being replaced with contract
warehouse work at a local fulfillment center, but automation and the loss of
the requirement to interface with the customer means these places only require
a fraction of the employees to move the same volume of inventory.

I don't know if the pendulum will ever swing the other way. My wife for
example, buys clothes almost exclusively on-line. It's almost unthinkable that
she does this, you want to try on clothes after all. But she overbuys a
little, and only goes to the physical store to return items that don't fit or
she doesn't like. The once proud storefront has been turned into the return
counter in the customer service center. Why? "I don't like dealing with all
the crowds and it's such a hassle to go there to see if things are on sale,
I'll just check the web site every few days instead."

About the only brick and mortar we hit with any regularity these days is
Costco, and that's largely because their wine selection is cheaper than online
and very nearly always well selected and we can buy bulk toiletries and
cleaning supplies at a discount.

~~~
dmix
> Amazon and other online shopping venues decimated these brick and mortar
> shopping venues

Brick and mortar stores are still just fine (or better thanks to Yuppies).
Malls are getting decimated by Amazon and cultural trends against malls. The
80s suburban world where malls are the place to hangout is fading fast.

~~~
Widdershin
Malls have made a huge comeback among the young people in my city, after the
central city was decimated by a large earthquake.

One of the statistics that kinda blows me away, on Boxing Day, the largest
mall in the city (which is still tiny by American standards) is visited by
over 25% (>100000 people) of the population of the city.

~~~
lostlogin
Where are you? Christchurch?

~~~
Widdershin
Yep.

------
josh2600
Cool article, but I think the magic profitability button analogy ignores the
underlying economic thesis of Amazon.

Right now, the only obstacle to Amazon's profitability is Walmart. If Walmart
didn't exist, Amazon's pricing control supremacy would ensure they could
operate at the lowest possible market price on every item, and as the market
maker for product, they would control the cost floor as well.

In a sense, the end game for Amazon is this: it's fucking ludicrous to run a
company without profit for years. At some point someone else is going to try
to take more profits because of the volume pressure of Amazon. The end game
for Amazon is choking all of the other retailers out of existence, IMHO.

They don't have to flip a switch, they just need to wait. They're playing the
long game.

~~~
jonnathanson
All of which, ironically enough, was Walmart's original playbook: grow huge,
realize economies of scale so drastic that nobody else can hope to compete on
price, then use your size and buyer power to put even more downward pressure
on supplier prices.

Amazon vs. Walmart is an extremely interesting battle to watch. Amazon has
massive advantages in technology; Walmart has massive advantages in size,
distribution, and logistics. Amazon is gaining a lot of ground in the US;
Walmart is much stronger than Amazon internationally.

If I had to place bets, I'd take Amazon in the long run. They're much more
forward thinking and are playing a much more strategic game. Walmart has
become overly reliant on price leadership and has had a very hard time
orienting toward the future of retail. The Innovator's Dilemma will catch up
to it eventually -- but it'll take awhile, because Walmart is so damned
massive and dominant right now.

~~~
revelation
Walmart is much stronger internationally? They crashed and burned in Germany,
and the map of their international locations is.. not very impressive.

Frankly, looking at the US map, as a non-american, even there their presence
isn't particularly exhaustive. The USA just happens to be a big market.

~~~
brianbreslin
Walmart is huge in uk (asda) and china and Mexico. Amazon still is only really
operating in a handful of European countries and just got into India.

Walmart is actually investing in startup ecommerce plays in brazil (where it
has been established 40 years)

~~~
tlarkworthy
it's not number 1 though, which is hard for US to imagine ...

-[http://www.4-traders.com/TESCO-PLC-4000540/news/Tesco-Market...](http://www.4-traders.com/TESCO-PLC-4000540/news/Tesco-Market-Share-Unchanged-Sainsbury-Asda-Morrison-Fall-Kantar-15979118/)

------
guard-of-terra
Why would you, as a shareholder, want a company to become profitable if it's
not going to pay dividend anyway?

If anything, shareholders should push tech companies to reinvest every spare
cent, assuming it already figured out how to make money to stay afloat.

Raking cash and sitting on it is an awful mode: Google and Microsoft grow
suboptimally because of this.

~~~
prewett
As a shareholder, you don't want a dividend IF the company can invest that
money at a higher rate of return than you can. Berkshire Hathaway is the
textbook example of this: they have not paid a dividend in 40 years, but the
book value has grown by about 20% every year (averaged out).

I would not say that Google and Microsoft necessarily grow suboptimally
because they have a lot of cash sitting around. The current opportunities may
not be worth investing in. Berkshire has tons of cash, waiting for a good
opportunity. And when it comes, cash gets poured into it.

~~~
laxatives
I think thats only true if you have a lot of faith in the company. If you were
guaranteed greater return on reinvest, of course that would be better. But all
you're getting is less (or no) money now and the promise for more money later.
If this isn't something your emotionally attached to, it sounds like you're
just getting screwed.

------
johnrob
I think Amazon is simply reinvesting in growth while avoiding corporate income
taxes. Since they tend to move into proven industries, they are not likely to
lose any of the re-invested money.

They are effectively taking profit in the form of Amazon equity (via increased
stock price) and not paying any taxes.

~~~
tracker1
I don't have a problem with that... imho corporations should be working to
either grow (reinvest or diversify) or payout dividends... I'm pretty opposed
to a corporation holding on to vast unused/underused properties and cash
reserves. It does nothing for the communities they take hold in, or for the
economy at large.

------
jmduke
Benedict's analysis is consistently interesting, as he tends to apply a level
of financial rigor often absent from tech journalism/analysis. His stuff for
_Enders_ is incredible (though its unfortunate how difficult it is to get
ahold of Enders material, as its quality deserves a much more massive
audience.)

------
adventured
Amazon is clearly capable of generating Walmart or Target range profit
margins. In 2010 they earned $1.15b on $34b in sales. That's right on par with
Walmart's sales to net income ratio, and I believe Amazon accomplished that
without much focus on profitability.

The only concern I see about Amazon as a company, is the future stock market
returns for the next decade are already baked into the stock. They're
currently trading at three times the value of Target (with none of the profit,
no dividend, and soon to be comparable sales).

------
dev_jim
The problem with this whole profit "debate" about Amazon is that most people
don't understand that public corporations are not like households or small
businesses. Generating a profit is not the same as a person's savings. If a
company can reinvest their excess income in new ventures that will drive
growth that will increase revenues and thus the stock price. That is a much
better use of capital then generating a profit, which is then taxed at 35%,
and having either having that cash sit in the bank, buying back stock, or
paying it out as a dividend (which then taxes the person receiving the
dividend). I'd much prefer a company that has recognized opportunities to
invest in then one that inefficiently uses my capital.

~~~
dragonwriter
> If a company can reinvest their excess income in new ventures that will
> drive growth that will increase revenues and thus the stock price. That is a
> much better use of capital then generating a profit

If a company has excess income to reinvest, that _is_ profit. You can't
reinvest profits if you don't have profits to reinvest.

> That is a much better use of capital then generating a profit

No, actually, its a use _of_ profit (perhaps one that converts it into
capital.) And, obviously, you have to generate profit before you can use it
for anything.

~~~
dev_jim
You don't understand how corporate accounting works.

~~~
reedlaw
I don't understand either. How can reinvesting corporate revenue avoid
taxation? Isn't corporate income taxed regardless of whether it's put into the
bank or reinvested into new ventures?

~~~
slykat
If you reinvest your profits into your own business that money usually gets
charged as a expense on the income statement so your reported gross profit
reduces by that amount and thus, you don't pay taxes on that amount.

For example, lets say Company XYZ anticipates making $100M in gross profits
but decides to invest $100M in R&D for a new product. Their reported gross
profit would be $0M for the year due to the $100M charge.

~~~
reedlaw
Is there anything analogous for personal income? That is, can I invest my
income in such a way that my gross income is $0 for the year? I know mortgages
are deductible, as well certain retirement savings accounts, but what about
daily living expenses? It seems a tad unfair that corporations can effectively
evade taxation while individuals cannot. Or is that by design because
corporate spending trickles down to individuals' salaries?

~~~
jacques_chester
Generally, no. The key difference between personal and corporate tax in most
countries is that personal tax is conceptually taxed _first_ , after which you
can spend what's left. But a corporation gets to spend _first_ , after which
taxes are levied on whatever remains.

Unlike you or I, if a company makes no profits, it pays no tax on its income.

The basic reason is because _income_ is seen as distinct from _profit_. If
personal income taxes were based on a profit-like model, you would require
everyone in a country to keep double-entry books on every transaction they
made. That is unlikely to be a very popular policy.

I am not an accountant, this is not financial advice.

------
codex
Amazon doesn't make a profit because the stock market doesn't demand it. As
long as a company is growing, it's stock will appreciate. It's only when
growth stalls that shareholders will demand that the intrinsic value of the
company be realized.

This works well for Bezos, who is so obsessed with empire building and the
future. So far growth has allowed him to continue this obsession. Even if
growth stalls, Bezos is so intent on pursuit of the new that Amazon may not
show real profits until he retires, or dies.

------
riggins
I'm not sure Amazon will ever make profits.

The general thesis is 'they're the low cost provider, they're going to make a
ton a profit'. This thesis is one that often leads Wall Street and investors
to tears. Because there's another factor that needs to be taken into account:
is there going to be a glut of capacity.

Here's the classic example. One of the managers of Buffett's textile mills
came to Buffett and told him they could invest in a new power loom that would
double production for the same cost to run. Buffett's response: that's
terrible, none of that will stick to our ribs. Buffett could see that everyone
in the industry would increase capacity, there'd be a glut of product, and the
industry wouldn't capture the profits.

Another classic example: fiber optic. Read a research report from the late
90's on the fiber industry if you can get your hands on one. Lot's of comments
on what a great investment Global Crossing would be because 'low cost provider
wins'. Of course 'low cost provider' went bankrupt because there was a glut of
capacity.

So bringing it back to Amazon, is there a glut of capacity? I'd say probably.
What's Amazon's fundamental purpose? Matching buyers and sellers (which they
do much much better than a mall). A computer basically has infinite capacity
to match buyers and sellers. The warehouses are nice but when I look at the
forest I question whether the profits are ever going to materialize. I see a
glut of capacity and no reason why that would lessen. It's getting easier to
start an internet company, not harder. The competition isn't going to cede the
field either. They'll continue to put a ceiling on prices until the bitter
end.

~~~
saosebastiao
I wouldn't be surprised if Amazon spent more on new fulfillment centers this
year than they did on their entire web facing development team for the past
three years. Amazon is an internet company in the same way that WalMart is a
parking lot company.

~~~
riggins
if you think its all about fulfillment centers, Walmart has a pretty
incredible logistics operation. The big brick and mortar companies have
warehouse operations as well. Plus, with Sears and Walmart already using their
stores as fulfillment centers its not hard to see that some of that brick and
mortar space will get converted to 'fulfillment' centers (I just call them
warehouses).

So then ask yourself, is warehouse capacity going to be constrained? Or will
there be lots of warehouse space and lots of people who can create a web
frontend to pair with that warehouse space?

Look, I love Amazon, I'm just telling you the 'low cost provider' wins thesis
is one that people repeatedly get wrong because the low cost is often due to a
technological advance that results in overcapacity in the industry.

~~~
saosebastiao
If you think of a warehouse as just a place to put stuff, then yeah, there has
been a glut of capacity for over a hundred years now. Walmart has an
incredible _transportation_ logistics system. I have no problem admitting they
do it better than Amazon. But WalMart still cant compete on fulfillment. Throw
in the worlds largest inventory selection (I'm guessing at least an order of
magnitude larger than WalMart as a whole, and about 2-3 orders of magnitude
larger than an individual WalMart store), and the ability to _guarantee_ same
day fulfillment, and Walmart doesn't even come close.

Remember, even then, you are comparing Walmart to Amazon...not JoeSchmoe.com
to Amazon. If you think it just amounts to putting things in a box and calling
UPS for a pickup, I double dog dare you to compete with Amazon. It doesn't get
any closer to a pennies-on-the-dollar comparison.

------
mintplant
I'm a bit uninformed on this, so bear with me here. If Amazon is making no
"profit", that still means that its employees are getting paid, right? If the
people working there are making money off of the business, what problem
exists, exactly? Does it have to do with investor returns?

~~~
valgaze
Check these two ideas out:

1) Bezos said: _" Percentage margins are not one of the things we are seeking
to optimize. It's the absolute dollar-free cash flow per share that you want
to maximize, and if you can do that by lowering margins, we would do that. So
if you could take the free cash flow, that's something that investors can
spend. Investors can't spend percentage margins"_
([http://blogs.hbr.org/ideacast/2013/01/jeff-bezos-on-
leading-...](http://blogs.hbr.org/ideacast/2013/01/jeff-bezos-on-leading-for-
the.html))

2) Listen to Ruby on Rails' DHH break it all down here @ 44min30sec (he also
knocks salesforce) quoting Bezos' line "your margin is my opportunity":
[http://www.youtube.com/watch?v=jzERXJgi5vQ&t=44m30s](http://www.youtube.com/watch?v=jzERXJgi5vQ&t=44m30s)

~~~
barista
Those are some good links. Thanks. He's very savvy guy. Interesting how he
chose to conclude the interview which was very clearly targeted towards the
"investors" of Amazon as this:

"And the reason that I'm doing this interview with you is I want customers to
understand what makes us tick, how we operate, what our principles are. I
think customers want to know who they're doing business with."

smart!

------
vbl
They reinvest heavily. It's sad that my interview didn't result in an offer. I
really love Amazon.

~~~
bethling
Try again later. Really - each interview loop has different people who look at
different things. Just because one set passed on you doesn't mean that another
will.

If Amazon seems like a place you'd like to work, there's no reason not to try
again with a different team.

------
jmathai
> To put this another way, Amazon is LOTS of different startup ecommerce
> businesses on one platform. All the profits from the ones that work are
> spent on new, loss-making ones.

Doesn't that describe Google as well? Ads fund most of their initiatives...

~~~
mabbo
While I interned at Google, my manager said to me once "See, at Google, we
found a hose that money pours out of. It's name is 'Online Advertising'. We
now do two things- improving the flow of the hose, and searching for another
hose."

~~~
dictum
I'd say they've already found another hose: self-driving cars.

How they'll get them to market is the question.

~~~
jfoster
It will be interesting. They could launch several fully-automated business
based on autonomous vehicles: taxi, parcel delivery, (B2B) distribution, and
probably many more. Other options are for them to license out the technology,
or get into vehicle manufacturing, but I think those are far less interesting.

------
dnautics
could someone explain the marxism thing to me? I'm really scratching my head
on this. Certainly it's not his labor theory of value. Is it supposed to be an
analogy to "From those who can provide to those who need it"??

~~~
jlgreco
Karl Popper is most famous for his work in the theory of science; primarily
the importance of falsifiability. Apparently he had an issue with Marxism
because he felt it wasn't falsifiable. The idea is that it should be possible
in theory to prove any _good_ theory wrong. For example, the theory of
evolution is a good theory because there are things that we could discover
that could prove it wrong (Precambrian rabbits).

Marxism is not really what I would pick to talk about Karl Popper and
falsifiability... his writings on politics are pretty much a side-act. I am
guessing the author was recently reading some of Karl Popper's more political
writings. I would have picked psychoanalysis.

~~~
jfb
I don't think Marxism was Popper's side act, particularly later in life ( _The
Open Society And Its Enemies_ , _The Poverty Of Historicism_ ). Marxism and
Freudianism were targets of Popper's because they appropriate the language of
science for what he argued were in fact non-sciences.

It's important to remember that in the '20s, Marxism was presented as a
_scientific_ theory, that it described a logical, teleological process by
which human society could be perfected. This was the Popper's later great
white whale. Ask George Soros!

------
Tichy
The ponzi scheme theory: since apparently Amazon is making a profit it
reinvests, it seems to me it could make a "real" profit any day simply by not
reinvesting any longer.

------
nazgulnarsil
The thesis of this article seems to be that Amazon is capitalism personified
in one company.

