People really need to get off of the "income analysis" trope with Amazon. It's not how they operate their business, so why do people (analysts and media mainly) analyze it any other way?
In a downturn, a slight decrease in margins across the board will push a company on the razor's edge from profitability to unprofitability. Margin means margin for error - when the company isn't doing well and investors are scattering to safety and liquidity is nowhere to be found a higher margin gives your company a buffer when you have to cut.
Of course when revenues are growing like crazy and the economy is gangbusters it sounds great to cut margins for absolute growth but that's a booming economy. Things are very different in a downturn.
Does the buffer of market share outweigh the buffer of margin?
Interestingly, the "what companies are valued on" is an increasingly surprising thing when you think about how real estate development works. Properties are valued on a multiple of their Net Operating Income, which creates a scenario where capital improvements that have low ROI in terms of NOI are actually high ROI when you include the effect on equity (future sale price.) In the current environment of 4% cap rates (NOI / Sale price) each additional dollar of income increases the value of the property by $26 (one dollar for the income and 25 dollars for the sale price bump.) This is why every landlord is very incentivized to borrow as much as possible to improve property as much as possible to raise rents as high as the market will reliably bear (vacancy kills your NOI and scares off acquirers) and then sell the property.
Same reason that founding a startup is significantly less risky for a world expert in its problem domain than for a random investor in that startup. The founder has full knowledge of the domain and a lot of levers they can pull to adjust strategy; the investor has none of that. That's also why many VCs require terms to reduce their risk (liquidation preferences, participation, anti-dilution, warrants) or increase their control (board seats, voting rights, information rights).
And how has that worked out for 440 companies that used to be in the F500 that no longer are there?
> In a downturn, a slight decrease in margins across the board will push a company on the razor's edge from profitability to unprofitability.
Except the reason their margins are so low is because they keep feeding capital into the business to fund new projects.
> Of course when revenues are growing like crazy and the economy is gangbusters it sounds great to cut margins for absolute growth but that's a booming economy. Things are very different in a downturn.
Yup, you're right, things are very different in a downturn. Great listen about how NetSuite navigated downturns: https://a16z.com/2015/05/15/a16z-podcast-why-saas-revenue-is...
In reality the majority of businesses which run on large margins get lazy, allocate capital ineffectively, and underinvest in R&D.
Thin margins force you be lean. Thick margins afford you the opportunity (and risk) not to be.
That means it cost it 63% to buy products(on credit like terms), and 33.3% to fullfil orders.
So from a risk terms we can say their margin is equivalent to 3.7/33.3 = about 10%. Which isn't bad.
Furthermore, a lot of those costs are variable costs, like shipping, which go down if demand drops.
They're just choosing to reinvest profits into growth, and can stop doing that whenever they want.
I think we mostly agree, but not about how much risk they're exposing themselves to in a downturn.
What better way to additionally hedge against that than to have a many-billion-dollar contract for hosting with the government.
Amazon is a cash cow that simply feeds a relatively decentralized innovation engine. Moreover, the strategic moves they make (intentionally keeping GAAP margins thin, not separately disclosing AWS in the financial statements for years, etc.) should always be assumed to come from multiple, well-considered motivations.
Someone says, "It's just customer-obsession." Yes, that's the simple myth/story they want you to believe.
I wish Apple operated that way, as lowering Apple device price will very likely increase the absolute amount of dollars coming into their back acct.
I mean I get Amazon and Apple ear their income via different methods but still.
Amazon has an enormous lead in scale. More importantly, the only way to defend that lead is to consume as much market demand as they can, which puts downward pressure on their prices.
Too much market share would be the death of Apple. Too little market share would be the death of Amazon.
When you go down to processors like the ones in the Apple Watch or the AirPods, no one comes close to the size/power. There is a reason all Android watches are big ugly monstrosities.
You realize as far as marketshare, iOS has close to 50% in the US and well over 30% in most other industrialized nations. There is no exclusivity to owning an iPhone in developed markets.
Watches are dying. The reason Android isn't trying is because it's a passing fad.
But now you sound like Mac users back in the Mac 68K and PPC days.
Apple Watch sales have increased not decreased.
The iPhone from 2015 will probably be getting updates longer than the 2018 Moto G.
Both phones were around the same price at launch.
The iPhone 6s is still supported and still getting os upgrades and security patches - the Galaxy S6 isn’t.
The iPhone 6s should get at least one more year of upgrades but considering the iPhone 5s is two years older and still getting updates I would bet on at least two more years.
Long term, which is the better but?
Here is a comparison between the flagship Galaxy S9 to a two year iPhone 7.
Btw, your link shows how much better the Galaxy phone is. But if you choose your phone based on which has higher benchmarks rather than things like a better camera, to each their own.
Not to mention all of the security vulnerabilities that don’t get patched.
The advantage of updates is that it encourages app developers to take advantage of the latest features. For instance, the author of Overcast, my favorite podcast app could release a new version that required iOS 12 a month after it came out without having to lose any customers - anyone who could run iOS 11 could run iOS 12.
As far as updates, just the integration of shortcuts and Workflow has done wonders in iOS 12.
And apple lags just as much.
Shortcuts is a weaker version of Tasker. You could have switched to Android and had that 5 years ago.
As far as “batterygate”. Batteries degrade over time. Either Apple slowed the phone down or the phone shuts off.
They Do, up to a certain level, and we haven't quite reach there yet across all spectrum of devices.
> They're both snappy and useable.
They are not.
>Watches are dying. The reason Android isn't trying is because it's a passing fad.
The data tells a completely different story.
I've always thought they should make a $10,000+ model. iPhones are essentially a status symbol unless you buy it for privacy purposes. There is a decent market who would pay a lot of money to have a iPhone that the plebes can't afford. Hell, even a lot of broke people would save up to buy one
It's like cars, if you just want a tool to get from point A to B you can buy one cheap. On the other hand you can also spend hundreds of thousands on luxury cars.
Make some limited edition iPhones every year and I'm sure there would be demand and an eventual collector market
There are a lot more reasons to buy iPhones than status symbols and privacy. Chief of which is better performance and longevity.
The iPhone 5s from 2013 is still getting OS updates. The iPhone 6s from 2015 will still outperform most new Android phones and should be getting updates for at least another two years.
That's my point, when it came out the marketing around the iPhone was how using apple made you a trendsetter and you were ahead of the curve, now everybody has one. So raise the price and bring back the sense of exclusivity
as for performance, it really doesn't matter for luxury items. People pay hundreds of thousands of dollars for old cars and it's not because they perform better than a modern economy class vehicle
Or you can watch every single iPhone ad. None of them scream exclusivity.
There are other iPhones for sale besides the $1500 maxed out iPhone XS Max.
As to why margins matter... Bezos' quote talks about how valuations are multiples of cash flows. This is true, but multiples aren't constants. Basic investment theory suggests that the multiple should be an increasing function of the company's growth rate, its ratio of sales to assets, and its margins. So if you want to maximize your company's value you ought to be concerned with all of those things. Which isn't to say that trading lower margins for higher growth is a bad decision in Amazon's case, but it's not like it's an irrelevant number.
However, in its disclosures to bond investors, the company added back items like stock-based compensation, sales and marketing expenses, even general and administrative expenses to arrive at what it called a “community-adjusted EBITDA” of positive $233 million.
What does this have to do with the article? Percentage margins aren't mentioned anywhere. It mostly talks about absolute dollar operating income which, unlike GAAP income, isn't too different from free cash flow. For example: "Operating income for AWS was $7.29 billion in 2018, up from $4.31 billion in 2017. [...] And AWS is the lion's share of Amazon's operating income: Nearly 58% in the fourth quarter of 2018, and nearly 59% for the full year." So AWS is certainly a major driver for Amazon's free cash flow.
"It's not how they run their business" is an interesting observation, but businesses ultimately don't get to choose the yardstick they are measured by. In the long term, that is income.
All three are trying to differentiate more and more (with varying degrees of success) while they increase the price of the commodity services so it doesn't compete with the differentiated ones. They will not compete on price with each other.
I just don't know what will happen if somebody plays an Amazon at the commodity segment, and go selling services with thin margins.
However, your comment has me thinking that FB doesn't have a way to lock people to their cloud - they'd be forced to compete on price more than any other major cloud provider. Probably not a great business.
But is Apple a cloud provider? I recall they have some data centers but I thought that it was rumored they used Google Cloud or AWS (or both) too.
When Amazon got into the cloud business, they actually had most all of the non-software challenges solved already. It turns out that datacenters and distribution centers go in the same kinds of places and have very similar kinds of challenges. They benefited significantly from knock-on effects from running their existing business.
If Facebook got into the cloud game, they would have to learn two new businesses at once: cloud hosting and industrial real estate.
I don't think that they would be able to obtain good pricing on either real estate or server hardware. Their current hardware vendor can't absorb that large of a scale out.
That sounds good in a blurb in CIO Magazine but is likely completely disconnected from reality.
The complexity of building a cloud provider is not primarily in the physical management of physical assets in a big box building.
Building data centers is hard because there are not a lot of places that you can build them effectively. Large scale, specialty real estate deals are the kind of thing that effect a company's financials in a big way and for a long time -- much longer than the market cycles where you determine whether or not to continue or abandon your hypothetical, nascent cloud offering service -- and are exactly the type of thing that market investors will pillory your company for if you fuck up.
If you're Amazon and you're starting off in the datacenter game and it doesn't go well, you can always transition the property into a distribution center. Those are useful to you anyway.
If you're Facebook, what are you going to do? Who are you going to sell this $800-1200/sq ft (that is the cost of building a turnkey DC and puts AMZN's largest datacenter somewhere between 172-258mil and that's just one of them) "big box" to? They should make a multi-billion dollar investment for that and hire a global enterprise sales organization on top of that to sell it?
Maybe it's not so much that what CIOs say is divorced from reality but that they see reality at a scale that you don't. Their abstractions may not make sense to you.
although it's outside facebooks current core competency i think they wouldn't have too many issues getting into the cloud game if they wanted to. they could hire all the expertise they need and get 100 data centers up and running in 5 years.
but why would they? it's like google getting into the ISP market to compete with verizon et al. google runs its very profitable business on top of the commodity rails and keeps limited deployments of google fiber as a stick to threaten slow or uncooperative ISPs. facebook can run its profitable software based businesses on top of the infrastructure instead of joining the cutthroat race to the bottom of cloud computing that may or may not be semi nationalized/regulated as ISPs and utilities are today
Facebook can't say the same and getting 100 datacenters up and running would cost them 25 billion before hiring anyone -- that's more than half of their cash.
I agree with you though that it makes zero sense for Facebook to do this.
As an enterprise customer of all three, I will tell you that both Google and Microsoft have terrible UI, terrible permissions sets and terrible documentation. Microsoft has terrible policies and support but their interface still edged out Google. Google constantly shutting off APIs and forcing people to refactor isn't doing them any favors either.
IAM and the documentation are AWS' secret sauce. It's the thing that wins over those internal champions/coaches that an enterprise sales organization needs at their prospect companies to close large scale deals. In an environment where I have to manage security, compliance and administration on top of just using the thing, it makes my job 1000x easier.
They tried that with Parse acquisition but shut it down
What do you consider thin margins? Their overall margins are better than Walmart's.
Amazon: 65_932_000 / 177_866_000 = 37% 
Walmart: 126_947_000 / 500_343_000 = 25% 
US Retail: 5% [$2,251 / $44,124]
Intl Retail: -3% [-$642 / $20,849]
AWS: 29% [$2,177 / $7,430]
Really striking diff between Retail and AWS biz.
Walmart, for what its worth, had operating income of $20B on $500B in revenue, so about 5% there too.
Not any more, if their advertising business keeps skyrocketing, Amazon will be US's Alibaba.
And thank god Kubernetes exists. Not about to waste my time relearning the API of every new cloud offering a company wants me to try.
If you have the dev resources to do that, great. But lots of other players will prefer to use off-the-shelf stuff from cloud providers.
But even with “off-the-shelf stuff”, your site reliability engineers would still be using Kubernetes as the primary language to communicate. Or I guess you could go all cutting edge and go one layer up with Istio instead. In that case then, Kubernetes is still there hiding underneath.
(Or maybe all three. They really are eating the industry, but they add value so, yeah, I guess they deserve their rent. Just sucks for anyone else in that space.)
Turtles all the way down I guess, which now I’ll have to spend all weekend on researching unfortunately.
Kubernetes is no more the be all end all of maintaining cloud agnosticism than using the repository pattern means that you can tell your CTO to get rid of your company’s multi million dollar Oracle installation.
if you've told me aws takes more premium on their products than apple per $, i wouldn't believed.
I think that's the point the article is trying to make (first sentence of the article)
In 2018-Q4, North American retail drove $2.25B (59%) of OI; AWS drove $2.18B (58%) of OI. International retail lost ($642M) (-17%) of OI.
It took many years for amazon.com retail stuff to migrate to it, and supposedly some parts still aren't migrated.
> Well, the first big thing Bezos realized is that the infrastructure they'd built for selling and shipping books and sundry could be transformed an excellent repurposable computing platform. So now they have the Amazon Elastic Compute Cloud, and the Amazon Elastic MapReduce, and the Amazon Relational Database Service, and a whole passel' o' other services browsable at aws.amazon.com. These services host the backends for some pretty successful companies, reddit being my personal favorite of the bunch.
(posted in 2011, and he claims he left amazon 6½y before that)
You sound confident so I'm sure there's something to it. But on the other hand, there's loads more, similar comments in that memo.
And Steve, well, Steve is known to be quite the iconoclast. I never took him to suffer fools gladly.
And if AWS were just Amazon's spare capacity, who would bet on their stuff staying up through cyber monday or prime day?
"Bezos is super smart; don't get me wrong.
He just makes ordinary control freaks look like stoned hippies."
I believe SQS was the first publicly available service. EC2 was obviously the tipping point and that was a couple of years later.
SQS as the first publicly available service sounds weird to me but I don't have any sources to cite otherwise.
Edit: Wikipedia says SQS was the first service https://en.wikipedia.org/wiki/Amazon_Web_Services#History
But I cheat a little. One of my small holdings is Amazon. They look set to dominate in multiple arenas. Fingers crossed at least one pans out!
In addition, kubernetes is going to start squeezing aws’s profit margins, particularly ec2 as people move to commodity k8s hosting.
Also, AWS moves faster than web tech on the whole, so even if the general shift to k8s continues, AWS will be there to make it easier than rolling your own, and at a price point that's "worth it."
The service layer is just an add-on. Part of their premium. Even if you go full open source you still need infrastructure to run it and that's exactly what companies don't want to do and won't do anymore, and the reason why AWS and Azure are massively successful.
I'm only a developer so I'm sure I'm missing Operations and Business perspectives. Would love to learn more.
You pay $.09 an hour more for an RDS m5.large than you do for an EC2 m5.large. What kind of DBA can you get for $67 a month? That’s maybe one hour of a good DBA’s time per month, tops.
Now, someone will correctly point out that you can run way more compute on a colo’d server than an EC2 instance and they’d be right. But when you realize you’re paying AWS for hypervisor patching, network automation - I’ve worked in places where a security group change in AWS was equivalent to a two week servicenow ticket with the network team - ...
The business perspective to AWS is that you bake operational costs into the product and stop paying people that generate those costs. Not good for sysadmins who aren’t willing to change, but it’s where we are. And it’s why you can’t just say “open source makes this convertible without difficulty” - somebody’s still gotta manage those services ;)
Have you looked at the different TF provisioners? They are all provider specific.
There are a lot of services on AWS that are specific to AWS that you would need to rearchitect your system to use. Even something as simple as an ETL process that lets you load directly from S3 into Redshift and Aurora.
In terms of the cutting edge of bringing "declarative, Kubernetes-style APIs to cluster creation, configuration, and management" see https://github.com/kubernetes-sigs/cluster-api
Unless you build your service like that from the start (e.g.: prematurely optimize, which practically no successful company has the chance to do), you will experience some amount of AWS lock-in.