Amazon Tries to Turn a Profit

The NYTimes is carrying a story I thought was interesting about Amazon.com trying to actually, gasp, turn a profit. When you have a small business it isn't terribly difficult to make sure you're selling things for more than they cost you. For an outfit like Amazon, it's a little more challenging.

Comments

What a concept!

[Anonymous Coward]

A Dot-com turning a profit? Has Hell frozen over? What's next...will Slashdot actually proofread articles & correct spelling errors? Only time will tell.

Re:What a concept!

[e-gold]

Just think about slashdot turning in profit...

I have. They mint a currency called mod points, which they currently give away! I can assure everyone here that if you're minting a currency, it's far better for your bottom-line if you SELL it. (I have a ten gram reward out there for the first person to hack the Slashcode so that site owners can sell mod points for e-gold, so yes, I have venal-profit-making motives for this post, but I also think it would be a cool thing for minor sites like Fairtunes and others to do. Besides, I've occasionally wanted mod points enough to pay for them, so why not sell me what I want?)

Anyway, one of the few companies that actually might make profit would be google. It's so unbelievably cool that I'd be happy to pay a few bucks a month just to use it.

I totally agree with you on this. What google might try could be an e-gold tipjar (there I go again, more venal-profit-making motives). They could accept e-gold, PayPal, and anything else they think they could sell, and many of us would give them tips because we like their service better than the other search engines. This (e-gold tipjars) can also be a solution to the "Napster problem," IMO, since if you listen to Courtney Love and other musicians, they get far less than a buck for a $15 CD.

No, I can't guarantee everyone would tip (same as the local diner in that respect) but many folks would, just to keep the musician happy, and if the average tip were a buck's worth of gold, she would not have to get a tip from everyone to do better than the RIAA does for her! IMO.

As usual, any slashdotter is free to contact me and get a bit of e-gold to play around with, just for the asking. Thanks for listening.
JMR

Now it's time to see who was right.

[Forge]

Was it The Amazon management who claimed for years that they had to grow the customer base wide enough before they actually started charging more per book than it cost them to supply.

Or was it the critics who claim that the moment Amazon started charging profitable prices the customer base would vanish because there is no such thin as "a good location" in cyberspace.

All we gota do now is sit back and watch. This should be fun. Personally I think they are both right. Users will defect but not enough to cause Amazon much sweat.

Re:Below cost at all times??

[King Babar]

Of course all figures are higly fictive, but you should be able to get the "point" of it.

In this way you will "loose" money for every book sold, but make enough money to cover that loss from fringe-business, such as advertising.

For some reason, nobody has mentioned what I suspect will be the most valuable "fringe" of this business, to the extent that it might bail them out pretty nicely even if everything they sell themselves only comes in at break-even:

Information on buying habits

Amazon has (and uses) a phenomenally large amount of information about what their customers buy, and the whole "customers who bought X often were also interested in Y" angle of the site that always freaks people out at first, until they realize how useful that can be.

I think that Bezos and company understood this pretty quickly, which is why they wanted to get into so many other product lines, since the richness of the customer database goes way up. It's nice and all to know that households who buy Object-Oriented Perl also buy the poetry of Wendy Cope, but it's way more important to know that such people also buy certain kinds of toys (for their kids), have a taste for certain clothing lines, and probably need a new car in the next 12 months. You don't have to be an e-merchant to make money on info like that, friends.

Or, if you think that trading in or selling info on individuals really won't fly, you can aggregate it and sell it to brick-and-mortar outfits so that they can better plan where to put their next round of locations. This can be seriously big money, if you play the game right.

Re:Below cost at all times??

[smillie]

One of the big problems is actually finding out what your real cost of an item is.

Cost is more that an items wholesale price. Things that add/modify that initial cost are:

Shipping costs are billed per truck load not per item. Weight and size of items vary and cost of fuel is dynamic.

Wharehouse costs. Size (shelf space) is only a part of this cost. There is also rate of turnover cost. Keeping one book for a year has higher wharehouse costs than keeping 10 books that sell out each month.

There is also the cost of money. Most inventory is purchased with borrowed money. Turnover and interest rates make this part of the cost flucuate. Even when the money isn't borrowed from someone else the cost exists.

People costs per item. This is all the salesmen, buyers, office personel that need to be paid. Their wages add to the cost.

"shrinkage" Items are lost, stolen, and damaged in shipment. How fragil an item is adds to the cost. How likely an item is stolen adds to the cost.

Having done accounting programs for companies, the best anyone could ever hope for was an approximation of an item's real cost. At the end of a quarter you compaired your estimated costs/profits with your bank balance. When they are close you are doing pretty good.

Shipping is a big problem.

[TheLink]

At the moment it is not cheap to ship lots of diverse stuff in small packages to numerous different locations.

That's why hypermarts, stores etc rent/buy floorspace - to provide an area where customers can go get the goods themselves. Easy and cheap to move the goods in bulk from a few spots to a single spot.

The five warehouses are a symptom of this problem - Amazon still got floor space in the end.

Dell does ok because it sells profit dense items and knows how to keep inventories low, and is quite specialised.

So there's a point where shipping is cheaper than floorspace rental, but what?

Ebay's model is likely to be more profitable - the customers do almost everything themselves. E-bay just helps with the information - the very thing the WWW is good for.

Cheerio,
Link.

My favourite quote fram the article:

[not_cub]

"Remember, I didn't go to M.I.T. or Purdue, but I control the checkbook here."

This is brilliant... truely Dilbert pointy-haired-boss management at its best. In the next few paragraphs she goes on to shoot down the optimization phd guy's quantitive analysis because her hunch is (paraphrase) "it's better for us to incur huge costs storing loadsa books than to only stock popular ones we might have a chance of ever selling".

The fastest way for amazon to turn a profit would be to turf out Ms Blake because distributing books is a numbers game...

not_cub

Lessons of Amazon

[e_lehman]

I'm not a stocks-and-business person. But following Amazon as a sort of case study has taught me a lot. (Perhaps a real financial person can correct me where I err...)

• Stock analysts generally suck. During the big tech-stock price run-up, analysts like Henry Blodget and Mary Meeker became famous for accurately predicting the rise. Of course, after the market began to collapse, they still predicted a rise. And after everyone else said, "Gee whiz-- I guess the bubble burst" and went home, they were still predicting a rise. Turns out they weren't analysts at all, just eternal optimists who, to a significant extent, created the bubble with their relentless, baseless cheerleading. (Sadly, while screwing investors who listened to their advice, they may have served their firms well-- in the short term-- by bringing in investment banking business.) Every now and then someone comes within a standard deviation of reasonable (Ravi Suria), and it really shakes up the house.
• The financial media generally sucks. Blodget and Meeker didn't just "become famous", they were lionized by the breathless bimbos on CNNfn and in investing magazines who apparently wanted to make thoughtful investing into a sort of celebrity gala. To this day, these media buffoons love to quote the same analysts who completely failed to predict, observe, or even retroactively recognize the tech stock bubble burst. (WSJ rocks, though.)
• Companies strive to deceive. Amazon, like many companies, reports a thing called "pro forma" financial results. These are sort of like real financial results, except that they throw out a half dozen or so things that make them look bad, such as interest payments on their massive debt. When Amazon says it will soon make a profit, they mean a pro-forma profit, which means a loss. It's intentional deception and should be outlawed by the SEC.
• Analysts still suck? Amazon's stock has been up recently because their results in the last quarter were better than expected. To some extent, though, this seems driven by Christmas toy sales. Since there isn't a Christmas every quarter, things might not really be so rosy. I haven't seen discussion of this in the financial press, however.

No Log In Link

[beebware]

Here you all go: http://channel.nytimes.com/2001/05/20/technology/2 0AMAZ.html?pagewanted=all
Richy C.

800K Equations = Amazon.Bomb

[The Mutant]

Anyone else think its a little much?

How many profitable firms find it necessary to build such a complex model?

And no, its not because Amazon.bomb' business is so complex.

This is just more of Bezos' BS. Stuff that will hopefully impress folks in the capital markets so he can raise more money.

800K equations. Shees!

Below cost at all times??

[Abreu]

How can somebody make a profit selling below cost at all times?

Sorry if I sound incredibly dumb, but I never got it.

I get it when you sell items ever-so-slightly above cost to make a profit selling large volumes, and still out-profiting the small guy. (Wallmart, Barnes and Noble -bricks and mortar stores-)

I also get it when you sell something below cost (or even give away), so that you can then sell other items at a hefty profit (razors, ink-jet printers)

Could some of the Economic/Politic/Corporate knowitalls at Slashdot explain this to me?

Or was it just the byproduct of the "our stock price will go up no matter our business plan" sort of thing that just blew up these last months?

------
C'mon, flame me!

Re:Below cost at all times??

[boaworm]

Perhaps if you read the entire first row of the post next time you reply to it ? Where did advertisement revenues go into your calculation ?

Assume your example...
Selling one book costs us $5, we sell it for $4.50.

For every book sold, US Mail sponsors you with 50 cents, since they make money on people buying stuff via mail. Then, for every book sold you have 100 hits on your webpage. You get 1 cent for every hit.
Now the calculation looks like this (for one book sold)

Purchasing the book : - $5
Profit from sale : + $4.50
US Mail sponsor : + $0.50
Ad's on WWW-page : + $1.00
------
This sums up to : + $1.00

Of course all figures are higly fictive, but you should be able to get the "point" of it.

In this way you will "loose" money for every book sold, but make enough money to cover that loss from fringe-business, such as advertising.

Re:Below cost at all times??

[kyz]

How can somebody make a profit selling below cost at all times?

Well, you know the idea of the loss leader. Amazon.com used to have this loss leader, called 'inventory'. They used it to promote the purchase of something else in the store, called 'shares in Amazon'. These were sold with huge profit margins.

Or was it just the byproduct of the "our stock price will go up no matter our business plan" sort of thing that just blew up these last months?

This article is titled 'Amazon tries to turn a profit' for a reason, y'know....

Re:Below cost at all times??

[OpCode42]

Ack, didn't you attend dot-com economics 101?

You dont make money over the web by making a profit, you make money by the volume of product you sell! More sales = more money coming in! Doh!

;-)

accounting 101... well, maybe 99

[swinge]

You are using the word "cost" where you should be using the word "costs". Let's say that you buy a book for $5 and sell it six months later for $6. Did you make money? ... it all depends.

• What is the inventory carrying cost, e.g., how much of the rent on the warehouse is due to that book? But the warehouse is extra large to leave room for future expansion... now how much?
• Oh, you own the warehouse... outright or mortgage? What's the interest on the mortgage? And how much could you make on your equity in the warehouse had you invested it in other opportunities you had?
• How much management and labor, and senior management time or other central corporate (yes, that's the same as /. "corprate") expenses are due to owning the warehouse?
• But, in the middle of the six month period you built a new warehouse, and sold the old one. So split the "cost" of the new, and the capital gain from selling the old.
• You considered "the opportunity cost of capital", that is, what else you could have invested the warehouse money in (and the book money, too). But what is your actual cost of capital? You got the money to pay for all this stuff (the new warehouse is much bigger, and you're dumping lots of new stuff in it) from investors. Bondholders expect interest, so we know how much we pay them, but they don't generally lend money to risky businesses like ours. Based on our current share price, vs our cash on hand, is it "worth it" to sell more shares to raise more money?
• How long can we hold out at our current rate of expenditure? There is no "current" rate, all the numbers are growing every month, take that into account.
• Oh, yeah, don't forget what are the "terms" we buy the books on, vs. those we sell on: how long after we got the book did we actually pay for it (accounts payable), and how long will take after we ship to get the money from the customer (accounts receivable). Even though we sell for more than we buy for, since we are growing, it turns out that we owe much more than we are due.

  Oh, and set some money aside to cover returned merchandise... how much?

• Was the book sold to a new customer? Our marketing people tell us that a new customer will likely buy another $400 of merchandise in the next year, vs an existing customer's expected $200. How much of our advertizing and marketing costs should be applied to this book, vs how much the profit from expected future books sold to this customer?
• If purchasing habits are so predictable, shouldn't all that expected future profit accrue to this book which did the heavy lifting?
• What if we can charge this customer a higher price for those future books than they would ordinarily pay? (we just need cookies, and one click... STOP! I'm not talking about the ethics of it, or the public relations if anybody found out... books were bought and books were sold, we're just trying to figure out whether we made any money. Later we can decide whether the programmers of that system are more or less ethical than either the marketers, or the customers who take advantage of our generous return policy, never even thinking about what shipping costs us. Certainly all are less moral than we accountants who are honestly trying to arrive at the right numbers here.)
• Of course, there's lots more...

advanced accounting is a highly technical and extremely fascinating subject. 101 is kinda boring, but it's the only way to get there... To sum up, there is no "correct" answer to whether you made money from the $6-$5 book. Over periods of time, the entire firm can be seen to make money or not, but it's always in the context of what came before and what position they'll be left in for the future.

Interesting...

[smari]

The idea of Amazon not allready making a good turnover is pretty neat, yet they are obviously not. And come to think of it - I can understand why. All right, they've got quite a good store going on there, but HOW THE HELL are people supposed to find things, expecially when going there for the first time! I think if they were to redesign their site, according to a simple law of organization I choose to call "Common sense", they would probably start gaining a profit quicker.
But theres annother problem: The laws of information architecure are so simple when it comes to this: You cannot create a perfect database, whereas for each item of information in the database, the complexity of the database itsself goes up.
They may therefore be better off the way they are today... who knows?

Profits fo Amazon!?

[mscout1]

And so Amazon makes a profit.
At the next stockholders meeting, Satan shows up.
Instead of his usual pitchfork, he holds a snow shovel. He glares at the CEO, shakes the ice encrusted shovel. and shouts:

"THIS IS YOUR FAULT ISN'T IT?!"