Why Amazon Is Profitless Only By Choice

An anonymous reader writes "Eugene Wei, a former employee at Amazon and Hulu, explains why Amazon continues to post quarterly earnings statements with lots of revenue but no actual profit. Many of Amazon's retail businesses and platforms are quite profitable by themselves, Wei says, a fact that is hidden by large expenditures on investment for the future. He writes, 'If Amazon has so many businesses that do make a profit, then why is it still showing quarterly losses, and why has even free cash flow decreased in recent years? Because Amazon has boundless ambition. It wants to eat global retail. This is one area where the press and pundits accept Amazon's statements at face value. Given that giant mission, Amazon has decided to continue to invest to arm itself for a much larger scale of business. If it were purely a software business, its fixed cost investments for this journey would be lower, but the amount of capital required to grow a business that has to ship millions of packages to customers all over the world quickly is something only a handful of companies in the world could even afford. ... I'm convinced Amazon could easily turn a quarterly profit now. Many times in its history, it could have been content to stop investing in new product lines, new fulfillment centers, new countries. The fixed cost base would flatten out, its sales would continue growing for some period of time and then flatten out, and it would harvest some annuity of profits. Even the first year I joined Amazon in 1997, when it was just a domestic book business, it could have been content to rest on its laurels. But Jeff is not wired that way. There are very few people in technology and business who are what I'd call apex predators. Jeff is one of them, the most patient and intelligent one I've met in my life.'"

Comments

"apex predators"

[Anonymous Coward]

In the moral confusion promoted by global capitalism, "apex predator" became a term of approval - even among the prey.

Re:"apex predators"

[Anonymous Coward]

I always read it as "total psychopath".

Re:"apex predators"

[Swampash]

Apex predators are an essential part of any ecosystem. When apex predators start failing that means the ecosystem is failing.

So it's basically just another metaphor that doesn't work for business. When a Great White Shark dies, that's bad for the ocean. When a Sumatran Tiger dies, that's bad for the jungle. When a sociopathic CEO fails, I don't give a shit.

Re:"apex predators"

[bsolar]

Apex predators are "essential" in the sense that spontaneusly emerge in ecosystems. When apex predators starts failing it's bad only for the current equilibrium of the ecosystem, which will be replaced by a new equilibrium (not necessarly worse than the previous) in which there will be most likely another apex predator. Actually exactly the same applies in business.

Re:"apex predators"

[__aaltlg1547]

Apex predators are an essential part of any ecosystem. When apex predators start failing that means the ecosystem is failing.

So it's basically just another metaphor that doesn't work for business. When a Great White Shark dies, that's bad for the ocean. When a Sumatran Tiger dies, that's bad for the jungle. When a sociopathic CEO fails, I don't give a shit.

Another way it doesn't apply is that the thing that is essential to the predator's survival is an animal that is totally destroyed when so used. Jeff Bezos is a businessman. The thing his business survives on is the fact that customers come to him with their business. He makes a margin on that business. the customer survives the transaction.

It is very un-predatory behavior.

Viewed at another level, you might say that his company is trying to take revenue away from competitors, and has an ambition to take all their business and thereby destroy them. Well fine, but that's not like what a predator does either. A predator tries to get its prey, but then it fills its belly and is satisfied and doesn't hunt for a while. It doesn't constantly invest energy in trying to expand its food supply. In fact, it invests no energy in that, beyond chasing competitors out of its territory. It never tries to increase its territory beyond what it needs to keep its belly full and its belly is not infinitely expansible.

So let's dispense with the bad metaphor. The behavior isn't predatory.

It's a distinctly human behavior: empire building.

Re:"apex predators"

[dcollins]

"It's a distinctly human behavior: empire building."

This metaphor is no better. An empire is a bunch of kingdoms or geographic entities forged together into one institution. If Amazon were buying up/taking over existing brick-and-mortar stores, then empire-building would be a pretty good metaphor. But it's not -- it's consuming their custom and destroying those businesses entirely. So in that regard the predation metaphor is really better.

Re:"apex predators"

[Anonymous Coward]

Another way it doesn't apply is that the thing that is essential to the predator's survival is an animal that is totally destroyed when so used. Jeff Bezos is a businessman. The thing his business survives on is the fact that customers come to him with their business. He makes a margin on that business. the customer survives the transaction.

The predatory metaphor is not in relation to the customers. It is in relation to other businesses. The atoms in the prey animals survive just fine too, but we still call predators predators. Not that I necessarily think it's a very useful metaphor, but if it's a bad one, that's not because of the reason that you point out.

Re: "apex predators"

[Anonymous Coward]

You are of course correct. However, evolution is a poor model to emulate in our corporate management. A recent example is the banking industry, pure evolution and Darwinism for companies is fine if you're prepared for global economic collapse their 'drives" might create. I prefer to liken capitalism to fire, something useful when carefully regulated and carefully tended and watched. As a species we should use our intelligence to avoid the Darwinistic penalty for mistakes.

Re:"apex predators"

[93 Escort Wagon]

The guy picked the term "apex predator" not because it fit, but because it sounded cool.

Hopefully Bezos took a shower before this guy decided to so thoroughly kiss his ass.

Another one that has turned evil

[gweihir]

For anybody that disagrees: The holy grail of capitalism, the "market" only works if there is competition. Amazon is aiming squarely at a monopoly and that is the most evil construct capitalism knows as it negates all positive effects that capitalism can have.

Re:Another one that has turned evil

[wisnoskij]

It is hard to hate someone who provides such a great service.

And I do not see any Monopoly like actions, like MS has done in the past. just peerless competition.

I have not seen them stifling other competing services, just competing and winning against retail. It is not their fault that retail does not seem willing to change to compete, and that no one is decent launching Amazon-like services.

It is like Steam, sure they have a monopoly, but it is not their fault.

Re:Another one that has turned evil

[Anonymous Coward]

It is hard to hate someone who provides such a great service.

This. Amazon has changed business for the better. When I was a kid anything bought via phone or mail was "allow 4 to 6 weeks for delivery". Only with Amazon did this finally change to 2 or 3 days. Now Amazon is investing heavily to provide same day delivery. What a gigantic difference. Others now provide delivery this quickly but only because they can't compete with Amazon otherwise.

So far Amazon has been a great example of Capitalism's good points (except for maybe refusing to collect state sales tax until recently). I'm surprised to see all this hate.

Re:Another one that has turned evil

[houghi]

The problem is that nobody can become competition, unless you have enough money already.
Competition is always explained with a 19th century business model in mind where you talk about many bakeries in a city that will keep prices down.

This is true if there are several parameters true.
1) There is competition to start with and/or it is easy to start a new competitor. e.g. I can start making bread myself and start selling it.
Reinheitsgebot in Germany was a law to prevent competition, not just high quality beer.
2) You talk about only a minority of items. So not the whole chain from beginning till end and no crossover products.
4) You need to have a big enough sample of competitions to prevent price fixing between competitors. When you have only a few competitors, they will devide the market into shares without any real incentive to rock the boat, thus no need of lowering the prices anymore.

When your customer base a a few hundred or a few thousand people in a city, you can easily say that having say 10 or 100 bakeries for bread is enough to keep the competition going.

When your customer base is 1.000.000.000+ people, having 10 companies means in reality not having real competition.

I agree that it is not their fault (other than trying to be a monopoly is almost naturally for a company.) that does not make it right nor should it stop people from preventing this from happening.

That however needs government rules and the people who pay the government are not willing to let that happen.

One of the advantages of being a monopoly is that during the race towards the moment that they are a monopoly, you pay less. The moment it becomes a monopoly, not only will they be able to dictate the price (and that still might be low) they also dictate the product. So perhaps YOU are interested in price, I might be interested in other things.

Look at the ISPs that are unwilling to invest in faster Internet for over a long period of time. Google will take over, because what they are interested in is selling your data and the more data you give them, the more they can sell.

Having not enough competition will slow down innovation. And when I think of competition on a global scale, I imagine hundreds if not thousands of companies that I should be able to choose from.

If that comes at a slightly higher price overall, I am gladly willing to pay for that.

Re:Another one that has turned evil

[srichard25]

You don't see any Monopoly like actions yet from Amazon because they are not truly a Monopoly yet. When MS was battling neck-and-neck with Apple, they were generally seen in a pretty positive light. It wasn't until they had destroyed all competition that they started abusing their monopoly status. I predict the same thing with Amazon. After Amazon has destroyed most of the local stores and there is no other alternative but to shop with them, will they still provide the same great service for the same low prices? History says that this is not likely.

Re:Another one that has turned evil

[Anonymous Coward]

When I was a kid anything bought via phone or mail was "allow 4 to 6 weeks for delivery". Only with Amazon did this finally change to 2 or 3 days.

How much of this is Amazon and how much of this is UPS and FedEx modernizing their services with the advent of newer technology? Amazon doesn't actually deliver anything, though they've made great strides in minimizing the time spent preparing the order. They certainly have a symbiotic relationship with shippers and the two have worked together to streamline the process, but a good bit of that 4-6 weeks was spent in transit, and eliminating much of that time is none of Amazon's doing.

Two words

[Anonymous Coward]

Tax avoidance

Re:Two words

[CastrTroy]

Exactly. It makes very little sense for a business to post profits. Personally, I'd rather have a business hire more workers than pay money to the government (workers pay taxes anyway). Even if they aren't hiring people directly, they're usually using the money to create some kind of economic activity which will mean more jobs in some other company. If they post profits, it just means money is sitting in the bank doing nothing, while some of it is going to the government. If the government was smart, they'd tax revenues, and companies would have to figure out how to work the amount of taxes paid into their cost structure. Too bad human citizens can't just pay taxes on profits. I'd love to only pay taxes on money left in my account at the end of the year, regardless of what I chose to spend it on.

Simplified version.

[will_die]

The author is upset because Amazon has expanded beyond selling just books and invested earnings into expansion instead of giving back to the investors.

Re:Simplified version.

[RawsonDR]

The author is upset because Amazon has expanded beyond selling just books and invested earnings into expansion instead of giving back to the investors.

Somehow you distilled the article down into something that it's not. Where does he come across as upset? He isn't even critical of Amazon.

The author gives a seemingly simple explanation as to how Amazon conducts its business differently than everyone else. This apparently is unique enough that it garners lots of wild speculation by other observers and financial analysts, many of the same reactions I'm seeing in the comments here. (My) Simplified version:

• Amazon happily accepts a lower average margin of profit than other companies would. A small subset of its products showcase this to an extreme, but they are the exception.
• The profit it does see, it uncompromisingly reinvests back into itself.

The above concepts are not unfamiliar in the least - any business that wanted to get ahead by being more efficient than the competition started by doing this first. You forgo the low hanging fruit to lift your business into a bigger marketshare, and reap the rewards at that level. The small but significant difference, in my opinion, is that Jeff Bezos does this on autopilot.. it's a mentality instead of a tactic, almost a philosophy. It is a tiny difference in human psychology, which amounts to a profoundly different company than would exist otherwise.

But the rest of us need an appropriate speculative explanation. It's this speculation to which the author is responding.

Apex predators.

[serviscope_minor]

People love to seem themelves as some sort of lion (apex predators, but sometimes killed by buffalo) or hawk or something. Excluding humans as predators, since humans will literally eat anything that moves, apparently no matter how toxic or dangerous, apex predators include a lot of things.

For example whale sharks which are huge, slow moving an harmless to anything larger than plankton.

Electric eels which while cool are small and live in muddy water has gills that don't work in water and eats small invertebrates.

The black backed gull which basically is a honking great seagull and about as annoying.

In Austrailia, cane toads are apex predators too. Too toxic to eat.

The small and exceptionally pretty poison frogs are apex predators too. Again, far too toxic to eat.

Murray Cod. Requires no further explanation.

And so on. Apex predators include more than just fast moving birds and large felines.

The problem being...

[Anonymous Coward]

Amazon opting to be flat, effectively at 0% margin, is a game other businesses don't have the will to do, and Amazon doesn't have the will to do so indefinitely. The idea is to endure long enough to starve out competitors until monopoly acheived. At that point, rather obscene profit can be reaped. This is critical because much of Amazon's businesses is very intensive in up front investment to get logistics or infrastructure going. Competitors currently can compete because the logistics and infrastructure they built is already there. If competitors are forced out over time, it's really hard for a *new* competitor to emerge.

I've seen it discussed in hosting versus EC2. While companies can operate cheaper or as cheap as EC2, they don't see money at that scale. I've seen at least one company talk very seriously about starting to close down hosting and reclaim investment in datacenter footprint since EC2 has made it impossible to profit. Once that move has been made, this company is unlikely to ever get back into the game again because it would mean having to build up a lot of expensive infrastructure with low likelihood of long term payoff.

Re:The problem being...

[Anonymous Coward]

A company does not need to pay out dividends to be a good investment.

For institutional investors that can direct policy at a company because they have enough shares to have enough votes and/or seats on the board, I would agree with you.

For individual investors looking to buy 10, 100, or even 1000 shares: that's delusional. Small-scale investors pretty much require dividend payments for a stock to be a good investment, otherwise you are simply speculating (read: gambling) that the institutional investors are going to increase the value of your tiny ownership stake. I highly recommend reading Benjamin Graham before you toss your principal into the winds of non-dividend-paying equities.

Re:The problem being...

[gweihir]

Indeed. The classical strategy is this:
1. Kill all competitors, even if it brings you to the brink of death yourself.
2. Now that the competition is dead, raise prices arbitrarily high.

This is one of the reasons why a completely free market does not work.

Re:The problem being...

[swillden]

Amazon opting to be flat, effectively at 0% margin

No, Amazon is not operating at 0% margin. Amazon is generating healthy profits from its business. But it is choosing to reinvest those profits rather than either pay them out as dividends or pile them up in the bank.

The idea is to endure long enough to starve out competitors until monopoly acheived. At that point, rather obscene profit can be reaped.

Since the basis of your argument is factually incorrect, there's really no reason to go into this, but I want to. Your conclusion "At that point, rather obscene profit can be reaped" is a common assertion of predatory pricing theories... but one that doesn't really seem to actually exist. In the last few decades courts have added a test for predation that requires that there be a realistic prospect of recouping the losses due to predatory pricing in the ensuing period of monopoly rents. After courts adopted that test, no antitrust litigation based on a predation theory has succeeded, because it's extremely hard for anyone to rationally believe that losses will be recouped.

Why? Two reasons.

First, predatory pricing is ruinously expensive. Far more so for the would-be monopolist than its targets. This is because in order for a company to be in position to execute such a play it must already own most of the market, which means that the net effect of the below-cost prices it sets get multiplied by the volume it already does, plus the new share that it acquires from its targets.

Second, assuming the monopolist does manage to drive out all competition, and begins charging obscene prices, it becomes not only possible but very profitable for competitors to enter (or re-enter) the market. Actually, because of this, if the competitors have access to good capital markets it's unlikely that they'll be driven out of business at all, because everyone will recognize the higher prices which are to come and so capital will be available to enable the competitors to survive the price war.

So-called "post-Chicago" theorists have been able to construct some narrow scenarios in which predatory pricing is rational, but they're very narrow and ultimately boil down to circumstances in which the competitors can be successfully bluffed by the would-be monopolist.

Note that all of this is distinct from a different scenario, in which the big player isn't being anti-competitive at all, but is instead is just much more efficient, and therefore has much lower costs. That sort of "monopolist" can maintain healthy profit margins while pricing goods below what the competition can afford. This, however, is not harmful to consumers, in fact it's good for consumers. Of course there's the possibility that once the competition is driven out the monopolist will raise prices while retaining its low costs. Should that ever happen, then that would be an appropriate time for regulators to step in. I'm not aware of any real-world examples, though.

Re:The problem being...

[Shadow of Eternity]

Where's the competition in the ISP or Cellphone market then? Oh, right, it doesn't exist because of BARRIERS TO ENTRY.

Re:How long are shareholders willing to wait?

[Anonymous Coward]

Sometimes, you need to be a dick to wall street and tell guys like Carl Icahn to go fuck themselves. There is a difference between returning profits to shareholders and gutting your entire company to give money to shareholders. Sometimes you need to think about longer term and not just about the next quarter, or even the next 3 years for that matter.

Re:How long are shareholders willing to wait?

[Anonymous Coward]

I'm confused by your post - a company does not need to turn a profit to "retuen value" to shareholders.
Indeed, since profits are taxed, it's actually quite smart not to declare any.
Instead, investors find avlue through share price growth, and dividends, (if any).
In many fical regimes, the first is by far the most favourably treated, and for good reason.

Re:sweatshop

[Anonymous Coward]

The Amazon warehouses are run like sweatshops. There are some other more detailed articles out there, if you can find them. The working conditions are horrendous and the pay abysmal, and nearly all of it temp work. So, while on the surface the service might be great, it comes at a cost. There is a reason they're able to undercut and drive out the local businesses which actually pay their employees and provide benefits.

So those employees should file lawsuits regarding the OSHA violations that make their working conditions illegal.

Oh, they're not doing anything illegal? It's just a low-paying job for what they get accomplished? All those employees should quit working for Amazon then, and get another job.

There are no better jobs for people with their education level, you say? So if Amazon didn't exist they would be unemployed and even worse off, because they sure as hell wouldn't be able to find a job at those bookstores as the knowledgeable salespeople? Holy crap, Amazon should burn!

Right now we have a very large amount of unskilled workers in the US. While there are a lot of people who are actually competing for those crappy temp jobs because they're not qualified for anything, the environment and pay is going to suck. The solution isn't to bitch at Amazon, those people wouldn't be any better off if Amazon didn't exist, they'd definitely be worse off. The solution is to do a better job at education. Once there are less people who are willing to take those jobs, Amazon, Wal-Mart, and others will be forced to raise salaries and improve working conditions in order to get workers. Things will get more expensive for the consumer, and most people are going to bitch about it, but we're going to be better off for it in the long run.

Re:"Apex Predators" need to be put down

[drinkypoo]

The good news is that Amazon is highly distributed, and what they operate (fulfillment centers) are in significant demand. If Amazon goes away, its assets can be sold to a variety of buyers and still be highly useful.

Re:How long are shareholders willing to wait?

[Bananenrepublik]

That's wrong. If a company buys assets, then it's profits decrease, but it definitely doesn't make your stake in the company any less valuable. Since stock prices reflect both the current assets of the company (after all stocks express owenrship on these assets) and the expectation of future gains (that's the speculative part), it is quite sensible for the stock price to go up for a company that invests instead of making profits.

Re:sweatshop

[nonnald8336]

The Amazon warehouses are run like sweatshops. There are some other more detailed articles out there, if you can find them. The working conditions are horrendous and the pay abysmal, and nearly all of it temp work. So, while on the surface the service might be great, it comes at a cost. There is a reason they're able to undercut and drive out the local businesses which actually pay their employees and provide benefits.

So those employees should file lawsuits regarding the OSHA violations that make their working conditions illegal.

Oh, they're not doing anything illegal? It's just a low-paying job for what they get accomplished? All those employees should quit working for Amazon then, and get another job.

There are no better jobs for people with their education level, you say? So if Amazon didn't exist they would be unemployed and even worse off, because they sure as hell wouldn't be able to find a job at those bookstores as the knowledgeable salespeople? Holy crap, Amazon should burn!

Right now we have a very large amount of unskilled workers in the US. While there are a lot of people who are actually competing for those crappy temp jobs because they're not qualified for anything, the environment and pay is going to suck. The solution isn't to bitch at Amazon, those people wouldn't be any better off if Amazon didn't exist, they'd definitely be worse off. The solution is to do a better job at education. Once there are less people who are willing to take those jobs, Amazon, Wal-Mart, and others will be forced to raise salaries and improve working conditions in order to get workers. Things will get more expensive for the consumer, and most people are going to bitch about it, but we're going to be better off for it in the long run.

So, let Amazon, Walmart etc. do whatever they want, since it's just a bunch of uneducated, unskilled workers we're talking about? You're right about one thing, the solution is for these people to get education/skills in order to rise above these types of jobs. Luckily for the big companies, there will always be a supply of unskilled, uneducated workers, and since we're not going to bitch at Amazon for treating employees like subhumans, they will continue to do so. The same way a big chunk of Walmart employees are on public assistance, because the pay/hours are not enough on their own. So, we - the taxpayers, are footing the bill for welfare/foodstamps etc. so that Walmart can make more profit. In essence, we're subsidizing Walmart family's fortune. There will never be a point where the big companies are forced to raise salaries, because there will always be a supply of people who are unable to get a better job.

Re:sweatshop

[Anonymous Coward]

Right now we have a very large amount of unskilled workers in the US. While there are a lot of people who are actually competing for those crappy temp jobs because they're not qualified for anything, the environment and pay is going to suck.

It's worse than that. We also have a very large number of skilled workers who can't find employment in their fields, so they are also competing for those crappy temp jobs!

Re:sweatshop

[Gavagai80]

What you do is you change the law so that what they're doing is illegal. Nothing else will make a difference anyway.