Ballmer Says Amazon Isn't a "Real Business"

theodp writes According to Steve Ballmer, Amazon.com is not a real business. "They make no money," Ballmer said on the Charlie Rose Show. "In my world, you're not a real business until you make some money. I have a hard time with businesses that don't make money at some point." Ballmer's comments come as Amazon posted a $437 million loss for the third quarter, disappointing Wall Street. "If you are worth $150 billion," Ballmer added, "eventually somebody thinks you're going to make $15 billion pre-tax. They make about zero, and there's a big gap between zero and 15." Fired-up as ever, LA Clippers owner Ballmer's diss comes after fellow NBA owner Mark Cuban similarly slammed IBM, saying Big Blue is no longer a tech company (Robert X. Cringely seems to concur). "Today, they [IBM] specialize in financial engineering," Cuban told CNBC after IBM posted another disappointing quarter. "They're no longer a tech company, they are an amalgamation of different companies that they are trying to arb[itrage] on Wall Street, and I'm not a fan of that at all."

Comments

IBM no longer a tech company?

[drinkypoo]

The only computer-related business I can think of with more R&D budget is Microsoft, IBM isn't a tech company? Shut your mouth. Then again, if Cringely says it, it's probably wrong.

Amazon is clearly a business. But its model is Microsoftian EEE. Sure, you can sell through Amazon, but they keep stats and if it becomes worth it to stock what you're selling, they're going to do that. Of course, on eBay, if the Chinese see you sell a lot of what they've got, they'll start selling it directly. Then you only get to sell to people who care about shipping time and support.

Amazon is a real business, but their business model basically requires that they shut everyone else down, and not everyone wants to shop with Amazon. So they'll eventually fail if they don't find a new model.

Re:IBM no longer a tech company?

[squiggleslash]

Only because they're trying to corner the market. And yes, I'm aware they kind of invented the type of cloud system that they are, but Bezos has been explicit from the beginning that he doesn't want competitors, and he'd rather see a few years of losses with the service underpriced than have a small share of the market.

I personally wouldn't invest in Amazon. That said, overall the company seems sustainable, it can afford to make losses like the one last quarter in part because it can easily reverse those losses if it ever becomes a serious problem. They're playing the "very long" game, everything they do seems to be aimed at ensuring they're a significant player 50 years from now. To me, that's absurd, you can't predict the future like that, but, hey, if they want to try - with other investor's money - then more power to them, it's that kind of attitude that moves us forward - usually.

Re:IBM no longer a tech company?

[TheRaven64]

That's generally how Amazon operates. Lose money to establish a dominant market position, then start working out how to make that profitable. People used to comment that their business was to lose money on each sale, but make up for it in volume. It was a facetious comment, but with a grain of truth: Amazon couldn't afford to sell books the way that they did until they were selling enough that they could own a lot of distribution infrastructure and amortise the costs.

Ballmer isn't in any place to complain. The XBox and Zune followed the same model when he was MS CEO. It didn't work so well for the Zune, but the XBox spent years losing money before it had a sufficiently large market share to be profitable.

Re:IBM no longer a tech company?

[drinkypoo]

The reports are that the cloud provider part of the business is losing stunning amounts of money.

Only because they're trying to corner the market

right, but just like retail, it's not clear that this is possible,

overall the company seems sustainable, it can afford to make losses like the one last quarter in part because it can easily reverse those losses if it ever becomes a serious problem

It's not clear that it can. Amazon's model depends on endless growth, but you can't grow forever.

Re: IBM no longer a tech company?

[__aajwxe560]

Actually, as a former short time IBMer, I think you're both right. IBM core has lifers that have been sucked in and have worked there for years, most without skulls that ate actually marketable outside of IBM (yes, really). This self feeds where the vast majority internally still are riding on skills from 20yrs ago, and so the company competes over the past several years by bleeding out acquisitions it makes as it tries to buy its way into new markets without a real coherent strategy (see everything from storage platforms to their analytics acquisitions over past several years). Its a sales company where they try and compete on their long, slow, stodgy, established contracts, every once in awhile buying a new company and then rolling the capabilities under existing software contracts and agreements, adjusting the margin charge yearly to justify. This hasn't been working for several years at this point, anyone who understands basic financials can see the company has been playing financial games for about the last 4yrs (Money Mag gets credit for being one of the first mainstream places to call this out about a yr ago, even questuoning Buffets inVestment). So yes, they are tech in the sense they invest quite a bit into r&d to establish a patent hold, if someone else comes up with a remotely competent product that sells, IBM goes through this portfolio to attain a royalty stake while divesting itself of the risk. Does that sound like a tech company?

Re:IBM no longer a tech company?

[alexander_686]

No, we can be pretty sure that this will be the model for the next 2 years. Probably for the next 5 to 10.

Amazon has one of the lowest Return of Investments (ROI) in the S&P 500.
It has one of the highest Price to Earnings ratio (P/E) in the S&P.

The only way this makes sense is if Amazon is trading growth for profits today for bigger profits tomorrow. Depending on what model you use, you get 5 to 10 years. Combine that with the public statements of Bezos, and I doubt it is 2 years.

Re:IBM no longer a tech company?

[_Sharp'r_]

Ballmer's grandstanding. I'm pretty sure he understands the numbers in Amazon's 10-K filings.

Amazon made $745 million in income from $74 billion in sales last year, for a net income of $274 million.

That even seems understated, because they're obviously spending way more to expand their capacity than they need for just supporting their current operations. Last year, they have a net cash flow of $5.5 billion from operations, then spent $ 3.4 billion on purchases of property, equipment and software. Even after spending that much geared towards growth, that still leaves $2 billion in free cash flow to spend.

Let me put it another way, Amazon's net worth (assets minus liabilities) has gone from $17 Billion in 2010, to $23 Billion, then $27 Billion, now $33 Billion end of 2013. You don't do that without being profitable each year along the way, regardless of what they decide to do with the profit, which is clearly currently to reinvest the cash in order to expand quickly and grab as much market share as they can.

Ballmer's just jealous that no matter what Microsoft does or who they purchase, they can't convert their windows/office cash cows into a worthy reinvestment, because they're essentially out of new ideas, having mostly missed the ground floor of the Internet revolutions. So Microsoft's best bet is to act like a mature company and pay dividends so their stockholders can use that money to invest in something like Amazon.

Cuban is right

[tomhath]

IBM is a marketing company. Their product line is a hodge podge of mismatched technology from companies they bought that doesn't work together, so they also sell consulting too.

The US tech industry

[Taco Cowboy]

Although I came in the tech field quite late (in the 1970's) I've still been around the block a few times, so here's my take ...

IBM
IBM was a sales company with strong tech foundation. Was. Now IBM has turned into a service company

Cisco
Cisco's strength was derived from teams of cracked engineers churning out amazing communication hardware. Was. Now that the cracked teams of engineers have mostly left Cisco has turned more and more like an Indian company

Microsoft
Microsoft used to be THE company that sells software that corporations need (from OS to their office suites). Used to. Now Microsoft is a company clinging onto new versions of legacy software

Apple
Apple used to be a very brave company that dare to come up with strange products that people crave for. Used to. Now Apple, much like Microsoft, is a company clingong onto new versions of legacy hardware

Re:The US tech industry

[LordKronos]

Apple clings so much to legacy hardware that the CPU clock speed of their new entry-level Mac mini is nearly the same as a decade ago.

That's not apple. That's the entire CPU industry in general. Clock speed, we are right around where we were a decade ago. And that has nothing to do with clinging, but rather what's realistically possible. CPU speed used to increase rapidly because it was the easy way to increase performance year after year. Then we started getting into diminishing returns....smaller improvements in performance even while power consumption and cooling requirements grew rapidly. So now they've learned they need to focus their improvements on both multi-core design as well as per-clock execution efficiency.

Re:The US tech industry

[theshowmecanuck]

Microsoft used to be THE company that sells software that corporations need (from OS to their office suites). Used to. Now Microsoft is a company clinging onto new versions of legacy software

I agree for the most part on your points. But for major products like Office, we see people here agreeing quite often that if it ain't broke, don't fix it. And that is valid too... it is a good product even now. But sure, now they seem to be more interested in catching up and copying other companies' ideas than innovating; or even being clever and visionary enough to understand which companies have truly good new ideas and products before they buy them.

What I think is ironic in all this, is it is my understanding that Ballmer was at the helm for most of the time when this mental and innovative contraction took place. Even more interesting is that Microsoft stock went up when he finally left. My take on that is that he's not really qualified to make any judgements on other companies.