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?

[MoogMan]

Amazon isn't 'losing money' - Just take a look at it's top-line growth vs capital expenditure.

Amazon is re-invest revenue instead of distributing back to stakeholders, or keeping cash in the bank. Cash in the bank is seen as waste. Instead, cash re-invested is being leveraged to create accelerated future growth.

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?

[Shados]

Since most of the loss comes from reinvesting revenue, at any point they could theoritically stop investing so much and turn a profit. They just choose not to.

So in theory at least, they should be fine.

Re:IBM no longer a tech company?

[Luckyo]

You're missing the point. Amazon is making a profit, but it's not distributing it to investors, which is what gets flagged as "profit" by finance. Instead they are re-investing profit into more and more expansion.

If they were to stop the aggressive expansion, they could likely post a decent profit. But they choose not to.

Re:IBM no longer a tech company?

[timeOday]

That has long been Amazon's strategy, and it was working - solid growth that was essentially self-funding. But look at this graph. In the past the "loss" was always negligible - they would run a small profit or loss each quarter while investing heavily and posting solid growth, indicating they could choose to start taking profits at any moment even without raising prices.

But last quarter's loss was big, too big. That is why the stock suddenly took a hit.

Re:IBM no longer a tech company?

[alexander_686]

Let me be the Devil's advocate.

First, Amazon is not "re-investing profit into more and more expansion." Amazon has one of the worse Return on Investment (ROI) in the S&P. That is, it has below average profits on its investments. What it is doing is exchanging profits for growth. It is a subtle but importance difference.

You are right, Amazon could be today's profits for bigger future profits. That is the general consensus among stock analyst. Which is why Amazon's stock price tends to flop around so much. Stock analyst have to guess what Amazon's profits will be in 10 years, which is shrouded in risk and uncertainty.

However there is a contra view. That Amazon is stuck in low margin business that will never generate large profits. That the only way to expand is to offer lower prices than anybody else, resulting in a "Red Queen's Race", where everybody has to run faster just to stay where they are. If that is true, Amazon will never be able to generate "normal" profits, so future profits will be small, not large.

Only time will tell on who is right.

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.

Bennett on e-commerce

[Anonymous Coward]

Ecommerce is a fast changing world and I know Balmer left Microsoft to go sow his oats in the basketball world, but I think we'd benefit from some insight from Bennett Haselton on the matter, someone outside many industries who has a proven track record for out of the box thinking. I'd like get some insight from him before I draw any conclusions. He's a frequent contributor.

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.

Re:Wow

[TheRaven64]

You're a decade out. Microsoft's initial success was Microsoft BASIC, which was actually pretty good, back in the '70s. IBM wanted them to port BASIC to the PC and, when their negotiations for CP/M as the OS fell through, asked MS to write them an OS too. MS bought QDOS and rebranded it (and there was a lawsuit later about this, so it's probably the first instance of interesting business practices by MS). They also sold MS DOS to PC clone makers, which helped cement them in the market. At the time, there were a number of MS DOS clones that were better, but they made their other products depend on their own version to force others out of the market. By the '90s, with Windows 3.0 only running on MS DOS, they were getting pretty good at it...

Re:Is Microsoft a company?

[TheRaven64]

You might want to read some news from the last decade. Microsoft started paying dividends in 2003 and has paid them annually. When they started, investors were unhappy because it showed that they no longer thought that the best thing to do to increase value was to invest the money in the company.

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

[dgatwood]

As many folks have already pointed out in other threads on the subject, Intel screwed up the Haswell line by using an entirely different pinout on the i7 than on the i5. The result is that any motherboard with soldered-on chips has to be specifically designed for one or the other.

Apple chose the i5, presumably because that's the hardware grade where most of the Mini's sales came from, rather than doubling their R&D cost by building two very different motherboards.

Here's hoping Intel doesn't screw up Broadwell in the same way.

Re:Wow

[dbIII]

so it's probably the first instance of interesting business practices by MS

Starting up after dumpster diving for BASIC interpreter source code wasn't interesting enough?

The MS business model has always been to sell something that has already been demonstrated as a success by someone else and then use lawyers to stop the next in line doing the same thing. It's not unique (outside of computing) and it's not as bad as some of the practices of Cisco, HP etc (and MS being underhanded enough to deal with clones led to the cheap PC) - the only tragedy is they came to dominate so there wasn't really a lot of other stuff to copy and compete with. That's probably a major reason why computers generally still suck to use compared to what we would have expected by now. The MS Windows 10 desktop looks like a linux desktop from before this site even existed and the back end is nowhere near as good - how pathetic is that?

An insult from a dork is a compliment

[Alan Kennington]

If Steve Ballmer said something complimentary about me, I would take that as a slanderous insult. Amazon should feel happy to be insulted by Ballmer. Amazon is the only big internet-based business that I like.

It should be kept in mind that the theory of perfect markets says that competition drives all profits to zero. So making an extremely slim margin is a sign of a healthily functioning market, whereas the absurdly high profits that MS have made in the last 20 years are proof that free markets did not do their job in the case of MS software. So I would say that MicroSoft was not a "real business". It was, as we all know, a de-facto monopoly. And a monopoly is not a "real business". Real businesses compete against other businesses.

Re:Wow

[Anne Thwacks]

You mean when Bill Gates was introduced to IBM by his mum with such a high recommendation that they bought an OS from him that he didn't even have?

Its hard to top that!

Re:Wow

[LordLimecat]

Previous to that, I suppose Bills education as a Lawyer was probably the fuel for later hijinx.

Bill dropped out of a computer science program to start a business building software for traffic statistics equipment. Going to Harvard is not the same as being educated as a lawyer-- they DO teach other things than law there.

Seriously, where are people getting all of their bogus info? Every thread its people spouting about crypto, history, politics, and 90% of it is wrong.

Re:Wow

[Ksevio]

Who gave you a monopoly on deciding which words people can use?!