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Why Amazon Has No Profits and Why It Works

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Re: Why Amazon Has No Profits and Why It Works

#81

Post by TrevorJ »

pdpi wrote: post #35
exelius wrote: post #24

I listened to a talk by Amazon's CTO, Werner Vogels, where he was explaining that Amazon's entire strategy is to build an infrastructure for itself, then rent that infrastructure out to its competitors. That way, increased competition can actually fuel your growth. The talk was about APIs, but Amazon views APIs as a general term: "Fulfilled by Amazon" is an example of a non-technical API. Likewise, I think Amazon's s…

> The talk was about APIs, but Amazon views APIs as a general term: "Fulfilled by Amazon" is an example of a non-technical API. It's not a "non-technical API". We have name for those things: they're services. Amazon provides services, and that extends to both digital services (with which you interact via APIs — that P stands for Programming, damn it!), and meatspace services.

The business model sounds a lot less 'new economy cloud magic' when you just call it what it is: Business to Business.

Re: Why Amazon Has No Profits and Why It Works

#82

Post by hnnewguy »

AndrewKemendo wrote: post #48

With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon. Sorry but that is ridiculous. Look at the stock price for Amazon. Anyone who has invested in Amazon has seen an a…

>Anyone who has invested in Amazon has seen an amazing unprecedented ride upward

Only if they sell to realize those gains, and that can only occur if they can find a buyer who has an even greater expectation of profit in the future.

This concept seems to elude people, but the value of a company that never makes a profit is precisely $0.

Re: Why Amazon Has No Profits and Why It Works

#83

Post by Zombieball »

uptown wrote: post #4

It'll be interesting to see how their profitability trends as they adjust their prices. I've seen a trend over the past year or more of dramatically higher prices for things I've previously purchased from Amazon. I can do a 1-for-1 comparison on receipts, and see the huge bump. In some cases, those products are more expensive everywhere, but in most cases, I'm able to find those items at a price close-to or better th…

I think one of the main points of this article is that Amazon doesn't necessarily set the prices on many of their products, rather this is controlled by their 3P sellers.

Re: Why Amazon Has No Profits and Why It Works

#84

Post by jacquesm »

vasilipupkin wrote: post #64
SilasX wrote: post #51

Earlier quoted context omitted.

If you reinvest all profits, you're still turning a profit. To say otherwise is to confuse the issue, even if technically correct in some contexts.

Not really, because your re-investments could be profit-destroying. If you earn 100 dollars of profit and gave to investors, the investors now have $100. If you reinvest $100, the investors have a bet that some time in the future they will have more than $100. Clearly, the two are different.

Think of it as endless stockdividends, so every profit is turned into money that fuels further growth of the machine without having to hit anybody up for capital. As long as there is growth plow the profits back into the engine. Once the growth stops (you'd have to wonder what the implications of that alone would be, I'm not sure I can quite envision how large a vertically integrated company that would run into the limits of geographical expansion would be, planet wide perhaps?) you can start thinking about dividends. Until then the best investment is to re-invest because that is where ultimately you'll make the highest ROI.

It's the longest of long bets, and since Bezos / Amazon is betting on itself there is a large number of ways in which he can affect the outcome. If he would invest his profits after dividend into some other company (after all, just letting it lay around would be very wasteful) he's likely not get as much influence and not as high an eventual ROI.

It's a very smart long term strategy.

Re: Why Amazon Has No Profits and Why It Works

#85

Post by sliverstorm »

ChuckMcM wrote: post #46
macspoofing wrote: post #34

Earlier quoted context omitted.

That's all great but at some point they still need to turn a profit.

As the article points out, they don't. By running the business this way they are constantly building / growing new businesses but during a downturn they just build more slowly (rather than lose money). It is a very different way of operating but one which has provided some interesting benefits for them. Nominally a business uses profits to either pay dividends or fund unexpected opportunities (like buying some small…

So if they will never pay dividends, why is their stock worth anything?

Re: Why Amazon Has No Profits and Why It Works

#86

Post by vasilipupkin »

bengali3 wrote: post #53

Investing in themselves is the right thing to do from a finance perspective as long as they continue to have an overall internal rate of return greater than their cost of capital (IRR > WACC) according to thatswacc.com, AMZNs Weighted avg Cost of Capital is 10.05% So until their overall growth slows down to less than 10% per year they will have less pressure to return dividends. AMZN (WACC 10.05%) net sales growth: 2…

that's not entirely correct. this is useful for choosing among internal projects. Do decide whether to invest in growth or pay the shareholders, you need to assume that you can earn greater return than the shareholders could do on their own.

Re: Why Amazon Has No Profits and Why It Works

#87

Post by nbush »

nroach wrote: post #60
philip1209 wrote: post #3

Excellent analysis. > Amazon has perhaps 1% of the US retail market by value > With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon.

What is Walmart's % of US retail market?

Almost 11% in 2011 [1], about the same as it is today.

1. http://www.reuters.com/article/2011/08/16/us-walmart-idUSTRE...

Re: Why Amazon Has No Profits and Why It Works

#88

Post by philwelch »

igravious wrote: post #77
vinceguidry wrote: post #66

Earlier quoted context omitted.

> I listened to a talk by Amazon's CTO, Werner Vogels, where he was explaining that Amazon's entire strategy is to build an infrastructure for itself, then rent that infrastructure out to its competitors. This was the game played by John D. Rockefeller. He had so much infrastructure built up by the time they split up Standard Oil, that each new state Standard Oil immediately had everything it needed to keep operation…

Blimey. Fascinating. Sounds like a rather frightening and ruthless individual. Am curious. What would your nominations be for the Rockefeller of the tech (software/hardware) world? Ever thought about that?

In the 1990's, undoubtedly Gates.

Re: Why Amazon Has No Profits and Why It Works

#89

Post by WalterBright »

tdees40 wrote: post #13
uptown wrote: post #4

It'll be interesting to see how their profitability trends as they adjust their prices. I've seen a trend over the past year or more of dramatically higher prices for things I've previously purchased from Amazon. I can do a 1-for-1 comparison on receipts, and see the huge bump. In some cases, those products are more expensive everywhere, but in most cases, I'm able to find those items at a price close-to or better th…

The real question is if buyers will stick around once prices go up. I remember, during the bubble, buy.com's strategy was to sell at a loss, grow customer base and then raise prices. The first two parts worked reasonably well, but once they raised prices, everyone left.

That's why the conventional wisdom of sell at a loss, drive everyone else out of business, raise prices to monopoly levels doesn't work.

Re: Why Amazon Has No Profits and Why It Works

#90

Post by superuser2 »

jacquesm wrote: post #5
cm2012 wrote: post #2

Interesting note: Over 50% of the volume and driving force of Amazon's huge merchandise growth mentioned in the article is from small ($100k - $20m a year) mom and pop businesses around the country selling on Amazon. I wrote a blog post about it a while ago - http://www.kevinlordbarry.com/amazons-little-known-world-cha... . a16z touches on this, but it has wider reaching implications than just Amazon's revenue.

$20m / year is a mom & pop business?

Sure. I worked summer jobs in IT consultancies with approximately that in revenue. They were owned and managed day-to-day by one guy acting as CEO/COO with his wife doing the books and payroll.

They had employees, but were still entirely owned and managed by a literal "mom and pop" whose children I went to school with.

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