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Amazon and the "profitless business model" fallacy

eugenewei.com

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Re: Amazon and the "profitless business model" fallacy

#51

Post by stavros »

gotrecruit wrote: post #48
minouye wrote: post #42

If you're not familiar with the "long-term" thinking of Bezos, this anecdote from Brad Stone's recent book on Amazon is particularly interesting: Bezos wanted AWS to be a utility with discount rates, even if that meant losing money in the short term. Willem van Biljon, who worked with Chris Pinkham on EC2 and stayed for a few months after Pinkham quit in 2006, proposed pricing EC2 instances at fifteen cents an hour,…

i'm a big fan of Bezos, honestly, but to say that pricing your products in such a way as to make >$100 billion in cash is a "mistake"... that's just crazy talk.

Meanwhile, the iPhone has slowly but steadily been losing mindshare to its amazing competition.

Re: Amazon and the "profitless business model" fallacy

#52

Post by cperciva »

Mikeb85 wrote: post #43
tptacek wrote: post #21

Earlier quoted context omitted.

Yes; everyone investing it would be wasting their money.

Not if Amazon decides to use some of it's free cash to buy back shares... Share buybacks and dividends are the end game for all public companies. Profits don't mean anything if money isn't being returned to shareholders. Amazon's generous valuation means that long-term investors think they'll continue to grow, and someday they'll return money to shareholders...

If they never make a profit, how do they obtain the cash to spend on buying back shares?

Re: Amazon and the "profitless business model" fallacy

#53

Post by philtar »

gotrecruit wrote: post #48
minouye wrote: post #42

If you're not familiar with the "long-term" thinking of Bezos, this anecdote from Brad Stone's recent book on Amazon is particularly interesting: Bezos wanted AWS to be a utility with discount rates, even if that meant losing money in the short term. Willem van Biljon, who worked with Chris Pinkham on EC2 and stayed for a few months after Pinkham quit in 2006, proposed pricing EC2 instances at fifteen cents an hour,…

i'm a big fan of Bezos, honestly, but to say that pricing your products in such a way as to make >$100 billion in cash is a "mistake"... that's just crazy talk.

We'll have to wait and see.

Amazon is on its way to fulfilling all my needs and wants. Why wouldn't I give it all my money?

Re: Amazon and the "profitless business model" fallacy

#54

Post by chronic25 »

fauigerzigerk wrote: post #41
hristov wrote: post #22

There are some issues with this explanation. The main issue is that the rules of accounting have a very good provision to take into account investing into the future. It is called capitalization. Thus, if a company spends money to build or acquire a new asset, it is called capital spending and it is not subtracted from the profits. Thus, for example, if a company had a million dollars of profit and decided to spend t…

That's all true, but Amazon is free cash flow positive. So it's not like they're making huge "losses" after deducting capex.

There are too many MBAs on Hacker News now adays

Re: Amazon and the "profitless business model" fallacy

#55

Post by pmarca »

hristov wrote: post #22

There are some issues with this explanation. The main issue is that the rules of accounting have a very good provision to take into account investing into the future. It is called capitalization. Thus, if a company spends money to build or acquire a new asset, it is called capital spending and it is not subtracted from the profits. Thus, for example, if a company had a million dollars of profit and decided to spend t…

The accounting rules (GAAP) have only a loose correlation to how most modern large companies actually operate the levers of their businesses. Management teams of well-run companies spend very little time thinking about the formal financial statements.

Accounting bears the same relationship to actually running a business that the Efficient Market Hypothesis does to actually effectively investing -- which is to say, almost nothing.

Re: Amazon and the "profitless business model" fallacy

#56

Post by pmarca »

jaggederest wrote: post #4

I think Amazon is a great example of the kind of company that makes genuine long term fundamental change to the way the world functions. I really wish that more companies had a less quarterly mindset and would pursue things similarly.

I agree completely.

The catch, though, is that Jeff had to endure years of vitriol and abuse from Wall Street and the press to get into this position. I have met a lot of founders who think they could get through that, and very few who actually can.

I think Jeff was helped enormously by having this dark period for Amazon happen (a) during a broad-based tech recession and (b) in Seattle. I'm not sure how possible it is to do what he did through that period in a normal era and in the Bay Area.

Re: Amazon and the "profitless business model" fallacy

#57

Post by pmarca »

yetanotherphd wrote: post #26
krakensden wrote: post #23

It's worth noting that Yglesias actually knows this[1]. His point is that public companies generally aren't allowed by their shareholders to be this ambitious. Which 100% vindicates Eugenewei's point about tech companies being wary of capital markets. [1]: http://www.slate.com/blogs/moneybox/2013/10/22/amazon_profit...

If the stock market refused to acknowledge the value of long term investment, then all stocks would have the same book-to-market ratio. However, investors and CEOs will rarely see eye-to-eye on the correct level of company growth, since CEOs by their nature tend to want to increase the size and scope of their company. Investors know that only some companies will benefit from this increase in size and scope, and other…

That's a very idealized view. The reality is harsher. Public CEOs are under enormous pressure from many fronts.

Re: Amazon and the "profitless business model" fallacy

#58

Post by pmarca »

gizbot wrote: post #14

Strangly, this was the business model of cable companies for the longest time. They never turned a profit. When they expanded, they could use the increased income stream to go deeper into debt. The profits and extra capital went into more expansion. Eventually, they ran out of room to expand, and where are they now? Someday, Amazon will need to face the brutal reality of profit.

They are enormously profitable, is where they are now. Same with mobile carriers who ran the same play.

Re: Amazon and the "profitless business model" fallacy

#59

Post by timedoctor »

There is no issue with reinvesting for growth. Businesses that require a lot of capital to grow need to do that and might need to continue operating with lower or minimal profits as they grow.

However at some point it's important to be able to say that they have played out the majority of their growth ambitions and are ready to start optimizing the business for greater profit.

The trouble is that human nature for many CEOs with big egos and the structure of corporations is to want to continue to grow forever. This is a dangerous attitude. For example perhaps Microsoft shareholders would have been much better off if the company was run without ANY ambitions to compete with Google, Apple OR to dominate mobile or tablets or search or any of these areas. Instead if Microsoft was to just focus on Windows and Office and extract as much profits from the business as possible, then return these profits to shareholders, then the shareholders would be free to invest in Apple and Google stock.

The trouble with this is that for an ambitious CEO this might feel like giving up. I don't believe it's giving up. it's called focus. Focusing on what you are really good at (in this case Windows and Office), rather than pretending that you are great at everything.

Re: Amazon and the "profitless business model" fallacy

#60

Post by michaelt »

cperciva wrote: post #50
MaysonL wrote: post #33

Earlier quoted context omitted.

Last quarter, Amazon had 834M of depreciation, and 281M of stock-based compensation: 1.1 billion of non-cash deductions from revenue. They made capital expenditures of 1.03 billion. They ended the quarter with about $100 million more cash than they started with.

281M of stock-based compensation ... ended the quarter with about $100 million more cash than they started with. This looks like a loss to me. They could have sold $281M of stock and gotten $281M in cash; instead they ended up $181M short of that.

In general when you're a CEO or board member you'll make more money by granting yourself $x million in stock than you'll make by paying a dividend of $x million which has to be shared among all investors.
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