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Amazon and the "profitless business model" fallacy

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Re: Amazon and the "profitless business model" fallacy

#61

Post by vidarh »

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.

In the short term. Bezos point is that by pricing everything this way, proposing to compete with Amazon is crazy talk for most people: Their margins are razor thin, so you need to be able to beat them consistently on cost to have a chance of surviving, and beating them on cost will requires economies of scale that are impossible for a lot of people.

Apple on the other hand, is marketing high end products with ridiculous margins, which leaves a lot of market niches on the table, and leaves a lot of room to make money even with a cost base that is massively higher than Apples. That's made people line up to get a piece of the cake.

How many people start companies intending to compete with Amazon? Meanwhile, new smart phone companies sprout up on a near daily basis, and there's a whole industry in providing designs, SOCs, cases and components for people who just want to slap one together and put their (or someone elses...) logo on a phone.

Re: Amazon and the "profitless business model" fallacy

#62

Post by marvin »

girvo wrote: post #44
ballard wrote: post #24

The author may not fully appreciate the long game Bezos has been uniquely blessed to play: the sooner Bezos can effectively expand what's working, without over-expanding, it's bootstrapping on a massive scale: buying speed without diluting ownership to even more money sooner. It's not deficit spending (until it is), it's reinvesting profit to grow assets that are the body of the money monster. (For Starcraft fans out…

> For Starcraft fans out there: It's like being broke because of focusing on building SCVs While I personally play Protoss, I think this is an awesome way of thinking about it. "Keep your money low" is a mantra that you must remember when playing SC2, and I've always been curious how that translates to actual economics. If I recall correctly, there was an actual paper written applying Starcraft economics to "real wor…

I'm not sure if it is a 100% perfect analogy to real-world economics, but the best analogy is that all money you use in Starcraft is "working capital". Money in the bank only does you any good insofar as it allows you to handle unexpected emergencies, all other cash should be deployed towards your goals. Which in Starcraft would be to defeat your opponent with generating more cash as a subordinate objective, and in business would be to either make as much money as possible throughout the history of your company, or fulfill whichever goals your company has. Amazon does this by keeping low margins to discourage competition and reinvesting as much as possible.

The biggest difference between Starcraft economics and real-world economics is that Starcraft has no regular expenses or debt, so there is no way to go bankrupt. This removes a large risk element in reinvesting your money.

Re: Amazon and the "profitless business model" fallacy

#64

Post by cynicalkane »

pmarca wrote: post #55
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, al…

GAAP book value and GAAP earnings are definitely correlated with stronger returns for shareholders. Which seems to call into question the efficient market hypothesis, but says good things about GAAP.

Re: Amazon and the "profitless business model" fallacy

#65

Post by hristov »

pbreit wrote: post #25
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…

Can you explain how capital expenditures do not affect profits? Doesn't capitalization just mean that expenses are applied over time? They don't disappear, correct?

Capital expenses do not affect profits for the reporting period they happen in. It is true that after that reporting period there is a depreciation cost applied to take account of loss of value of an asset.

For example, if a company buys a distribution center, it will not expense the cost of the distribution center as an expense. But as time goes on it will expense a depreciation expense that accounts for the loss of value of the distribution center as the building gets older, less useful, etc. But buildings last for a long time, and a building with the land it is on never actually goes down to a value of zero. So not all expenses associated with the distribution center will be applied over time.

So capitalizing something definitely helps you get more income.

Re: Amazon and the "profitless business model" fallacy

#66

Post by michaelt »

KaoruAoiShiho wrote: post #46

Amazon only has around 10 more years before 3d printing starts to kill retail. Beware.

I will bet you $100 that in ten years time, it will not be commonplace to 3D print a fully working:

* Mobile phone * Bottle of beer * Sweatshirt or * Pear

What do you say?

Re: Amazon and the "profitless business model" fallacy

#67

Post by chrisgd »

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 majority of the article talks about free cash flow which takes capex into account. And capex does impact the p&l once it is built and being depreciated.

Re: Amazon and the "profitless business model" fallacy

#68

Post by gjm11 »

eru wrote: post #30
ballard wrote: post #24

The author may not fully appreciate the long game Bezos has been uniquely blessed to play: the sooner Bezos can effectively expand what's working, without over-expanding, it's bootstrapping on a massive scale: buying speed without diluting ownership to even more money sooner. It's not deficit spending (until it is), it's reinvesting profit to grow assets that are the body of the money monster. (For Starcraft fans out…

> He probably has aces up both sleeves to clobber anyone that tries to make a move. The razor thin margins are a great moat in themselves.

I'm still trying to work out whether (1) ballard's remarkable cascade of mixed metaphors was itself a joke, or (2) eru's comment was poking fun at it, or (3) both comments were intended entirely straight and it's just coincidence that the density of metaphor mixture is so high.

Both comments make perfectly good sense taken "straight". I'm leaning towards #3, with apologies to ballard and/or eru if I missed their joke.

(My father was in a meeting once when someone said "Let's not beat about the bush. | When all's said and done, | at the end of the day | you just have to take the bull by the horns." At which, at least the way he tells it, everyone else nodded sagely while he desperately tried not to laugh too loudly.)

Re: Amazon and the "profitless business model" fallacy

#69

Post by tks2103 »

The writing style and grammar in this post interfered with my comprehension. In the end, I was unable to finish reading it.

Some examples:

"Giant, heavy electronics items that Amazon sometimes ships for free when the shipping cost is clearly non-trivial and cost more than the usual thin margins on such goods are another."

"But if you sell a glass of lemonade for $2 and it only costs you $1 to make it, and you decide business is so great you're going to build a lemonade stand on every street corner in the world so you can eventually afford to move humanity into outer space or buy a newspaper in your spare time, and that requires you to invest all your profits in buying up some lemon fields and timber to set up lemonade franchises on every street corner, that sounds like a many things to me, but it doesn't sound like a charitable organization."

"The vast vast majority of products Amazon sells it makes a profit on."

It should be relatively easy to rephrase most of the language. For example, the last sentence should be worded: "Amazon makes a profit on the vast, vast majority of products it sells."

I think it would be worth it. I can't understand a lot of the post without effort.

Re: Amazon and the "profitless business model" fallacy

#70

Post by swalsh »

I've always thought of Amazon as this last dinosaur of a by gone era. The days where you can have a really big vision, where if you work a spreadsheet a bit here and there you suddenly have massive amounts of profit. We just need to wait for the world to finished being disrupted. If you disagree with the vision, then you "just don't understand". Most of these business failed, but Amazon found just enough profits sitting somewhere that they have managed to keep on living... So they are in this unique position where they are allowed to invest, and grow to unfathomable heights (well theoretically) because its a survivor bias of the investors.
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