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.<p>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 these million dollars on a new fulfillment center, they could spend the money for their fulfillment center and still report a million dollars in profit.<p>So it is not quite clear-cut to say that Amazon's desire to build fulfillment centers around the world is costing them their profits. Those things should be capitalized and once they are capitalized they should not affect the profits. Amazon did in fact report significant capital spending (as one can see on their cash flow statement).<p>However, things are not that simple. Sometimes some expenses which are about building for the future and investing into new growth are not capitalized. This is the case because for some expenses the benefits are so uncertain and difficult to quantify that the SEC requires that they are reported as ordinary expenses instead of capital spending. These types of expenses tend to involve R&D and may include certain administrative expenses associated with growth initiatives.<p>Therefore, many companies that are trying to grow do report lower profits because they have those expenses that are associated with investment into future growth but are not capitalized. This may be the case for amazon. But it is a question to what extent it is the case for amazon. For example, they do capitalize software and website development for new products and websites. So one cannot simply say that they are showing losses because they are spending all the money on making great new products. But then again, they expense software development for existing products. So perhaps the losses are associated with new growth features that are built into existing software.<p>So all in all it is a big muddle and it is not at all clear whether amazon is an inherently highly profitable company that happens to be investing in the future, or they are wasting money, or their business model is just not that profitable.
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:<p><i>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, a rate that he believed would allow the company to break even on the service. In an S Team meeting before EC2 launched, Bezos unilaterally revised that to ten cents. “You realize you could lose money on that for a long time,” van Biljon told him. “Great,” Bezos said.</i><p><i>Bezos believed his company had a natural advantage in its cost structure and ability to survive in the thin atmosphere of low-margin businesses. Companies like IBM, Microsoft, and Google, he suspected, would hesitate to get into such markets because it would depress their overall profit margins. Bill Miller, the chief investment officer at Legg Mason Capital Management and a major Amazon shareholder, asked Bezos at the time about the profitability prospects for AWS. Bezos predicted they would be good over the long term but said that he didn’t want to repeat “Steve Jobs’s mistake” of pricing the iPhone in a way that was so fantastically profitable that the smartphone market became a magnet for competition.</i>
Out of all the articles I have read on the issue, this one most accurately sums up the views and opinions of the upper half of the organization. Nobody is scared. Nobody is feeling defensive. Nobody thinks the business as a whole is on the wrong path (although there are definitely a few ventures that some feel are in the wrong).<p>I don't have the most broad corporate employment history, but as far as it extends, I've met tons of people who feel like they could join a competitor to their own employer and win against them within a decade or so. I have never met a single person who worked at Amazon that has felt that way about competing against Amazon. Even if that competitor had the pocketbooks of Wal-Mart. To me, that speaks volumes about a business strategy.
" I sell a used book on Amazon, it takes a cut of the transaction, I am the one packing and shipping that item to the buyer. "<p>In true Amazon "dominate all retail by making it accessible to consumers" their relatively new "Fulfillment By Amazon" service drastically simplifies consumer reselling by eliminating the need for the consumer to do the "packing and shipping".<p>It's an amazing service, and they are getting darn close to the "just ship us a box of your stuff"<p>I bet that we see that inside of the next five years, there are lots of problems (like what is / is not valuable) but you can see them already working around these issues by only accepting items with modern barcodes, charge small warehousing fees if something sits too long in inventory, etc.<p>(1)<a href="http://services.amazon.com/fulfillment-by-amazon/benefits.htm" rel="nofollow">http://services.amazon.com/fulfillment-by-amazon/benefits.ht...</a>
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 there: It's like being broke because of focusing on building SCVs.)<p>On the other side of the gorge of eternal peril: Cash is king, and should not be underestimated. Or those with the war-chests may try to puke all over Bezos' cake by mistaking lack of current reserves for an actual weakness. I'm sure Bezos is fully aware the ridge-line he's walking on. He probably has aces up both sleeves to clobber anyone that tries to make a move.<p>Long term, I'd say walmart continues to cash in on the greater unwashed that don't know any better for b&m impulse buys while amzn goes after suppliers and logistics, maybe even an Ali Baba and/or Kickstarter to bring in more product pipes.
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.
Bezos has found and hacked a feature of public markets: you can get away with no profits as long as you're growing. Therefore, you can construct a profitless business scheme that reinvests all profits (or doesn't generate any) as long as your sales forever climb. It's the business equivalent of the Ponzi scheme--and if you look at Amazon's revenue, it is a classic exponential curve.<p>If sales ever plateau and investors force you to generate profits, the plane stalls and the whole thing spirals down, because it's the profit reinvestment which actually drives sales growth, and actual profits attract competitors who have been unable to pull off the profitless-hyper-growth trick. So far that hasn't happened.<p>Amazon's value is in the entire business and not the sum of its parts, which means that at some point, investors expect to own a profit making enterprise and not a bunch of warehouses. However, that won't happen until sales plateau or Bezos dies. Ironically, at that point the business loses a lot of value, both because growth has stopped and because competitors are about to enter the space, emboldened by Amazon's newly discovered profits. The whole thing is a bit of a sham. Any growth industry (Internet retail) can support only one "no profit rocket," and eventually it comes back to earth when that industry matures and ends the hypergrowth phase.
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.<p>Which 100% vindicates Eugenewei's point about tech companies being wary of capital markets.<p>[1]: <a href="http://www.slate.com/blogs/moneybox/2013/10/22/amazon_profits_not_there_and_they_re_not_worried.html" rel="nofollow">http://www.slate.com/blogs/moneybox/2013/10/22/amazon_profit...</a>
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 <i>deeper</i> into debt. The profits and extra capital went into more expansion. Eventually, they ran out of room to expand, and where are they now?<p>Someday, Amazon will need to face the brutal reality of profit.
The writing style and grammar in this post interfered with my comprehension. In the end, I was unable to finish reading it.<p>Some examples:<p>"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."<p>"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."<p>"The vast vast majority of products Amazon sells it makes a profit on."<p>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."<p>I think it would be worth it. I can't understand a lot of the post without effort.
I believe in Jeff's long term vision theory. He is even building a $42 million giant clock called the '10,000 Year Clock' atop the Mount Washington in Nevada. This is to portray his long term vision.<p>(I feel guilty to mention, but this reminds me something of the 1000 Year Reich sorts)
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.<p>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.<p>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.<p>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.
By running at zero profit margin, Amazon is essentially growing itself as fast as it can manage, i.e. reinvest every dollar. Its current revenue growth is even faster than Google. That ensures itself as the biggest ecommerce platform for years to come. If it wants more profit, it can certainly do it. I believe Amazon will eventually automate most of its systems, like using robots instead of humans for warehouse, and gain significant profit margin. Chinese company Taobao (like eBay) provided free service for 5 years, and gained dominant market share. Now it is hugely profitable.<p>On the other hand, Jeff is likely more interested in just growing the business than counting profit dollars.
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.
Everything you need to know about Jeff's strategy is in this book: <a href="http://www.amazon.com/Sam-Walton-Made-In-America/dp/0553562835" rel="nofollow">http://www.amazon.com/Sam-Walton-Made-In-America/dp/05535628...</a><p>Different medium and market, but basically the same overall strategy.
I think I might be a in some kind of bubble. That article sounds like absolutely every article I've ever read about Amazon and I don't think I've ever seen any of the posts he said "didn't get Amazon".
I wish Amazon would stop subsidizing Kindle device buyers, by surcharging everyone else by $2 on ebooks - especially when that money isn't even split with the authors.<p><a href="http://davidgaughran.wordpress.com/2011/07/11/amazon-hold-back-the-growth-of-e-books-around-the-world/" rel="nofollow">http://davidgaughran.wordpress.com/2011/07/11/amazon-hold-ba...</a>
Great explanation, but I don't think this business model is incompatible with "flipping the switch" partially as Amazon already did. Examples: raising the minimum amount for free delivery from 25 to 35, or removing free delivery from Amazon UK to certain countries like Spain to avoid cannibalizing it's own business in those countries.
Its not uncommon for companies to reduce their profit by various stratagems to reduce the tax they pay.<p>For example Apples massive overseas cash pile that they dont want to repatriate and pay out to the owners of the company
this is classical bait and switch. No idea why everyone is discussing that *<p>They 'invest in the future' by selling at or close to a loss, until they kill everyone around them. When they are the only ones around they can dictate price and terms.<p>* actually, just realized. For whatever reason, amazon is spend some PR money to give out the message that they are investing in the future like anyone else. I've seen some articles in several news papers and radios. They are probably in or expecting legal action on that and want to influence some group toughs.