BEST OF THE WEB: The bottom line on Amazon’s growth
Wednesday, October 30, 2013/
Despite over a decade of growth, ecommerce giant Amazon is yet to consistently post profits. This has led some to accuse the Jeff Bezos-founded online retailer of being a “profitless” enterprise.
In this article on his blog, former Amazon employee Eugene Wei argues the company’s critics overlook the fact that most of the company’s business units are, most likely, already profitable:
Amazon is a classic fixed cost business model, it uses the internet to get maximum leverage out of its fixed assets, and once it achieves enough volume of sales, the sum total of profits from all those sales exceed its fixed cost base, and it turns a profit. It already has exceeded this hurdle in its past.
I’m fairly certain most of Amazon’s retail businesses remain quite profitable. Some may not be, but they help to reinforce Amazon as the retail site of first resort. By the time I left Amazon in 2004 many of its retail businesses were already spinning off healthy profits. It is much harder to tell now from the outside because Amazon doesn’t present a full P&L by business line to the outside world. You can see revenue by broad categories of the business, but most of its costs are lumped together in one giant blob on the income statement.
However, rather than deliver a profit to investors, Wei argues Amazon is instead opting to re-invest the free cashflow generated by its businesses into further growing its scale:
Amazon has decided to continue to invest to arm itself for a much larger scale of business. If it were purely a software business, its fixed cost investments for this journey would be lower, but the amount of capital required to grow a business that has to ship millions of packages to customers all over the world quickly is something only a handful of companies in the world could even afford. Joey Chestnut doesn’t just wake up one day and win the Coney Island hot dog eating contest every year, he has to spend months of training to prepare his digestive system for the feat.
The problem is that, even with the internet, the logistics of becoming the world’s largest retailer takes a serious amount of investment:
Amazon has seen that lowering its shipping costs and increasing the speed of shipping items to customers is like a shot of adrenaline to customer’s propensity to buy from them, and so it has doubled down on building more and more fulfilment centers around the world. When I joined Amazon it had one fulfilment center. Today it has dozens just in the US alone, and I would not be surprised if it has more than 100 fulfilment centers worldwide now.
Wei argues that, because of this large-scale reinvestment of cashflow, Amazon’s critics are wrong to describe the company as being “profitless”.
A profitless business model is one in which it costs you $2 to make a glass of lemonade but you have to sell it for $1 a glass at your lemonade stand. 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.
Assuming the veracity of Wei’s argument, the real question then becomes how long Amazon’s investors will be happy with the company investing in further growth over paying dividends to shareholders.
Amazon escapes or escaping Amazon? Getting away from it all
As the world becomes ever more interconnected, a growing number of people choose to go camping and hiking in a bid to get back to a simpler lifestyle. In this piece on Wired, author mat Honan recalls one such trip:
A few years ago, my wife and I spent three weeks hiking the backcountry of California. We walked more than 200 miles without crossing a road – and even better, without fielding any calls, emails, tweets, or other day-to-day Internet bullshit. It was heavenly. But at trail’s end, as we stood atop Mount Whitney, looking over the unfolding American West, I was appalled to see smartphones everywhere.
Unfortunately, Honan’s sense of self-righteousness was soon interrupted by a colleague, who pointed out that even in the wilds of North America, technology had been inescapable:
As I began telling my story to a colleague, he stopped me cold: “Did you bring GPS?” I said that I had. “Well, that’s not really being out in the wilderness,” he replied. And he kind of had a point.
It seems as smart devices get smaller and mobile networks spread further, truly escaping technology is getting more and more difficult:
We’re living in a remarkable time, when it will soon be impossible to be truly alone. Waldeinsamkeit becomes more and more endangered with every cell tower. And if you’re the kind of person who can only leave email behind when you go off the grid, that means you’re going to need a new plan.
Honan concludes that escaping technology might end up being an exercise in futility. But perhaps that’s not the point. Rather, what we really need to do is spend some time away from our regular lives:
Getting away from technology by leaving it behind becomes a pointless exercise in competitive reductionism. Where do you draw the line? Your smartphone? Your GPS? Your compass? Your tent? Fire?
Here’s a better idea: Shut up and bring your iPhone into the backcountry, but resist the urge to open the email app. If you can’t manage that, delete or turn off the account. Don’t worry, it’ll come back.
The lesson is simple: The next time you plan an Amazon getaway, don’t feel you need to get away from Amazon.
Why Americans pay more for broadband
Communications Minister Malcolm Turnbull has recently announced strategic review of the national broadband network. Against this backdrop, the success or failure of telecommunications policies overseas should play an important role in informing the debate surrounding Australia’s future broadband policy.
Recently, the BBC’s Tom Geoghegan took a look at why consumers in the US generally pay more for slower broadband speeds than their cousins in the UK, Europe and Asia:
[The prices of] some of the cheaper [packages] available in certain cities, at lower to mid download speeds, San Francisco ($99/£61), New York ($70) and Washington DC ($68) dwarf London ($38), Paris ($35) and Seoul ($15).
This research echoes the findings of another report earlier in the summer by the OECD, which compared countries in terms of their broadband-only prices. Across all 10 download speeds and capacities, it consistently ranked the US near the bottom.
According to the Obama administration, a lack of competition is a key part of the problem:
“Americans pay so much because they don’t have a choice,” says Susan Crawford, a former special assistant to President Barack Obama on science, technology and innovation policy.
“We deregulated high-speed internet access 10 years ago and since then we’ve seen enormous consolidation and monopolies, so left to their own devices, companies that supply internet access will charge high prices, because they face neither competition nor oversight.”
However, a documentary maker who recently investigated the question discovered the issue is more complicated than simply too much deregulation. Rather, the key issue is whether competitors are encouraged to duplicate each other’s infrastructure or compete by providing services on the same networks plays a large role in determining broadband quality – and prices:
Rick Karr, who made a PBS documentary in which he travelled to the UK to find out why prices were lower, says that the critical moment came when the British regulator Ofcom forced British Telecom to allow other companies to use its copper telephone wires going to and from homes.
But US regulators took a different approach. Rather than encouraging competition between operators using the same network, the US encouraged competition between different infrastructure owners – big companies that could afford to build their own networks.
The end result is that while Americans have a greater range of broadband technologies available to them, they also pay a premium for the privilege:
The critics should take a broader view, says Scott Cleland, chairman of NetCompetition, a pro-competition e-forum supported by broadband interests.
In Europe, people are selling different capacities at different prices, but the US encourages different technologies and a diversity of choice – people can choose phone, cable, wireless or satellite, he says. And suppliers can get a return from their investment which can be ploughed back into improving the infrastructure – $1.2tn has been reinvested since the mid 1990s.
In the past, Australia has toyed with both approaches, with a duplicate rollout of cable internet and competition policy allowing competitors to install their own DSLAM equipment in Telstra exchanges. The question now is which direction we want our internet infrastructure to take in the future – and whether it should use one technology or many.