7 ms·

Cool article, but I think the magic profitability button analogy ignores the underlying economic thesis of Amazon. Right now, the only obstacle to Amazon's pro

Cool article, but I think the magic profitability button analogy ignores the underlying economic thesis of Amazon. Right now, the only obstacle to Amazon's profitability is Walmart. If Walmart didn't exist, Amazon's pricing control supremacy would ensure they could operate at the lowest possible market price on every item, and as the market maker for product, they would control the cost floor as well. In a sense, the end game for Amazon is this: it's fucking ludicrous to run a company without profit for years. At some point someone else is going to try to take more profits because of the volume pressure of Amazon. The end game for Amazon is choking all of the other retailers out of existence, IMHO. They don't have to flip a switch, they just need to wait. They're playing the long game.

melvinmt 13y ago
> They don't have to flip a switch, they just need to wait. They're playing the long game. So.. why is that "fucking ludicrous"? Seems to me they're playing the Long Run Equilibrium game just fine: "In the long run, every competitive firm will earn normal profit, that is, zero profit."
hcarvalhoalves 13y ago
I believe you're the one reading the strategy right. The fact they diversify a lot and squeeze revenue out of any by-product (AWS is an example, payments are another) might indicate that.
tnuc 13y ago
Amazon is nowhere near the size of Walmart. Bezos doesn't have an end game, he'll just keep driving growth until he gets sick of it. Then they'll get Steve Balmer to make the growth stop :)
- josh2600 13y ago
  In what market? In cloud infrastructure I think it's safe to say Walmart is actually the smaller contender. Over time cloud infrastructure could subsume all of retail, at least in theory. If that's the case wouldn't you rather own Amazon than Walmart? I'm not implying this is reality, I'm just saying predicting future potential is not as simple as current Market Capitalization might imply otherwise IBM would own the NASDAQ today.
- true_religion 13y ago
  > Bezos doesn't have an end game, he'll just keep driving growth until he gets sick of it. What is the 'end game' of Wallmart? I mean, don't most established companies just want to continually drive growth till they saturate the market, then reap?
  - apalmer 13y ago
    Difference is walmart is actually making money, amazon isnt. So Walmart can continue what they are doing forever and thats ok, if it were clear that amazon intends to continue what they are doing forever investors would bail and the remaining investors would force amazon leadership out if possible. As far as when the Amazon endgame starts, my guess is when they are doing as much business as walmart
- riggins 13y ago
  Amazon is nowhere near the size of Walmart. Walmart does ~500B in rev. Amazon did 61B in rev in '12 and is on pace for 72B-ish in '13.
jonnathanson 13y ago
All of which, ironically enough, was Walmart's original playbook: grow huge, realize economies of scale so drastic that nobody else can hope to compete on price, then use your size and buyer power to put even more downward pressure on supplier prices. Amazon vs. Walmart is an extremely interesting battle to watch. Amazon has massive advantages in technology; Walmart has massive advantages in size, distribution, and logistics. Amazon is gaining a lot of ground in the US; Walmart is much stronger than Amazon internationally. If I had to place bets, I'd take Amazon in the long run. They're much more forward thinking and are playing a much more strategic game. Walmart has become overly reliant on price leadership and has had a very hard time orienting toward the future of retail. The Innovator's Dilemma will catch up to it eventually -- but it'll take awhile, because Walmart is so damned massive and dominant right now.
- josh2600 13y ago
  Don't forget: All else being equal, Walmart takes a profit. That's why I'm bullish on Amazon from an economic perspective. Culturally, I often wonder about the consumer value of monopolized markets.
  - jonnathanson 13y ago
    Traditional economics holds that monopolies are bad for consumers. Essentially, this is because the monopolist can do whatever it wants, and the consumers have no alternative. The monopolist has no incentive to keep prices low, to innovate, or to improve its service level, because the consumer can't exactly go elsewhere. These days, however, the threat of new entrants into any given market is much higher. Starting costs are drastically lower than they were when conventional microeconomic theory was being worked out. All things being equal, as a consumer, you still don't want a monopolist owning the market -- but the monopolist has to be somewhat cautious, for fear of disruption. It seems highly unlikely that Amazon will ever operate a true monopoly over all categories of retail. Nor will the government (and competitive lobbying) allow it to get there. But an oligopoly is certainly possible. (On a micro level, Walmart has basically functioned as a de facto monopolist in certain regions where it has virtually no competition. Those days are over, though.)
raganwald 13y ago
> The end game for Amazon is choking all of the other retailers out of existence, IMHO. The trouble with this is that it plays exactly into the article's point. We can't disprove that Amazon will one day choke all the other retailers out of existence. We can always say, "tomorrow will be the day, just wait." Meanwhile, Chinese factories are selling bicycle parts on eBay. Will WalMart fail but be replaced by manufacturers selling direct to end-users and disintermediate Amazon? I have no idea, but it's no less plausible than Amazon driving absolutely everyone out of business. I'm not trying to debate eBay vs. Amazon, I'm simply suggesting that if we're talking "long games," there's a lot of uncertainties. Profitable companies are winning now.
- sillysaurus 13y ago
  Will WalMart fail but be replaced by manufacturers selling direct to end-users and disintermediate Amazon? I have no idea, but it's no less plausible than Amazon driving absolutely everyone out of business. Seems unlikely, because the main reason to go to Walmart or Best Buy is to get the product the same day you want it, and also to see it in person before buying it. Amazon won't drive everyone else out of business until they offer both of those.
  - robryan 13y ago
    The expansion into same day shipping is happening. In terms if people who want to physically see the product, I don't think that is Amazons game. They are are better off giving up that market segment and the overheads associated with it. Same day shipping and no hassle returns is probably close enough for a lot of people.
    - sillysaurus 13y ago
      Is amazon offering no hassle returns? How's it work?
      - robryan 13y ago
        I don't live in the US and have never made an Amazon return. I was under the impression though that they organised for a courier to picking the package from you, rather than you having to go and send it?
prostoalex 13y ago
There's a precedent of selling the product pretty much at cost and maintaining a profitable company. 80% of Costco's profits come from selling annual memberships, their product markups pretty much cover the costs of operating the warehouses, and yet even WalMart rarely beats Costco on prices http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world http://www.businessweek.com/articles/2013-06-06/costco-ceo-c...

melvinmt 13y ago

> They don't have to flip a switch, they just need to wait. They're playing the long game. So.. why is that "fucking ludicrous"? Seems to me they're playing the Long Run Equilibrium game just fine: "In the long run, every competitive firm will earn normal profit, that is, zero profit."

hcarvalhoalves 13y ago

I believe you're the one reading the strategy right. The fact they diversify a lot and squeeze revenue out of any by-product (AWS is an example, payments are another) might indicate that.

tnuc 13y ago

Amazon is nowhere near the size of Walmart. Bezos doesn't have an end game, he'll just keep driving growth until he gets sick of it. Then they'll get Steve Balmer to make the growth stop :)

josh2600 13y ago
In what market? In cloud infrastructure I think it's safe to say Walmart is actually the smaller contender. Over time cloud infrastructure could subsume all of retail, at least in theory. If that's the case wouldn't you rather own Amazon than Walmart? I'm not implying this is reality, I'm just saying predicting future potential is not as simple as current Market Capitalization might imply otherwise IBM would own the NASDAQ today.
true_religion 13y ago
> Bezos doesn't have an end game, he'll just keep driving growth until he gets sick of it. What is the 'end game' of Wallmart? I mean, don't most established companies just want to continually drive growth till they saturate the market, then reap?
- apalmer 13y ago
  Difference is walmart is actually making money, amazon isnt. So Walmart can continue what they are doing forever and thats ok, if it were clear that amazon intends to continue what they are doing forever investors would bail and the remaining investors would force amazon leadership out if possible. As far as when the Amazon endgame starts, my guess is when they are doing as much business as walmart
riggins 13y ago
Amazon is nowhere near the size of Walmart. Walmart does ~500B in rev. Amazon did 61B in rev in '12 and is on pace for 72B-ish in '13.

jonnathanson 13y ago

All of which, ironically enough, was Walmart's original playbook: grow huge, realize economies of scale so drastic that nobody else can hope to compete on price, then use your size and buyer power to put even more downward pressure on supplier prices. Amazon vs. Walmart is an extremely interesting battle to watch. Amazon has massive advantages in technology; Walmart has massive advantages in size, distribution, and logistics. Amazon is gaining a lot of ground in the US; Walmart is much stronger than Amazon internationally. If I had to place bets, I'd take Amazon in the long run. They're much more forward thinking and are playing a much more strategic game. Walmart has become overly reliant on price leadership and has had a very hard time orienting toward the future of retail. The Innovator's Dilemma will catch up to it eventually -- but it'll take awhile, because Walmart is so damned massive and dominant right now.

josh2600 13y ago
Don't forget: All else being equal, Walmart takes a profit. That's why I'm bullish on Amazon from an economic perspective. Culturally, I often wonder about the consumer value of monopolized markets.
- jonnathanson 13y ago
  Traditional economics holds that monopolies are bad for consumers. Essentially, this is because the monopolist can do whatever it wants, and the consumers have no alternative. The monopolist has no incentive to keep prices low, to innovate, or to improve its service level, because the consumer can't exactly go elsewhere. These days, however, the threat of new entrants into any given market is much higher. Starting costs are drastically lower than they were when conventional microeconomic theory was being worked out. All things being equal, as a consumer, you still don't want a monopolist owning the market -- but the monopolist has to be somewhat cautious, for fear of disruption. It seems highly unlikely that Amazon will ever operate a true monopoly over all categories of retail. Nor will the government (and competitive lobbying) allow it to get there. But an oligopoly is certainly possible. (On a micro level, Walmart has basically functioned as a de facto monopolist in certain regions where it has virtually no competition. Those days are over, though.)

raganwald 13y ago

> The end game for Amazon is choking all of the other retailers out of existence, IMHO. The trouble with this is that it plays exactly into the article's point. We can't disprove that Amazon will one day choke all the other retailers out of existence. We can always say, "tomorrow will be the day, just wait." Meanwhile, Chinese factories are selling bicycle parts on eBay. Will WalMart fail but be replaced by manufacturers selling direct to end-users and disintermediate Amazon? I have no idea, but it's no less plausible than Amazon driving absolutely everyone out of business. I'm not trying to debate eBay vs. Amazon, I'm simply suggesting that if we're talking "long games," there's a lot of uncertainties. Profitable companies are winning now.

sillysaurus 13y ago
Will WalMart fail but be replaced by manufacturers selling direct to end-users and disintermediate Amazon? I have no idea, but it's no less plausible than Amazon driving absolutely everyone out of business. Seems unlikely, because the main reason to go to Walmart or Best Buy is to get the product the same day you want it, and also to see it in person before buying it. Amazon won't drive everyone else out of business until they offer both of those.
- robryan 13y ago
  The expansion into same day shipping is happening. In terms if people who want to physically see the product, I don't think that is Amazons game. They are are better off giving up that market segment and the overheads associated with it. Same day shipping and no hassle returns is probably close enough for a lot of people.
  - sillysaurus 13y ago
    Is amazon offering no hassle returns? How's it work?
    - robryan 13y ago
      I don't live in the US and have never made an Amazon return. I was under the impression though that they organised for a courier to picking the package from you, rather than you having to go and send it?

prostoalex 13y ago

There's a precedent of selling the product pretty much at cost and maintaining a profitable company. 80% of Costco's profits come from selling annual memberships, their product markups pretty much cover the costs of operating the warehouses, and yet even WalMart rarely beats Costco on prices http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world http://www.businessweek.com/articles/2013-06-06/costco-ceo-c...