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It saddens me that people are bothered about this. It highlights the continued disconnect between the interests of the companies traded on the market and those

It saddens me that people are bothered about this. It highlights the continued disconnect between the interests of the companies traded on the market and those of the investors at large. Bezos has been completely transparent about his philosophy regarding long-term and short-term profitability. This is not out of character for Amazon. Rather the opposite: the day I hear Amazon cutting long-term projects to boost short-term profitability is the day I would sell my Amazon stock. This is the way Amazon has operated for most of its history. They've already built up enough of a track record for us to trust that they know what they're doing. It is stupid to expect them to behave like other companies when we have seen them operate in this manner for some 20 years successfully. Maximizing short-term profitability is not a high priority for Amazon, and it never has been. Why is the market surprised then when they re-invest in growth? Because the market can be stupid.

tptacek 12y ago
It shouldn't sadden you, because Amazon is a pretty extreme case of this behavior. They've been unprofitable for a very, very long time, and they command a very high multiple of earnings. Matt Yglesias has suggested that they're less a business than a charity run by Wall Street. At some point, they need to demonstrate that the land they're grabbing can be both defended and put to productive use. Amazon's performance in the public market is more or less than only communication channel that exists to prompt Amazon to shift from Alexander the Great mode to Qing Dynasty mode.
- bcantrill 12y ago
  Wow, I love that analogy. Alexander the Great is a particularly apt historical analogue for Amazon if only for the triumph of logistics in their mutually astonishing conquests.[1] [1] http://www.goodreads.com/book/show/208006.Alexander_the_Great_and_the_Logistics_of_the_Macedonian_Army http://www.goodreads.com/book/show/208006.Alexander_the_Grea...
- jdbernard 12y ago
  The land they have is being put to productive use. Unless I am very misled, they have many revenue streams that are profitable. No one is successfully invading their space, so I would argue they are defending their territory quite adequately. Alexander only stopped because his troops wouldn't keep going. Why should Amazon stop? Also, I liked Eugene Wei's response[1] to the comments of Yglesias and others. [1]: http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-model-narrative http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-prof...
  - tptacek 12y ago
    Nobody is successfully invading their space because those spaces are, to painfully stretch the analogy, still under martial law: Amazon is aggressively subsidizing them with sweet terms for customers.
    - jdbernard 12y ago
      But that's working. And unless I'm mistaken (which is quite possible) those spaces under martial law are profitable. If people were pointing out that Amazon wasn't generating revenue, that would be a different story.
      - tptacek 12y ago
        I'm not saying it's not working. I'm making descriptive statements, not normative ones.
- applecore 12y ago
  A high multiple of earnings doesn't mean anything if they're barely profitable.
- larrys 12y ago
  Although I'm a critic I don't think it's a stretch that they could be profitable. I still buy from them even though they now charge sales tax in my state and that was one of the reasons I started to use them way back. I think they could increase pricing to the point of profitability and if they are the last man standing (or have gotten enough people into same habit) they could end up profitable. It's a big deal that I can buy almost everything I need from Amazon and get it quickly so they are in the forefront of my mind instead of getting a camera from B&H or a PC from Newegg. I think this is pretty typical behavior with many of their customers. Amazon has become a habit. Just like showing up at HN has become a habit.
hnnewguy 12y ago
>Maximizing short-term profitability is not a high priority for Amazon, and it never has been How do you define "short-term"? Amazon IPO'd 17 years ago. And there's a big difference between "maximizing short-term profitability" and being even marginally profitable.
- jdbernard 12y ago
  Amazon has a profitable business and they have for a long time now. They do not turn a profit because they keep sinking their profits back into expansion. There is a huge difference between being unprofitable because you can't sell product, and being unprofitable because you are choosing to take your earnings and invest them back into growth. Yes, you must be careful not to over-extend yourself, and at some point you've taken over the world and just can't grow anymore. But I haven't heard anyone give argument for either of those being the case, just non-specific fretting about how Amazon still is not profitable. I'm not even saying Amazon is doing the right thing. But they are doing exactly what they have been doing successfully for the last 17 years. Why do we keep getting worried about it?
  - cube13 12y ago
    >They do not turn a profit because they keep sinking their profits back into expansion. Uh, that's pretty much the definition of "unprofitable".
    - jdbernard 12y ago
      My point was that Amazon is unprofitable by choice and that makes all the difference. Amazon is putting food on the table for thousands of people. They are facilitating the sale of product for tens (hundreds?) of thousands of businesses. Their technology underpins and enables many of the startups we love. Their cash flow was and is healthy. That is very different than being unable to turn a profit. edit: What I meant by "a profitable business" is that Amazon is in several different industries. They have profitable business. They offset their profitable business with growth expenses, but they have business that is profitable.
    - 12y ago
hhw 12y ago
Perhaps, but there's an even bigger disconnect between Amazon's current market cap and the best case scenario of what they could be earning if they did focus on short-term profitability. Let's take a simplistic look at what their earnings would have looked like last year if they had only spent half as much on R&D ($6.565B) with no adverse affect to their bottom line. Add $3.283B to their actual net income of $0.274B for a total of $3.557B of potential earnings. Taking their current market cap of $146.58B (after today's 11.19% drop) and that still gives them a P/E of 41x. Obviously, these numbers are pretty rough, but even if they had spent $0 on R&D, they'd still have a pretty high P/E. Maybe the share price is hurting more because the market is actually taking a 2nd look at the valuation, and not because they didn't realize what Amazon's strategy was.
larrys 12y ago
"Bezos has been completely transparent about his philosophy" I don't know if this is transparency as much as controlling the narrative and preempting and spinning potential criticism. Rhetoric. This is often done in marketing whereby you take a disadvantage and turn it into an advantage in the buyers mind. "Sure we charge more because we take the time to hand craft ..." instead of "we can't afford the same people and machinery and distribution to make our product cheaper and widely used ....
- jdbernard 12y ago
  He made the following statements in the very first shareholder letter back in 1997 [1]: We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows. We aren’t so bold as to claim that the above is the “right” investment philosophy, but it’s ours, and we would be remiss if we weren’t clear in the approach we have taken and will continue to take. He said he was going to do this from the beginning. You can call that spin if you want, but when you consistently do what you said you were going to do it seems more accurate to call it transparency. Not saying that Amazon hasn't leaned on the PR machine from time to time, but at least on this issue they have been pretty clear and consistent from the beginning. [1]: http://benhorowitz.files.wordpress.com/2010/05/amzn_shareholder-letter-20072.pdf http://benhorowitz.files.wordpress.com/2010/05/amzn_sharehol...
  - larrys 12y ago
    I first thought that perhaps spin wasn't the right word maybe it is (I just looked this up). From this; http://en.wikipedia.org/wiki/Spin_%28public_relations%29 http://en.wikipedia.org/wiki/Spin_%28public_relations%29 I see this: "Bernays was able to help tobacco and alcohol companies use techniques to make certain behaviors more socially acceptable in the 20th-century United States. " I don't think that the fact that it was said at the start makes that much of a difference. I think you can spin in advance as well as in retrospect. In a sense he has been able to manage expectations the same way a high school student (who also plays football) might tell Dad "ok I will try out for the team like you want me to but I play sports keep in mind that my grades may suffer". Then when he gets mediocre grades he reminds his parents that he warned them. Or band or any extracurricular activity.

tptacek 12y ago

It shouldn't sadden you, because Amazon is a pretty extreme case of this behavior. They've been unprofitable for a very, very long time, and they command a very high multiple of earnings. Matt Yglesias has suggested that they're less a business than a charity run by Wall Street. At some point, they need to demonstrate that the land they're grabbing can be both defended and put to productive use. Amazon's performance in the public market is more or less than only communication channel that exists to prompt Amazon to shift from Alexander the Great mode to Qing Dynasty mode.

bcantrill 12y ago
Wow, I love that analogy. Alexander the Great is a particularly apt historical analogue for Amazon if only for the triumph of logistics in their mutually astonishing conquests.[1] [1] http://www.goodreads.com/book/show/208006.Alexander_the_Great_and_the_Logistics_of_the_Macedonian_Army http://www.goodreads.com/book/show/208006.Alexander_the_Grea...
jdbernard 12y ago
The land they have is being put to productive use. Unless I am very misled, they have many revenue streams that are profitable. No one is successfully invading their space, so I would argue they are defending their territory quite adequately. Alexander only stopped because his troops wouldn't keep going. Why should Amazon stop? Also, I liked Eugene Wei's response[1] to the comments of Yglesias and others. [1]: http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-model-narrative http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-prof...
- tptacek 12y ago
  Nobody is successfully invading their space because those spaces are, to painfully stretch the analogy, still under martial law: Amazon is aggressively subsidizing them with sweet terms for customers.
  - jdbernard 12y ago
    But that's working. And unless I'm mistaken (which is quite possible) those spaces under martial law are profitable. If people were pointing out that Amazon wasn't generating revenue, that would be a different story.
    - tptacek 12y ago
      I'm not saying it's not working. I'm making descriptive statements, not normative ones.
applecore 12y ago
A high multiple of earnings doesn't mean anything if they're barely profitable.
larrys 12y ago
Although I'm a critic I don't think it's a stretch that they could be profitable. I still buy from them even though they now charge sales tax in my state and that was one of the reasons I started to use them way back. I think they could increase pricing to the point of profitability and if they are the last man standing (or have gotten enough people into same habit) they could end up profitable. It's a big deal that I can buy almost everything I need from Amazon and get it quickly so they are in the forefront of my mind instead of getting a camera from B&H or a PC from Newegg. I think this is pretty typical behavior with many of their customers. Amazon has become a habit. Just like showing up at HN has become a habit.

hnnewguy 12y ago

>Maximizing short-term profitability is not a high priority for Amazon, and it never has been How do you define "short-term"? Amazon IPO'd 17 years ago. And there's a big difference between "maximizing short-term profitability" and being even marginally profitable.

jdbernard 12y ago
Amazon has a profitable business and they have for a long time now. They do not turn a profit because they keep sinking their profits back into expansion. There is a huge difference between being unprofitable because you can't sell product, and being unprofitable because you are choosing to take your earnings and invest them back into growth. Yes, you must be careful not to over-extend yourself, and at some point you've taken over the world and just can't grow anymore. But I haven't heard anyone give argument for either of those being the case, just non-specific fretting about how Amazon still is not profitable. I'm not even saying Amazon is doing the right thing. But they are doing exactly what they have been doing successfully for the last 17 years. Why do we keep getting worried about it?
- cube13 12y ago
  >They do not turn a profit because they keep sinking their profits back into expansion. Uh, that's pretty much the definition of "unprofitable".
  - jdbernard 12y ago
    My point was that Amazon is unprofitable by choice and that makes all the difference. Amazon is putting food on the table for thousands of people. They are facilitating the sale of product for tens (hundreds?) of thousands of businesses. Their technology underpins and enables many of the startups we love. Their cash flow was and is healthy. That is very different than being unable to turn a profit. edit: What I meant by "a profitable business" is that Amazon is in several different industries. They have profitable business. They offset their profitable business with growth expenses, but they have business that is profitable.
  - 12y ago

hhw 12y ago

Perhaps, but there's an even bigger disconnect between Amazon's current market cap and the best case scenario of what they could be earning if they did focus on short-term profitability. Let's take a simplistic look at what their earnings would have looked like last year if they had only spent half as much on R&D ($6.565B) with no adverse affect to their bottom line. Add $3.283B to their actual net income of $0.274B for a total of $3.557B of potential earnings. Taking their current market cap of $146.58B (after today's 11.19% drop) and that still gives them a P/E of 41x. Obviously, these numbers are pretty rough, but even if they had spent $0 on R&D, they'd still have a pretty high P/E. Maybe the share price is hurting more because the market is actually taking a 2nd look at the valuation, and not because they didn't realize what Amazon's strategy was.

larrys 12y ago

"Bezos has been completely transparent about his philosophy" I don't know if this is transparency as much as controlling the narrative and preempting and spinning potential criticism. Rhetoric. This is often done in marketing whereby you take a disadvantage and turn it into an advantage in the buyers mind. "Sure we charge more because we take the time to hand craft ..." instead of "we can't afford the same people and machinery and distribution to make our product cheaper and widely used ....

jdbernard 12y ago
He made the following statements in the very first shareholder letter back in 1997 [1]: We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows. We aren’t so bold as to claim that the above is the “right” investment philosophy, but it’s ours, and we would be remiss if we weren’t clear in the approach we have taken and will continue to take. He said he was going to do this from the beginning. You can call that spin if you want, but when you consistently do what you said you were going to do it seems more accurate to call it transparency. Not saying that Amazon hasn't leaned on the PR machine from time to time, but at least on this issue they have been pretty clear and consistent from the beginning. [1]: http://benhorowitz.files.wordpress.com/2010/05/amzn_shareholder-letter-20072.pdf http://benhorowitz.files.wordpress.com/2010/05/amzn_sharehol...
- larrys 12y ago
  I first thought that perhaps spin wasn't the right word maybe it is (I just looked this up). From this; http://en.wikipedia.org/wiki/Spin_%28public_relations%29 http://en.wikipedia.org/wiki/Spin_%28public_relations%29 I see this: "Bernays was able to help tobacco and alcohol companies use techniques to make certain behaviors more socially acceptable in the 20th-century United States. " I don't think that the fact that it was said at the start makes that much of a difference. I think you can spin in advance as well as in retrospect. In a sense he has been able to manage expectations the same way a high school student (who also plays football) might tell Dad "ok I will try out for the team like you want me to but I play sports keep in mind that my grades may suffer". Then when he gets mediocre grades he reminds his parents that he warned them. Or band or any extracurricular activity.