13 ms·

I listened to a talk by Amazon's CTO, Werner Vogels, where he was explaining that Amazon's entire strategy is to build an infrastructure for itself, then rent t

• macspoofing 12y ago
  That's all great but at some point they still need to turn a profit.
  • bequanna 12y ago
    Yes. But only when there are no longer attractive opportunities for them to invest in expansion.
  • ChuckMcM 12y ago
    As the article points out, they don't. By running the business this way they are constantly building / growing new businesses but during a downturn they just build more slowly (rather than lose money). It is a very different way of operating but one which has provided some interesting benefits for them. Nominally a business uses profits to either pay dividends or fund unexpected opportunities (like buying some small company or what not) Amazon doesn't pay dividends and they invest every dollar they make "extra" back into the business to increase the total number of dollars in the pipes. They don't need to turn a profit, they just need to manage their investment profile to their revenue forecasts. Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce.
    • mkaziz 12y ago
      If they don't want a profit, what's their motivation for existing?
      • amaks 12y ago
        They do want the profit, they just keep reinvesting it to capex.
      • RaptorJ 12y ago
        "Amazon" isn't a thing that has wants or feelings. You can not make a profit and still pay your executives a bundle of money.
      • zaidf 12y ago
        It isn't that they don't want a profit, it's just that as long as they feel they can reinvest the profit relatively safely to make even more profit in the future, they will continue doing so.
      • AndrewKemendo 12y ago
        The other replies to this aside, I think the assumption inherent in your question is myopic. I know for myself, my motivation to get capital (profits) is so I can build things that improve decision making, increase longevity and in the end expand knowledge worldwide. Perhaps Bezos has motivations that are along the same lines and this is how he is achieving them.
      • gatehouse 12y ago
        Since they are a publicly traded company, the ownership can be fluid. As a shareholder you can stay in or cash out whenever you want, if you want to simulate a profit you can sell shares periodically. So the separation between the company's internal finances and the exchange of shares on the stock market is what allows this to happen and still make sense.
      • tim333 12y ago
        Profit in this case is generally a quantity calculated by accounting rules (US GAAP probably) and is a different thing from wealth created. Amazon has produced a lot of wealth for it's shareholders, enough for Bezos to be worth ~$30bn build spacecraft as his hobby. The difference is more obvious with a company like Facebook. Say they spend $1bn building the company from zero to 500m users and at the same time receive $1bn in ad revenue. Their accounting profit is $0 but their wealth is a lot due to the value of the 500m users. There are advantages to keeping the GAAP profit near zero because you pay no corporation tax that way.
  • SilasX 12y ago
    If you reinvest all profits, you're still turning a profit. To say otherwise is to confuse the issue, even if technically correct in some contexts.
    • vasilipupkin 12y ago
      Not really, because your re-investments could be profit-destroying. If you earn 100 dollars of profit and gave to investors, the investors now have $100. If you reinvest $100, the investors have a bet that some time in the future they will have more than $100. Clearly, the two are different.
      • jacquesm 12y ago
        Think of it as endless stockdividends, so every profit is turned into money that fuels further growth of the machine without having to hit anybody up for capital. As long as there is growth plow the profits back into the engine. Once the growth stops (you'd have to wonder what the implications of that alone would be, I'm not sure I can quite envision how large a vertically integrated company that would run into the limits of geographical expansion would be, planet wide perhaps?) you can start thinking about dividends. Until then the best investment is to re-invest because that is where ultimately you'll make the highest ROI. It's the longest of long bets, and since Bezos / Amazon is betting on itself there is a large number of ways in which he can affect the outcome. If he would invest his profits after dividend into some other company (after all, just letting it lay around would be very wasteful) he's likely not get as much influence and not as high an eventual ROI. It's a very smart long term strategy.
      • SilasX 12y ago
        Yes, in the future you might not be profitable. In the year that you turned a profit, you turned a profit, even if you decided not to pay it out as a dividend.
  • Pxtl 12y ago
    If all the profit goes back into the company to expand the company, is it somehow not "profit"? Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". Amazon's individual operations do generate a profit, except for the new bleeding-edge expansions into new businesses. Those things run at a loss, fed by the profitable wings of the company. And when they become profitable, they become a part of the other side of the machine and Amazon expands further. Amazon simply chooses to invest every penny of profit into growth. Somehow we don't consider that "profit".
    • vasilipupkin 12y ago
      it's not profit in the sense that we assume that amazon investors would be worse at reinvesting cash from existing operations than amazon management. It could very well be true now, but it may also not be as true as you think. That's why it's not really profit in the true sense of the word.
    • baddox 12y ago
      > Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". It's only misleading if you pick a definition of "profit" at random rather than investigating the definition being used in the article. As the article states, Amazon's gross profit is over 20%. And the article briefly hints that gross profit is not a very useful metric. It's certainly of little immediate relevance to Amazon's investors.
  • MaysonL 12y ago
    They're turning a profit continuously: it's just that they're turning that profit into warehouses rather than into cash.
• pdpi 12y ago
  > The talk was about APIs, but Amazon views APIs as a general term: "Fulfilled by Amazon" is an example of a non-technical API. It's not a "non-technical API". We have name for those things: they're services. Amazon provides services, and that extends to both digital services (with which you interact via APIs — that P stands for Programming, damn it!), and meatspace services.
  • TrevorJ 12y ago
    The business model sounds a lot less 'new economy cloud magic' when you just call it what it is: Business to Business.
    • exelius 12y ago
      Right, but the "new economy" twist is that Amazon likely doesn't know most of these companies exist outside of them being in a database somewhere. It's providing services in a self-service, one-size-fits-all kind of way.
  • exelius 12y ago
    Yeah; the talk was to a technical crowd, so I think he was trying to make an analogy as to how a developer should think about them. But Amazon's culture very technical, so it wouldn't surprise me if this actually was the way they think about them.
  • TeMPOraL 12y ago
    That's what I'm actually hoping will happen to services - that they will actually become function calls. For instance, why can't I install a local print shop as a system printer? I do some graphics work, then I click File->Print..., pick the "Printing Company XYZ", alter preconfigured defaults if needed, OK, and the next day a courier brings me my print job, all payments and address information transfer being handled in the background. Let me order pizza by RPC (we could streamline ordering in our local Hackerspace by voting on toppings on IRC and using a bot to make the order ;)). Let me do shopping by a POST request. The end result would be that the use of aby service that doesn't require your physical presence could be streamlined, a lot of time wasted on boring paper/legwork could be optimized away, and the system would work smoothly in the background as long as you top up your credit card regularly.
• twistedpair 12y ago
  At some point, when you're handling all the customer money, and the merchant money, and the supplier money, you become the ultimate middle man as everyone owes you money and the actual amount of money you need to move gets small and smaller because you're just netting internal accounts. There must be some massive savings (read profit) to be made there, when the entire economy is really just Amazon.
  • MaysonL 12y ago
    Good point: note that they get the customer's money before they pay the supplier (their accounts payable are a multiple of receivables), and they sell the merchandise before they pay for it (their payables are a multiple of their inventory).
  • auxbuss 12y ago
    It's even stronger than that. They also acquire massive cash-flow. And as every accountant will tell you: Cash-flow is king.
• larrys 12y ago
  You know what? Amazon, Werner and/or Benedict Evans can spin it anyway they want (like the kid who gets caught with his hand in the cookie jar) but the bottom line is they aren't making money and haven't pinned to a date they plan to do so. (So making arguments as far as one business unit vs. another don't matter many business operate the same way and in sum make money.) All the long winded explanation of the circumstances (such that Benedict gives in his writeup) hoping that people will be overwhelmed and not want to question what is going on (like a 20 page legal contract that can't easily be deciphered by non lawyers) I mean who even has the time to fully vet even what Benedict has "summarized" (not that it can be called that). There is a saying in negotiating which is "you can name the price if I can name the terms". In the case of Amazon it's like "Let me name the business model and I will also name the time frame toward profitability". One thing is for sure. Bezos may prove right in the end or not but there is no question he is operating according to his vision and doesn't look anywhere close to deviating from his (Benedict's words here) "lifestyle" business.
  • vasilipupkin 12y ago
    your comment is at best a gross exaggeration. They are making money, but they are re-investing that money at a crazy rate into new businesses. That represents a huge bet, which their shareholders are willing to take on. The alternative would be to pay out cashflow from operations to shareholders in the form of dividends, or grow slower. But look at the stock price over the last 5 years - clearly, investors want to take on the bet
    • vasilipupkin 12y ago
      Curious about the downvote. "spin it any way you want but they are not making money" is incorrect.
    • jgalt212 12y ago
      Diminishing returns will be Amazon's downfall
    • marincounty 12y ago
      I too am curios about the down voting, but this site is sometimes so polarized, or stifling with political correctness it's nauseating. Jeff Bezos can do no wrong in this market place; that is where we have a somewhat growing marketplace for certain professions. Professions that provide a livable wage, with a few dollars left over after rent in order to spend on Amazon. Besides Jeff's vanity projects(newspaper, drones, I don't fell like doing a bunch of research)--his business model has one glaring flaw. He needs cheap gas. There is good reason why have huge trucks that move a large amount of goods from one location to a more convenient location. Don't get me wrong I like Amazon. I am surprised he hasen't bought up some of the dirt cheap commercial Realestate and put in Amazon retail outlets. Outlets that just provide a place where customers could pick up their packages. Hell--he could automate them, and they could be open 27/7?
• vinceguidry 12y ago
  > I listened to a talk by Amazon's CTO, Werner Vogels, where he was explaining that Amazon's entire strategy is to build an infrastructure for itself, then rent that infrastructure out to its competitors. This was the game played by John D. Rockefeller. He had so much infrastructure built up by the time they split up Standard Oil, that each new state Standard Oil immediately had everything it needed to keep operations going and the breakup was essentially a bunch of paperwork. As a stockholder in all of the new firms, Rockefeller's net worth tripled, from ~300m to ~900 million. To make this strategy work, you need mountains of cash. In his salad days, Rockefeller cultivated excellent relationships with bankers, who would stop him on the streets of Cleveland and ask him if he needed money. Eventually he decided to buy up Cleveland's entire refining industry, an event that became known as the Cleveland Massacre. John offered three choices to rival refiners, cash, Standard Oil stock, or to get crushed. He leveraged his extensive railroad connections and infrastructure to bury competitors, for one thing he owned virtually all the oil tank rail cars, without which you couldn't sell your products because you couldn't move them efficiently. The right choice was to have taken stock, which would have made you fabulously wealthy. If you were any good at the oil business at all, he would also offer you a job, which again would have eventually made you very very rich. He had an insatiable hunger for quality staff. It was never a good idea to bet against Rockefeller.
  • chriskelley 12y ago
    Great write-up, really piqued my interest in Rockefeller. Any good reads you can recommend?
    • vinceguidry 12y ago
      http://www.amazon.com/Titan-The-Life-John-Rockefeller/dp/1400077303 http://www.amazon.com/Titan-The-Life-John-Rockefeller/dp/140...
      • WalterBright 12y ago
        I read Titan. Interestingly, it documents how SO's market share was declining steadily throughout the anti-trust trial, and Rockefeller was unable to stop it. It runs against the conventional story of SO being an inevitable monopoly.
• MaysonL 12y ago
  In rergard to inventory risk: note that their accounts payable are several times their inventory — their suppliers are financing their inventory (and then some).
• nikcub 12y ago
  > Costco comes to mind That isn't a coincidence. According to[0] "The Everything Store"[1], the latest biography of Amazon, Bezos picked up the model for Amazon retail from Costco founder James Sinegal. The first aspect was "value trumps everything" - where prices would be slashed and net margins thin. The second was the subscription model - Bezos learned that 70%+ of Costco's profit was from the membership fees. It was easier to charge a membership fee once and offer lower prices than it was to attempt to spread your profit margin across products and into the pricing. Amazon slashed its prices and adopted the thin margin model in the future and then implemented Amazon Prime. "The Everything Store" is a decent read, easy to flick through and some interesting cases and anecdotes within it. Ignore the negative reviews and give it a read if you haven't already. [0] http://bobmorris.biz/what-jeff-bezos-learned-from-jim-sinegal-founder-of-costco http://bobmorris.biz/what-jeff-bezos-learned-from-jim-sinega... [1] http://www.amazon.com/The-Everything-Store-Bezos-Amazon-ebook/dp/B00BWQW73E http://www.amazon.com/The-Everything-Store-Bezos-Amazon-eboo...
  • ignoramous 12y ago
    Amazon Prime isn't an idea inspired by Costco's membership model, AFAIK. The idea came during Company's annual "Up the River" conference where Amazonians gather for a two-day brain-storming sessions.
• mwal 12y ago
  > If they can build a completely vertically integrated retail platform from procurement to payment to delivery... Amazon has already set this up for books with their Kindle Direct Publishing platform[0]. Writers directly publish on Amazon (cutting out publishers) and their books are electronically delivered to customers' Kindles -> everything stays on Amazon. [0] https://kdp.amazon.com/ https://kdp.amazon.com/