Amazon's ultimate plan: "Eat global retail". Why Amazon is profitless.

[Vitalius]

Post at /.
 
Why Amazon is Profitless by Choice:

 

An anonymous reader writes:
 

"Eugene Wei, a former employee at Amazon and Hulu, explains why Amazon continues to post quarterly earnings statements with lots of revenue but no actual profit. Many of Amazon's retail businesses and platforms are quite profitable by themselves, Wei says, a fact that is hidden by large expenditures on investment for the future.

He writes, 'If Amazon has so many businesses that do make a profit, then why is it still showing quarterly losses, and why has even free cash flow decreased in recent years? Because Amazon has boundless ambition. It wants to eat global retail. This is one area where the press and pundits accept Amazon's statements at face value. Given that giant mission, 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. ... I'm convinced Amazon could easily turn a quarterly profit now.

Many times in its history, it could have been content to stop investing in new product lines, new fulfillment centers, new countries. The fixed cost base would flatten out, its sales would continue growing for some period of time and then flatten out, and it would harvest some annuity of profits. Even the first year I joined Amazon in 1997, when it was just a domestic book business, it could have been content to rest on its laurels. But Jeff is not wired that way. There are very few people in technology and business who are what I'd call apex predators. Jeff is one of them, the most patient and intelligent one I've met in my life.'"

 

Well, this made me go "wow".

I mean, it makes sense. The ultimate way to win in the long term regarding profits is simple: Continually invest new profits into expanding your business. Mind you, there are diminishing returns regarding this, and so long as you continually invest 100% of profits all the time, you never actually make any money. 

However, this makes me curious about what the future holds. About how big Amazon plans on actually becoming. 

It was only recently, through an email, that I found out they (Amazon) already have their own clothing store website. You might say "Well, yeah. Of course they do.", but the surprising thing, to me, was that it had nothing to suggest "This is owned and operated by Amazon." on it's webpage, aside from the little text at the bottom saying "©2013 Amazon.com, Inc. and its affiliates." The only thing besides that which told me this was the fact that I got the email saying so and directing me to it. If you try and buy something, it directs you to Amazon's checkout, which is the only time Amazon is mentioned as far as I can tell.

The thing that made me wonder about that store is that it isn't based in Amazon's website at all. It is it's own URL and such. 

What do you guys think? I find this very interesting. Personally, I don't like it. Simply because this implies that they want a monopoly on everything, and they (Amazon's owner(s)) are willing to patiently invest in and fight for that. Not a good thing imo. Monopolies or anything close to it are never good, unless they are run by good people (they never are AFAI can tell). 

Edit:

Related update,

France moves to protect independent booksellers from Amazon
 

Hugh Pickens DOT Com writes
 
"Tourists often marvel at the number of rich and varied bookstores along Paris streets. Right across from Notre Dame Cathedral is one of the city's most famous independent bookstores, Shakespeare and Company. Inside, every inch of space is crammed with books and readers. The city buys buildings in high-rent districts and tries to keep a core of 300 independent bookstore by offering booksellers leases at an affordable price. 'We have to keep our identity,' says Lynn Cohen-Solal, 'because if we don't, all the shops are exactly the same in Paris, in London, in New York, in New Delhi, everywhere.'

Now Eleanor Beardsley reports at NPR that the French government has accused Amazon of trying to push the price of physical books too low and is limiting discounts on books to ensure the survival of its independent booksellers. France's lower house of parliament has unanimously voted to add an amendment to a law from 1981, known in France as the Lang Law which sets the value of new books at fixed prices and only allows retailers to lower books' set price by 5%, in an effort to regulate competition between booksellers and to promote reading. Guillaume Husson, spokesman for the SLF book retailers' union, says Amazon's practice of bundling a 5 percent discount with free delivery amounted to selling books at a loss, which was impossible for traditional book sellers of any size.

'Today, the competition is unfair,' says Husson. 'No other book retailer, whether a small or large book or even a chain, can allow itself to lose that much money,' referring to Amazon's alleged losses on free delivery. Amazon spent $2.8 billion on free shipping worldwide last year to gain a competitive advantage. The bill limiting Amazon's price reductions in France still has to pass the Senate to become law. In a statement, Amazon said any effort to raise the price of books diminishes the cultural choices of French consumers and penalizes both Internet users and small publishers who rely on Internet sales."

Well... that was convenient. I didn't expect to see something so telling be posted on the same day as the first Slashdot post. Interesting.

[TheRoss0411]

I don't care, cheap prices and free delivery

[nsyedhasan]

Well it's good for the consumer. Once these stores go out of business then amazon ,or companies like it, will lift their prices. Most probably the prices won't go up because there will be more competition in the marketplace.

[Volbet]

So basically we are running into a paradox of the free marker. Can the free market allow a company to get so big, that it removes the free market? 

 

But I have to say that the tactic that Amazon uses is strange. Of course Amazon will gain big in the end, but they are also running a major risk. If they keep investing 100% of their revenue, they will not be able to withstand a possible loss in income.

[Vitalius]

I don't care, cheap prices and free delivery

 

 

Well it's good for the consumer. Once these stores go out of business then amazon ,or companies like it, will lift their prices. Most probably the prices won't go up because there will be more competition in the marketplace.

 

How is it good for consumers? Your statement is confusing. You are saying they will lift there prices once these stores go out of business, but they probably won't because there will be more competition in the market place. That isn't true if the stores go out of business. Confused..

So basically we are running into a paradox of the free marker. Can the free market allow a company to get so big, that it removes the free market? 

 

But I have to say that the tactic that Amazon uses is strange. Of course Amazon will gain big in the end, but they are also running a major risk. If they keep investing 100% of their revenue, they will not be able to withstand a possible loss in income.

This. 

It is hard to hate someone who provides such a great service.

 

And I do not see any Monopoly like actions, like MS has done in the past. just peerless competition.

 

I have not seen them stifling other competing services, just competing and winning against retail. It is not their fault that retail does not seem willing to change to compete, and that no one is decent launching Amazon-like services.

 

It is like Steam, sure they have a monopoly, but it is not their fault.

 

"It is hard to hate someone who provides such a great service."

 

This. Amazon has changed business for the better. When I was a kid anything bought via phone or mail was "allow 4 to 6 weeks for delivery". Only with Amazon did this finally change to 2 or 3 days. Now Amazon is investing heavily to provide same day delivery. What a gigantic difference. Others now provide delivery this quickly but only because they can't compete with Amazon otherwise.

 

So far Amazon has been a great example of Capitalism's good points (except for maybe refusing to collect state sales tax until recently). I'm surprised to see all this hate.

 

The Amazon warehouses are run like sweatshops [ft.com]. There are some other more detailed articles out there, if you can find them. The working conditions are horrendous and the pay abysmal, and nearly all of it temp work. So, while on the surface the service might be great, it comes at a cost. There is a reason they're able to undercut and drive out the local businesses which actually pay their employees and provide benefits.

They ["Apex Predators" like Amazon] are a massive danger to society, as the basically consume everything, build monopolies, restrict choice, destroy the market. They are also fundamentally stupid, as they are unable to even perceive the massive damage they are doing.

 

Basically, the only thing these people can do is build empires. One of the best known fact about empires is that they all collapse sooner or later. The larger they are, the worse the damage when they collapse as they will have killed anything that could take over when they are gone. Any admiration for these people is completely misplaced. They are not part of anything good, they are part of the problem.

[Imaginaerum]

Amazon has showed for the first 8 years of their existence lack of profits won't stop them, which makes me glad. But they still manage to buy the Washington Post so they're making extra money somewhere.

[Guest GRRigger]

I hope this brings benefits.

[nsyedhasan]

 

How is it good for consumers? Your statement is confusing. You are saying they will lift there prices once these stores go out of business, but they probably won't because there will be more competition in the market place. That isn't true if the stores go out of business. Confused..

It's is good for the consumer now. Later, only if amazon is the only store, they will be able to lift prices. But since amazon also sells other from other stores they won't because they will not be selling as many compared to the smaller stores.

[Vitalius]

It's is good for the consumer now. Later, only if amazon is the only store, they will be able to lift prices. But since amazon also sells other from other stores they won't because they will not be selling as many compared to the smaller stores.

Again, you aren't making sense.

Basically, what Amazon is doing is they are driving out competition by investing all their profits into expanding. The ultimate goal of this is to be the only one selling things and have no competition. 

The thing that keeps new competition from coming is that, to rival Amazon, you have to have a large sum of money to invest as they have. So only major corporations can do it. Meaning, odds are, there will be little to no competition for them.

Edit: 

From the comments,

 

 

Amazon opting to be flat, effectively at 0% margin, is a game other businesses don't have the will to do, and Amazon doesn't have the will to do so indefinitely. The idea is to endure long enough to starve out competitors until monopoly acheived. At that point, rather obscene profit can be reaped. This is critical because much of Amazon's businesses is very intensive in up front investment to get logistics or infrastructure going. Competitors currently can compete because the logistics and infrastructure they built is already there. If competitors are forced out over time, it's really hard for a *new* competitor to emerge.

 

I've seen it discussed in hosting versus EC2. While companies can operate cheaper or as cheap as EC2, they don't see money at that scale. I've seen at least one company talk very seriously about starting to close down hosting and reclaim investment in datacenter footprint since EC2 has made it impossible to profit. Once that move has been made, this company is unlikely to ever get back into the game again because it would mean having to build up a lot of expensive infrastructure with low likelihood of long term payoff.

That is what they are doing. Crushing the competition.

[nsyedhasan]

Again, you aren't making sense.

Basically, what Amazon is doing is they are driving out competition by investing all their profits into expanding. The ultimate goal of this is to be the only one selling things and have no competition. 

The thing that keeps new competition from coming is that, to rival Amazon, you have to have a large sum of money to invest as they have. So only major corporations can do it. Meaning, odds are, there will be little to no competition for them.

Sorry I'm not good with the words. You said about what I meant.

[Yoinkerman]

I'm glad that even though they're a public corp, they get to do what they want.

[James_AJ]

was this not obvious ever since... well, Amazon started expanding out into everything?

[Gunzkewl]

I don't know a single person who dislike Amazon, they have an amazing reputation. 

[DarkEcho]

Soon.

 

Soon we will see 1 hour delivery times where everything is shipped on amazon branded rockets.

 

The international amazon warehouse space station. Delivering anywhere, anytime.

[Anult]

Soon.

 

Soon we will see 1 hour delivery times where everything is shipped on amazon branded rockets.

 

The international amazon warehouse space station. Delivering anywhere, anytime.

 

And then, people will complain that their deliveries were an hour late.

[helping]

[monopoly intensifies] 

Just picked up some boxer briefs, been meaning to and 5$ a pair is a steal. Never knew they had their own clothing store. 

[Vitalius]

Just picked up some boxer briefs, been meaning to and 5$ a pair is a steal. Never knew they had their own clothing store. 

Me either. Until that email came. 

I bought a reversible belt for like $18? It is very nice.

*sigh*... just feeding the machine.

[LAwLz]

Well Amazon is not in Sweden yet so I've only used it like 2-3 times, so correct me if I am wrong but isn't Amazon a collection of stores, as well as their own store? I mean for example, if I were to buy this Dolphin hand puppet (5 points to anyone who gets the reference) I could actually choose to buy it from TheJungleStore instead of Amazon's own warehouse. So what is hindering other retailers from simply selling their items on Amazon if they were to start dominating the whole market?

It wouldn't be good if they became a monopoly, even though I think Amazon is awesome, but I don't really see any way to stop them nor do I see why it would be a bad thing if they did (don't see it as a good thing either mind you).

 

 

Speaking of Amazon, here is a really awesome quote from the founder of Amazon when a publisher asked them to censor bad reviews on books:

Publishers: What if people trash the books? Surely that would be bad for business.

Amazon founder: That's where you're wrong. You're in the business of selling books. We are in the business of satisfying our customers.

[rashdanml]

As far as I know, Amazon is largely a fulfillment corporation. It's not really killing other businesses, it's helping other businesses grow through Amazon.

The only issue I have with them is pricing of items in Canada. And international shipping costs (which is ridiculous for some items). Other than that, they're excellent.

[Vitalius]

Bump.

Just thought I'd add in this www.wimp.com article talking about this same subject.

[EAGLEPWNAGE]

Soon.

 

Soon we will see 1 hour delivery times where everything is shipped on amazon branded rockets.

 

The international amazon warehouse space station. Delivering anywhere, anytime.

Many uk stores offer 90 minute delivery now

[1funnygame]

So basically we are running into a paradox of the free marker. Can the free market allow a company to get so big, that it removes the free market? 

 

But I have to say that the tactic that Amazon uses is strange. Of course Amazon will gain big in the end, but they are also running a major risk. If they keep investing 100% of their revenue, they will not be able to withstand a possible loss in income.

its like BnL from wall-e

[Vitalius]

its like BnL from wall-e

It's exactly like BnL. 

Replaces world government and everything.

FYI, BnL is in most Pixar movies. There's a can of soda with BnL written on it (the exact same logo) in either Toy Story 1 or 2 (I believe 1). 

Most Pixar movie have tie-ins like that. In fact, there's a theory that they all happen in the same universe. Monster's Inc. Toy Story. Wall-E. Brave. All of it.

[1funnygame]

It's exactly like BnL. 

Replaces world government and everything.

FYI, BnL is in most Pixar movies. There's a can of soda with BnL written on it (the exact same logo) in either Toy Story 1 or 2 (I believe 1). 

Most Pixar movie have tie-ins like that. In fact, there's a theory that they all happen in the same universe. Monster's Inc. Toy Story. Wall-E. Brave. All of it.

ya remember buzz lightyears batteries are from BnL

[MzCatieB]

reason why i go to amazon first