Why Amazon Has No Profits (And Why It Works)

What amazes me about Amazon is how Wall Street treats them.  I love companies that put their profits back into the company to make the future better.  Some companies, like Apple, cannot necessarily put all of the profits back into the company, it goes against their strategy of extreme focus.  

However, the secrecy of all the spend is what baffles me.  Not that Amazon has to tell anyone where it spends its money, but that Wall Street gives them a break on it.  Apple doesn't say what their future products will be and Wall Street gets very upset, yet Amazon spends billions of its profits on reinvesting in Capex and then tells Wall Street its none of your business what we are spending it on and Wall Street says, "ok".  

The thing that would worry me about Amazon is lack of focus.  The varying array of different businesses Amazon has gotten itself into continues to grow.  From the article:

Amazon is in fact organized not just in these segments, but in dozens and dozens of separate teams, each with their own internal P&L and a high degree of autonomy. So, say, shoes in Germany, electronics in France or makeup in the USA are all different teams. Each of these businesses, incidentally, sets its own prices.

The bigger Amazon becomes, the harder it is to manage.  Amazon then becomes a conglomerate and eventually starts doing nothing well, just runs a bunch of revenue through its coffers.  This leaves the valuable revenue and cash flow at risk, giving an upstart the opportunity to out perform Amazon by focusing on one part of their business.  If that happens to be the profitable retail business, Amazon could find itself vulnerable as it may be focusing on other business lines and be too late to react.  

The Macalope Weekly: Hard lessons to learn | Macworld

“Android tablet revenue surpasses iPad for the first time (but not the last)” (No link, but tip o’ the antlers to … well, John Koetsier!)

Profit is a trailing indicator. And in the big picture, the overwhelming tide is to Android, in device diversity, in device quantity, in usage, in sales volume, in revenue.

This is a very interesting take on profit, especially in the tech industry, especially in hardware.  The times where hardware vendors have had a dominant position in market share, they have all either gone out of business or the businesses have been destroyed.  

To say profit is a trailing indicator is an insane comment.  The only way to keep a competitive advantage in hardware is to make a profit.  To gain market share usually comes at the expense of profit and is short lived.  R&D, customer service and quality of product are all things that suffer under the weight of large market share.  The only sustainable business model is consistent profits.  Sounds a lot lille Apple. 

How the U.S. Airline Industry Found Its Edge or Demise?

So what happened? The turnaround can’t be attributed to a bold, Da Vinci-esque initiative such as new carbon fiber aircraft, the pioneering of new markets or even low-cost innovation. Rather, it was the result of something far more modest: the slicing of airlines’ base offerings into customizable “options and extras.” The most famous of these options was checked-bag fees, but most of the recent innovations have focused on “upselling” passengers into an improved experience (e.g., selling fast-track boarding, lounge-access, extra leg room and others).  

This is one of the most interesting articles I have read from Harvard Business Review.  For one, I can't disagree more with the premise.  The premise of the article is that charging fees is a good thing for businesses.  Like many businesses in the "what have you done for me lately" quarterly earnings craze, the airlines have gone with the strategy of making bad profit.  

What's bad profit do you ask?  It's profit that erodes the long term profitability of the business.  Not all profit is created equal.  The airlines have sacrificed customer satisfaction and loyalty for short term profit.  The article argues it saved the industry and these are innovative.  I argue there is nothing innovative about this strategy.  It is lazy. 

As part of this shift, airlines realized that some people didn’t need everything that was included in the sale of a standard ticket; this opened the door to unbundling the “one size fits all” offer — and led to the introduction of fees for checked bags. Many business travelers never check a bag but historically subsidized the substantial cost for leisure travelers who did. Today, those who need the option pay for it. Many passengers grumbled, but the impact has been undeniably positive for the industry. Last year bag fees alone generated $3.6 billion in revenue in the U.S. Imagine where the industry would be without this?

What?  Unbundling?  They didn't unbundle, they added on fees.  If they were truly unbundling, that business traveler referenced above would start paying less for their ticket.  Instead, they kept prices the same or even raised them and tacked on these fees.  I can't comprehend this thought process. 

What really has saved the airline business?  From the outside looking in it seems they have become smarter about their routes.  They have cancelled many unnecessary flights, because most flights I go on are completely full.  That wasn't the case before, and it's not because the customers are excited about paying for baggage fees. 

The airlines seem to have become better at yielding their prices.  I don't know if it was a big practice in the past, but the airlines seem to be much more strategic about their pricing model.   

Articles like these make me wonder what we are learning about customer service.  These strategies allow for an upstart competitor to come in and take major share, think Southwest.  Southwest is growing faster than ever and that is because they don't nickel and dime their customers.  Maybe the other airlines should find their "true innovation". 

Amazon's Jeff Bezos: The ultimate disrupter - Fortune Management

He's a pro-customer, tightfisted risk-taker who is conditioning Wall Street to embrace his erratic earnings. If you're running a business with high margins -- watch out.

I am fascinated with Jeff Bezos and Amazon.  Years ago I became obsessed with Steve Jobs and Apple and the differences between the two companies are drastic.  People compare Jeff and Steve all the time, but there isn't much in common from their philosophies.  

The first thing that fascinates me about Amazon is when are they going to start making money?  Sure they bring in a large amount of revenue, but they really don't bring anything to the bottom line.  Can they ever?  If they make moves to make more bottom line will they lose their extremely price sensitive customers?  It will be interesting to watch.

I also don't know if this low margin business model is actually good for the consumer in the long run.  Sure, it's always nice to pay next to nothing for any items, but there are always consequences.  Innovation will lessen if a competitor can come in later and make no money and steal all the marketshare.  Also, for companies that sell to Amazon, if price is always driven down and margins are always squeezed, the products become worse over time.  Companies need to make money and margins are a good thing as it allows for better innovation in the product and higher R&D budgets.  If the margins are so low, the only innovation becomes cost-cutting and that is not good for anyone, especially the consumer.

Again, it will be interesting to watch.  

Amazon profits: They don't exist, but the company keeps on keeping on.

I totally agree with this article.  Companies like Amazon and Google are ruining innovation and stifling competition.  If they are going to compete in many markets at a loss, it prevents many other companies from entering the space because they can't compete and make a profit.  

I still don't understand the fascination with market share.  Market share without profit is meaningless.  The theory with Amazon is eventually they'll be able to bring some of that massive top-line to the bottom, but can they really?  Are customers loyal to Amazon or the price?  If they try to get more margin will they keep the business or have they just trained their customers to expect the service and goods at a discounted price and wait until they get it?  

It's about time Wall Street and bloggers start rewarding companies that make money and are growing longterm sustainable business models, instead of focusing on market share and number of non-paying customers a company acquires.