Amazon: Everything But Cost Control
August 9, 2013
Amazon is one of the Internet success stories which generally avoids too much praise and too much criticism. The company offers convenience for shoppers who want to get presents delivered to their door.
I read “Amazon’s Profits”, an analysis which takes a look at the concept of profits. The article points out, “You don’t actually know what the profits are.” I would agree. Figuring out Amazon’s financial statements is a time consuming task. When one tosses in various bits and pieces like Mr. Jeff Bezos’ own investment vehicles, I am not sure who owns what. I have heard at conferences that some promising start ups get an opportunity to have Amazon be like a Big Brother. I turn a deaf ear on chatter which suggests the type of deals which are possible. I assume that gossip is inevitable when a service has so many ways to provide services and products to customers worldwide. My most recent Amazon delivery showed up in the early evening. The delivery car was a standard station wagon. The driver looked like one of the fellows at the local pizza joint. Hey, it worked.
The write up presents a number of graphs. These indicators show revenues rising and net income flat, which has been one of the defining characteristics of Amazon for more than a decade. (“Where does the profit go?,” I ask. Some analysts do not seem concerned about this minimal profit attribute, however.) The Amazon revenue by business unit shows that the building block is eCommerce. The write up points out:
This chart [Amazon revenue by segment] shows the revenue segments that Amazon reports. These are in different industries, at different stages of development, and in different markets. It seems pretty likely that their underlying economics are different too. Not, that is, the FCF or net incomes that Amazon reports after all that re-investment, but the underlying performance of the divisions. Moreover, even this isn’t the full story, since Amazon is actually a lot more atomized. Most separate product lines have their own internal owner and P&L by country or region (with a lot of internal transparency, incidentally). Some of them fail and get killed, some have only just started and some are doing very well.
I am no financial wizard. I just assumed that rolling up revenues and costs allows Amazon to present the best possible picture to investors while hiding some of the details from competitors and inquisitive analysts.
The one point I would add to this interesting write up is that Amazon seems to be fighting an on-going battle with cost control. One quick example, “Selling General and Administrative Expenses, FY 2010, 2011, 2012 look like this:
With the approach Amazon is taking in Web services, I wonder if users of these cloud services are actually subsidizing Amazon’s technology infrastructure. The recent roll out of cloud search raises questions about how much money Amazon will pump into the service. Right now, connectors and other must-have features are not available. The interesting deals which have some competitors using Amazon Web services to deliver their service are offered along with similar or directly competitive Amazon branded services. (See my forthcoming article in Information Today “Amazon: The Search Lazy Susan.”) What are the levers Amazon will pull to get its costs under tighter control? How will Amazon deal with labor dust ups in Germany?
Amazon is an interesting company to try and analyze. Like Google and some other dominant Web operations, the finances of these companies are managed to trigger mystery. Investors seem to love AMZN. As I post this, the stock is in the $300 per share range. Hapless JCPenny is about $13 per share. Will JCPenny and other retail outfits survive? I don’t plan on opening a retail store. Heck, I can’t even go into local shops any longer. The outfits have gone out of business. Rampant mismanagement in the Amazon jungle? Good question.
Stephen E Arnold, August 9, 2013
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