Business and Industry

Amazon: A Loss for Them is a Profit for You!

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Matthew Yglesias spells out one of the occasional glories of sorta-kinda free market capitalism: how big bad companies and their fatcat investors lose so that you may win:

Amazon kept up its streak of being awesome this afternoon by announcing a 45 percent year-on-year decline in profits measuring Q4 2012 against Q4 2011. Not because sales went down, mind you. They're up. Revenue is up. The company's razor-thin profit margins just got even thinner, and in total the company lost $39 million in 2012.

The company's shares are down a bit today, but the company's stock is taking a much less catastrophic plunge in already-meager profits than Apple, whose stock plunged simply because its Q4 profits increased at an unexpectedly slow rate. That's because Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers. The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. Amazon sells things to people at prices that seem impossible because it actually is impossible to make money that way. And the competitive pressure of needing to square off against Amazon cuts profit margins at other companies, thus benefiting people who don't even buy anything from Amazon.

I blogged a decade ago on the eternal death of the book business as we peons eternally get more access to more books.

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  1. Fuck Amazon and their “dynamic pricing” and sales tax collection.

    1. Right, because brick-and-mortar stores do neither of those?

      OK.

      1. If only there were retail vendors who were neither B&M or Amazon…

    2. Dynamic pricing is the optimal market solution. Always fun to hear the “IT’S NOT FAIR!” whine come from new quarters.

      1. Who is saying “it’s not fair”?

        1. So you have a real argument against dynamic pricing?

          1. Creating artificial market volatility for something that isn’t scarce or particularly high in demand is a PITA for the customer and makes the seller look like a jerk.I’d compare it to deceptive price advertising which it often is.

            1. You cannot equate dynamic pricing with volatility. The algorithm is not volatile. It is simply reflective of market judgements.

              Dynamic pricing will still fail on the Internet because there are too many actors with too many published prices. But conceptually, it maximizes value across the board.

              1. It will fail as they are using it now. Much as other deceptive price advertising business strategies have failed.

                If a vendor consistently raises the price when I put an item in my cart or uses paid search advertising to promote a price that isn’t honored when you click through or jerks the price around based on my security settings and browser choice I’m going to buy from someone else.

                1. I haven’t seen that tactic used. In my experience items that are left in my cart for an extended period will normally go down in price over time – and sometimes they go up. Usually small amounts in either direction, unless the overall market goes up (like it did for hard drives last year).

                  Admittedly this is an unscientific and anecdotal observation. I do agree with the general queasiness over the notion that I might be getting a higher price than the next guy because I look like an easy mark. I feel the same way when shopping for plane tickets. (now there’s a situation where tickets available at that price often disappear before I can check out!)

    3. Fuck Amazon and their “we’ll charge you the same price for the hardback and the Kindle edition” pricing policy

      1. That’s the publishers’ fault, I believe.

      2. This is why I only read things in the public domain on an e-reader. I’m not buying an e-book unless it costs less than a physical copy and I can re-sell it.

    4. Well, I like the dynamic pricing and I live in a no sales tax state, so I think Amazon is great.

  2. Amazon is the Walmart of retail!

    1. Walmart makes money.

    2. The parking is a lot better at Amazon than it is at Walmart.

    3. That’s what I was thinking. I can’t imagine Iggy writing a column praising Walmart.

  3. Matt Yglesias: a column from him is a loss for us all.

    1. Yeah, but it seems as if something blocked the stupid for this column. I have faith that it will return soon, however.

      1. It returns as soon as you click on the link:

        “Competition is always scary, but competition against a juggernaut that seems to have permission from its shareholders to not turn any profits is really frightening.”

        What an absolute fucking moron. Margins, at least across and industry, are almost entirely a function of perceived risk. Wal-Mart has 3% profit margins. Medical insurers are about the same. Apple and Google have 20% margins. The difference has nothing to do with “permission from shareholders” or competition (is the tech industry not competitive?). That is utterly laughable.

        Seriously, how the fuck do people read this idiot. He doesn’t even have the most cursory grasp of business or economics or anything, really.

        1. He tells them what they want to hear. For a leftist, having a bookish writer give them something they can nod along with in agreement and satisfaction is an almost sexual pleasure.

        2. Seriously, the only reason I can think why somebody would write something so stupid (other than them having the IQ of a baboon), is because they’re setting up Amazon as the target of the next coordinated negative propaganda campaign, ie, “OH NOEZ!! Amazon is a monopolist undercutting the competitionzzz!!” Makes some sense given that leftards have never liked Amazon due to the sales tax thing.

          1. I think that could be their move. They honestly hate success. See the failure of the socially conscious investing strategies some of the pension funds have tried. If you’re succeeding, it’s obviously exploitation. Failure and poverty are virtuous, success and wealth are suspect at best.

            1. Trouble is, it isn’t an argument based on a foundation of logic. It’s an argument based on emotion, founded on unreason.

              It’s tough to argue with someone who responds with fear when they’re confronted by the prospect of examining their precepts.

        3. Amazon has a forward PEG of 5 and a forward PE over 140. That is an indication that the shareholders are happy with their strategy and not hammering their stock price for their behavior. This rewards execs that get a big chunk of compensation in stock options and RSUs.

          Amazon’s strategy of low margins leaves a tiny price umbrella for new competitors to emerge because they already have scale advantages that are very expensive and capital intensive to duplicate and that investment will lead to a pretty unprofitable outcome for new entrants. So they have a very wide moat and even if you cross that moat, there’s not much treasure to be found. Contrast this with social networks of various kinds. The barriers to entry are low and there’s gold in them thar hills (e.g. FB has a ridiculously high gross margin)

          http://www.eugenewei.com/blog/…..nd-margins

      2. Er, yeah. Like KPres said, click the link. Or better yet, don’t.

  4. Amazon is the company that doesn’t change in an industry forever changing. Remember Apple in 1999? Barely hanging on by their fingernails. Amazon? Same thing.

    Fast forward to 2012, Apple I believe is now building a Death Star behind the Moon (an ergonomic, eco-weenie Death Star with a unibody chassis mind you), and Amazon is still barely hanging on by their fingernails.

    1. Eh, things change in the tech industry because it’s a brand new industry.

      Amazon’s next move is to push delivery times lower and lower. Right now Prime gets you free two day delivery. What if that becomes one day or even same day delivery. It can happen.

      They don’t need to do anything different so much as they need to do what they do faster and more efficiently.

      1. Amazon is building a distribution center in Fresno to facilitate same or one day delivery to northern and southern California.

        1. Amazon is building a distribution center in Fresno to facilitate same or one day delivery to northern and southern California.

          That’s why they caved on sales taxes.

    2. I guess you haven’t heard of the Kindle or Amazon Web Services. Or Kindle Digital Publishing. Or Createspace.

      1. Or same day shipping. Or Amazon Fresh. And they also own Woot and IMDB.

        1. I meant them moving one day or same day shipping to their Prime service, which I think will happen at some point. Fresh is awesome if you live in Seattle. Hopefully one day it will come to places around the country.

          1. Amazon is building/acquiring distribution centers in urban centers. They won’t stock the entire inventory, but they will start to offer same-day delivery on many products. Essentially, they want to take over the role that WalMart and Target play right now, i.e. you order toothpaste, toilet paper, an extension cord, some socks, a case of Aquafina, and aluminum foil and it arrives on your doorstep before you get home. It’ll save you running those little errand runs.

      2. Kindle:
        I want a book published in 2002, Kindle charges $10.99.
        or I can buy the same book used (LIKE NEW) for $1.01 plus $2.99 shipping.

        1. Hardcover used was $7.99

        2. Did the emergence of e-readers take the option away from you to buy a used physical book? What’s that? No, in fact the biggest player in the e-book market is also the world’s largest seller of used books?

          How is this something to complain about? If you don’t like e-books or you don’t consider them a good value, DON’T BUY THEM!

          1. OK, I won’t. The simple fact is that the pricing mechanism defies logic.

            1. No, it defies your personal preferences (I’m assuming). The fact that people are paying that price for an electronic copy of a book that they could buy a hard copy of at a lower price means that there are people who value the electronic book higher than the used hard copy book. I am one of those people. I understand you and I have different preferences, but both my preferences and yours can be logical.

            2. Defies logic? Truth is, an e-book is more valuable to me than a dead-tree book. I don’t want to wait for a book to be delivered. I don’t want to keep it on a shelf. I don’t want Nosy Nellies asking me how I like it on the plane. And if I go to visit relatives and forget mine, I want to be able to pick up their tablet, log in, and start reading right where I left off.

            3. Only if you think cost, rather than value, should be the guiding factor in pricing.

      3. They already do next-minute delivery of e-books, TV shows, and movies via download.

        I believe they are piloting same-day delivery of some products in large urban markets.

        Don’t forget Amazon Marketplace, where the essentially lease out their infrastructure to anyone who wants a highly functional retail web presence.

        Amazon innovates plenty. And they make money. Their margins are low, but real, and they grew last quarter.

        1. Plus, Kindle Direct Publishing enables anyone with something he wants the world to hear to publish an e-book and sell it through Amazon, side by side with all the “real” books by “real” authors, for zero cost other than a share of your sales revenues. That is effing awesome.

          1. And even things that no one wants to hear.

  5. The thing is Amazon dumped a ton of money investing in infrastructure (twice as much as the year before 3.6 billion). I imagine the thought is to make money off that investment in the future. This analysis is rather silly, you could object to the PE ratio and say it is out whack, but saying it is charity when it very clearly wants to make money is stupid.

    1. Server space. Distribution center acquisition.

  6. Competition is always scary, but competition against a juggernaut that seems to have permission from its shareholders to not turn any profits is really frightening.

    If you think that’s bad, think about competing against companies that get government bailouts – companies that not only don’t turn a profit but actually lose tons of money and then get your tax money – money you made by running a profitable business – to keep them in the business of competing against you. If you think Amazon is a juggernaut, try getting in the way of the feds.

  7. From what I understand a big part of Amazon’s business is selling/leasing their proprietary IT, I wonder if that is included here or if it’s just retail figures?

  8. Yglesias is such a fool. Today, he is happy that Amazon drags down prices and loses money. But tomorrow he will take this logic and decry it when it a different company does it and makes money.

  9. Amazon will eventually meet the same fate as Monkey Wards and The Great Atlantic and Pacific Tea Company.

    1. So what? Everything will eventually.

  10. I thank the people who made it possible for coffee, cheap HDMI cables, and a wall mount for a TV to show up today before I even put on shoes.

  11. I remember way back in the dark ages when everyone knew no one could ever compete with Wal-Mart or Microsoft. We became their serfs, right? Or the Almightly Government stepped in and shut them down, right? Because those were the only possible outcomes.

    1. Funniest thing to me is that I wouldn’t invest in wal-mart today simply because I think their business model is going to lead them into bankruptcy in the not-so-distant future (5-10 years).

      1. Well, we know this time it’s different. Google and Amazon are forever. And evil. And we are powerless to stop their brutal profiteering at our expense.

  12. Yglesias: Still a moron. Amazon has invested billions in new shipping centers and servers recently, as they note in their financial statements, and has made billions in profits over the life of the company. They are a great, well-run company that competes fairly in as close to a free market as there is in this country today. $39 million is a miniscule loss, and they will make it up in the next quarter.

    Full Disclosure: I own a few shares of Amazon, so I pay close attention to them. Yglesias may not be capable of paying close attention to anything.

    1. Their forward PE is still in the 140s and their forward PEG is still above 5, which means their growth isn’t justifying their multiple. They’re a great company, but the fundamentals don’t justify the price.

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