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Can Someone Please Explain the Amazon Business Model???

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  • Can Someone Please Explain the Amazon Business Model???

    I can't help but think that some day this is going to make a classic HBS case matter how it turns out. (I also couldn't help but note that several alleged "financial" news outlets confused the 9 cent per share loss and reported it as positive 9 cents per share earnings - so much for reading comprehension among financial journalists).

    In the meantime can someone explain to this mystified observer exactly how this is supposed to work?

    "...After the close Thursday, posted a quarterly loss of $41 million, or nine cents per share, matching analyst expectations. Revenue jumped 24 per cent $17.09 billion against expectations of $16.76 billion and its stock surged US$31.18, or 9.39 per cent, to $363.39..."

    Here's the first part of the Amazon earnings press release:

    SEATTLE--(BUSINESS WIRE)--Oct. 24, 2013-- Inc.
    (NASDAQ:AMZN) today announced financial results for its third quarter ended September 30, 2013.

    Operating cash flow increased 48% to $4.98 billion for the trailing twelve months, compared with $3.37 billion for the trailing twelve months ended September 30, 2012. Free cash flow decreased 63% to $388 million for the trailing twelve months, compared with $1.06 billion for the trailing twelve months ended September 30, 2012. Free cash flow for the trailing twelve months ended September 30, 2013 includes fourth quarter 2012 cash outflows for purchases of corporate office space and property in Seattle, Washington, of $1.4 billion.

    Common shares outstanding plus shares underlying stock-based awards totaled 475 million on September 30, 2013, compared with 469 million one year ago.

    Net sales increased 24% to $17.09 billion in the third quarter, compared with $13.81 billion in third quarter 2012. Excluding the $332 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 26% compared with third quarter 2012.

    Operating loss was $25 million in the third quarter, compared with an operating loss of $28 million in third quarter 2012. The unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter on operating loss was $7 million.

    Net loss was $41 million in the third quarter, or $0.09 per diluted share, compared with a net loss of $274 million, or $0.60 per diluted share, in third quarter 2012. The third quarter 2012 includes a loss of $169 million, or $0.37 per diluted share, related to our equity-method share of the losses reported by LivingSocial, primarily attributable to its impairment charge of certain assets, including goodwill...

  • #2
    Re: Can Someone Please Explain the Amazon Business Model???

    Amazon is supposed to become the Walmart of the web. And I guess it is -- if you take the profit part out of it. :-)


    • #3
      Re: Can Someone Please Explain the Amazon Business Model???

      It seems quite reminiscent of the 98-99 timeframe for Amazon when I was with the company.

      Share price was getting silly combined with accelerated spending by the company.

      The difference between then and now at first glance seems to be gross margins are holding(even growing a bit) which I view as a strong positive.

      My guess(I've still got some good friends in senior roles there, but no knowledge of upcoming stuff) based on previous performance is truly long-term strategic investment being made with that blowout in overheads.

      From day 1 Jeff has reiterated that short-term profit is not even at the bottom of a long force-ranked list of priorities.

      And from having worked directly with the guy I believe it was then, and remains now, a genuine core principal of the company.

      The company seems to be able to successfully resist shareholder pressure for short term profit as well as relatively immune from negative investor sentiment.

      I'm obviously biased, but I think the combination of Amazon's virtual network of customers and its physical infrastructure network represents a pretty wide and deep "moat" in the words of Warren Buffett.

      So I'm guessing Amazon is dredging a wider and deeper moat, maybe with some crocodiles.

      But I have to admit the valuation/PE ratio is simply insane......but I am biased as it's the first year since I left where my post Amazon cumulative investment return has been beaten by my alternative universe Amazon return had I stayed with the company.

      Amazon's valuation is only 1/3 less than Walmart's and Walmart has 5 times the cash flow.

      Interestingly, Walmart and Amazon both share quite similar inventory turns(10-ish) today...which Rick Dalzell formerly of Walmart(and now former Amazon) specifically mentioned back in the 90's the opportunities for exceeding Walmart in inventory turns....which don't seem to have been achieved.

      I wouldn't put Amazon in the same category as Tesla, not by a long shot......but I think there are some very superficial parallels with Tesla/GM and Amazon/Walmart.

      I suspect the reasons for the ramp up in Amazon share prices include(but not limited to):

      *frothy FIRE economy share prices

      *possibility of investors seeing Amazon able to continue growing(online sales as % of total retail) in even a lousy(maybe even shrinking in the future) consumer retail market.

      *direct competition with not only Walmart for physical product delivery, but also the likes of Apple with digital content delivery.

      *knowledge that if things got tough, Amazon could take a break on the investment side of things and see it flow through to the bottom line as their sitting on more cash than Walmart.

      But NO WAY would I be a buyer at this silly price.....and I'm surprised how few shares are being shorted at this price(compared with 1/3 with Tesla).

      So take it with a grain of salt......because I'm biased to the positive because I worked there and still believe in the company and the people it employs.......but also biased to the negative because I'm pissed that this past year I would have been financially better off having stayed with the company....arrggg.


      • #4
        Re: Can Someone Please Explain the Amazon Business Model???

        a small setback in the bigger Amazon scheme of things but one too close for comfort . . .

        Publishing Executive at Amazon to Depart


        Laurence J. Kirshbaum, a stalwart of New York publishing who joined Amazon in 2011 to lead its New York publishing imprint, will leave the company in January, Amazon said on Friday.

        Sarah Gelman, a spokeswoman for Amazon, said that Mr. Kirshbaum was “instrumental” in starting Amazon’s New York publishing office. “We’re sorry to see him go,” she said in an e-mail. Mr. Kirshbaum declined to comment.

        Daphne Durham, the publisher for Amazon Publishing’s adult trade and children’s businesses, will take over Mr. Kirshbaum’s duties, Ms. Gelman said.

        Mr. Kirshbaum’s departure is the latest sign that Amazon’s publishing performance in New York has failed to meet the initial expectations. Traditional publishers worried at first about Amazon’s growing power, and news reports speculated about whether New York was “facing a full-scale invasion from Seattle.”

        Mr. Kirshbaum, whose background was in the more commercial side of publishing, was initially successful in signing some top authors, including Timothy Ferriss (“The Four-Hour Chef”), Penny Marshall (“My Mother Was Nuts”) and Billy Ray Cyrus (“Hillbilly Heart”).

        But he was unable to persuade Barnes & Noble, the nation’s largest bookstore chain, to sell Amazon’s books in its stores. Independent booksellers, who tend to see Amazon as a discount retailer that undercuts their business, almost uniformly refused to sell its books.

        That damaged Amazon’s ability to persuade authors and agents, who depend on print sales, to make deals with Amazon. Most book sales still come from print rather than digital.

        Benjamin Anastas, whose book “Too Good to Be True” was published by Amazon in 2012, said that he knew the lack of brick-and-mortar sales would be a “stumbling block” from the beginning. But Amazon executives promised that their Web site was a major advantage.

        “They said what they could depend on and what other publishers couldn’t was that they have this incredible retail space, which is the Amazon online bookstore,” Mr. Anastas said.

        While he said he would consider publishing with Amazon again, he acknowledged that “it was frustrating not having the book in more bookstores.”

        Shelf Awareness, an industry publication, first reported the news of Mr. Kirshbaum’s departure.

        Mr. Kirshbaum, 69, began his career at Random House and eventually became the chairman and chief executive of the Time Warner Book Group. He retired in 2005 and became a literary agent. He is expected to return to work as an agent.

        Ms. Gelman of Amazon said that the New York office would continue to grow and that new imprints were expected to be introduced soon.

        Amazon Publishing includes imprints that are based in Seattle and focus on genre fiction like mystery, thrillers and romance.


        • #5
          Re: Can Someone Please Explain the Amazon Business Model???

          Originally posted by don View Post
          a small setback in the bigger Amazon scheme of things but one too close for comfort . . .

          Publishing Executive at Amazon to Depart

          By JULIE BOSMAN
          I wonder if this could be described as a bit like the Apple Newton?

          At the time the failure of the Newton was an embarrassment, but in retrospect it can be seen as a logical(but premature) step towards the future in the form of tablets/iPads.

          As a rabid reader(and still collector of older/obscure specialty niche books) I have to admit I've gone almost completely over to the digital e-book darkside.

          As e-book sales accelerate and physical book sales inevitably plunge over the long term I would think traditional publishing houses are ripe for disintermediation and the likes of Barnes & Noble will have to adjust their business models...who knows......maybe Amazon will become even more vertically integrated with physical locations for product pick up/returns/same day delivery of fastest moving products.....look, listen,feel of "hero" products...brand embassy(Apple)....and a place to compete with Barnes & Noble for people's lifestyle free time.

          Maybe just premature?

          Maybe a comparison(if available) of proportional digital/physical book sales would be useful?


          • #6
            Re: Can Someone Please Explain the Amazon Business Model???

            Anecdotally, Amazon was the only available choice, aside from an obscure Swedish co., when my wife recently wanted to shop for Desigual.

            Note that Amazon even gives us Euro peons the choice of ordering within the EU with VAT automatically added, or feeling lucky and ordering from the US and thus taking the chance of the local customs missing the shipment altogether, thus saving about 20%.

            Desigual at Amazon UK

            3609 hits

            official site of Desigual Latvia

            (Google translated from the Latvian)

            Desigual clothes are not currently available for purchase Latvian, so here we summarize the online stores that deliver Desigual clothing worldwide:

            Amazon UK, Amazon DE, Amazon FR, Amazon AT Amazon U.S. Tintin Style

            Desigual purchase in the U.S., in addition to VAT will be added to the present (pre-payment). In addition to the Latvian receiving the order will not have to pay anymore.

            To make sure that the chosen product is delivered worldwide, online shopping Checked to the seller of goods is Amazon - other vendors can not supply goods worldwide.
            Justice is the cornerstone of the world


            • #7
              Re: Can Someone Please Explain the Amazon Business Model???

              Originally posted by GRG55 View Post

              In the meantime can someone explain to this mystified observer exactly how this is supposed to work?

              "...After the close Thursday, posted a quarterly loss of $41 million, or nine cents per share, matching analyst expectations. Revenue jumped 24 per cent $17.09 billion against expectations of $16.76 billion and its stock surged US$31.18, or 9.39 per cent, to $363.39..."

              amazon is still a start up. its business model works on a different time scale than [all or most] other companies. that is how the company is being viewed by the market, just as it is being viewed by bezos.


              • #8
                Re: Can Someone Please Explain the Amazon Business Model???

                good point. amazon appears to be taking over the world. I just ordered a heavily discounted 25 lbs pail of pool chemicals - and I get free 2-day shipping with Amazon Prime. For many years now I thought the business model was a customer grab on the way to effective monopoly dominance with losses up front (like a heroin dealer who gives away product). They continue to innovate and expand.


                • #9
                  The Everything Store

                  Selling as Hard as He Can

                  By MICHIKO KAKUTANI

                  THE EVERYTHING STORE

                  Jeff Bezos and the Age of Amazon

                  By Brad Stone
                  Illustrated. 372 pages. Little, Brown and Company. $28.

         was named after the Amazon River, the largest river on the planet (by volume). According to Brad Stone’s absorbing new book, “The Everything Store,” some of the other names its founder, Jeff Bezos, initially considered were “” (after the command used by Captain Picard on “Star Trek: The Next Generation”), “,” “,” “” and “”

                  “Relentless” is certainly the perfect adjective to describe the company’s growth, and the tenacity with which Mr. Bezos has executed his vision: to use the web’s infinite shelf space to create what Mr. Stone calls “the merchandiser’s dream of the everything store — a store with infinite selection.”

                  Amazon started out modestly as a Seattle-based online bookseller in 1995: It was so small that every time someone made a purchase, Mr. Stone writes, “a bell would ring on Amazon’s computers, and everyone in the office would gather around to see if anyone knew the customer.” In 2012, its 17th year of operation, Mr. Stone reports, the company “cleared $61 billion in sales,” and it will probably become “the fastest retailer in history to surpass $100 billion.”

                  Amazon survived early prophecies of doom; branched out into selling music, movies, electronics and toys during the dot-com boom of the late 1990s; and made it through the dot-com bust of 2000 and 2001. After mastering “the physics of its own complex distribution network,” Mr. Stone notes, it expanded into selling jewelry, clothes, sporting goods, automotive parts and just about everything else, becoming the Internet’s top retailer and a leading platform for third-party sellers. The company would go on to revolutionize bookselling with its Kindle e-reader, even as it also positioned itself as a cutting-edge technology business, selling basic computer infrastructure like storage, databases and raw computing power; according to Mr. Stone, customers of Amazon Web Services include start-ups like Pinterest and Instagram, larger companies like Netflix, and divisions of the United States government, including NASA and the C.I.A.

                  Mr. Stone, a senior writer for Bloomberg Businessweek and a former reporter for The New York Times, tells this story of disruptive innovation with authority and verve, and lots of well-informed reporting. Although “The Everything Store” retraces early ground covered by Robert Spector’s 2000 book, “ Get Big Fast,” Mr. Stone has conducted more than 300 interviews with current and former Amazon executives and employees, including conversations, over the years, with Mr. Bezos, who “in the end was supportive of this project even though he judged that it was ‘too early’ for a reflective look” at the company.

                  “The Everything Store” does not examine in detail the fallout that Amazon’s rise has had on book publishing and on independent bookstores, but Mr. Stone does a nimble job of situating the company’s evolution within the wider retail landscape and within the technological revolution that was remaking the world at the turn of the millennium. He gives the lay reader an understanding of how Amazon was able to outmaneuver the already established book chain Barnes & Noble, and how it’s been able to grow and mutate and take on Internet giants like eBay and Apple.

                  Mr. Stone also provides a dynamic portrait of the driven and demanding Mr. Bezos, going so far as to track down his biological father, Ted Jorgensen, a former circus performer and unicyclist, whom Mr. Bezos hadn’t been in contact with for decades.

                  Two of Mr. Bezos’s basic principles are putting the customer first and thinking for the long term. Mr. Bezos and his lieutenants reasoned, Mr. Stone writes, that “lower prices led to more customer visits. More customers increased the volume of sales and attracted more commission-paying third-party sellers to the site,” which “allowed Amazon to get more out of fixed costs like the fulfillment centers and the servers needed to run the website,” which, in turn, led to greater efficiency and the possibility of lowering prices even further. At the same time, improving the customer experience — whether through deep discounts or free shipping — would lead to word of mouth, which would take the place of costly advertising.

                  One-click ordering allowed customers to purchase things with the single press of a button. Other initiatives, like offering a 40 percent discount on “Harry Potter and the Goblet of Fire” and express delivery, cost the company money, but, as Mr. Bezos saw it, helped to build customer loyalty. The introduction of Prime membership — which cost $79 per year, and provided free two-day shipping — similarly seemed to make little sense in terms of the immediate balance sheet, Mr. Stone says, but eventually justified its existence, turning “customers into Amazon addicts who gorged on the almost instant gratification of having purchases reliably appear two days after they ordered them.”

                  But if Amazon aspired to reduce friction for customers, Mr. Stone suggests that it remained a high-friction place to work. He describes the in-house culture as “notoriously confrontational,” and writes that because managers in departments of 50 or more people are required to “top-grade” their subordinates along a curve (and dismiss the least effective performers), “many Amazon employees live in perpetual fear” of termination.

                  Whereas other Silicon Valley companies like Google offer their employees lavish perks like free food, office gyms and day care, Amazon was known for its extreme frugality. In the late 1990s, Mr. Stone reports, a new executive “cut a rare office perk, free Advil, which he viewed as an unnecessary expense,” setting off “a near insurrection among employees.”

                  Manufacturers and retail rivals also became well acquainted with the sort of hardball that Amazon played. Small publishers dependent on Amazon sales of their back catalogs — and called, perhaps jokingly, sickly gazelles to Amazon’s cheetah — were pressured for better terms, Mr. Stone reports, while shoe brands like Nike and Merrell worried that Amazon was a “dangerous discounter” that would “very likely consign their new in-season products to the bargain bin in an effort to garner new customers and gain market share.”

                  As for rival e-commerce sites, some found themselves struggling to survive in the face of Amazon’s ferocious price-cutting. A New Jersey company named Quidsi, known for its website, Mr. Stone writes, was essentially forced into selling itself to Amazon after the introduction of a new service called “Amazon Mom,” with a “Subscribe and Save” program that drastically discounted diapers — at a huge immediate loss for Amazon, but with the achieved goal of “neutralizing an incipient competitor.”

                  What lies ahead for Amazon? Mr. Stone says he thinks that it’s likely that antitrust authorities will eventually “come to scrutinize Amazon and its market power,” but adds that the company has become “a masterly navigator of the law and is careful to stay on the right side of it.” He also predicts that Amazon might one day use 3-D printing (an evolving technology “in which microwave-size machines extrude plastic material to create objects based on digital models”) to print merchandise in its fulfillment centers, and that it will most likely introduce a mobile phone or an Internet-connected television set-top box soon, so that it can offer its services on all the connected devices its customers use.

                  The relentless Mr. Bezos, this book concludes, is not content simply to make Amazon an “everything store” but ultimately envisions “an everything company.”


                  • #10
                    Re: The Everything Store

                    Bezos purchase of a major newspaper, located in the regulatory nerve center of the nation, becomes a bit clearer, day by day . . . .


                    • #11
                      Re: The Everything Store

                      Originally posted by don View Post
                      Bezos purchase of a major newspaper, located in the regulatory nerve center of the nation, becomes a bit clearer, day by day . . . .
                      One of the great young folks working for me at Amazon WAY back in the day is now in a fairly senior position within the company.

                      In the last week he's met with 3 members of congress.


                      • #12
                        Re: The Everything Store

                        Originally posted by lakedaemonian View Post
                        One of the great young folks working for me at Amazon WAY back in the day is now in a fairly senior position within the company.

                        In the last week he's met with 3 members of congress.
                        Wonder if the Washington Post came up


                        • #13
                          Re: The Everything Store

                          Originally posted by don View Post
                          Wonder if the Washington Post came up
                          ya think?

                          wonder if the santa fe reporter will be mentioned...

                          amazing what one can stumble onto on a 'random walk down main st'
                          (read: didnt realize - or recall anyway - that JB was a wall st guy, its all starting to fill-in now)

                          The Birth of Amazon

                          LEGEND has it that the founding of Amazon is a classic story of a guy pulling himself up by his own bootstraps. In 1994, a bright, young fellow named Bezos heads off to the Seattle suburb of Bellevue, with not much going for him but old-fashioned pluck and a unique idea: Selling books on this new thing called the Internet. Some called him crazy, but the bold entrepreneur got his online “bookstore” started in his garage in 1995. And lo, 19 years later, it has sales of nearly $100 billion a year and has made Bezos the 13th-richest American.
                          REALITY Amazon did open for business in a Seattle garage, but guess where it was conceived? Wall Street! For the eight years between graduating from Princeton and landing in Bellevue, Bezos was a very well-paid Wall Street investment banker. In 1994, while working at DE Shaw, a powerhouse hedge fund, he came across a report showing that Internet marketing was about to boom, expected to grow by 2,300 percent a year. That’s when— click! —the Amazon light bulb lit up in Jeff’s head.
                          By the way, Amazon’s now-iconic brand name was not Bezos’ first choice. It was initially incorporated as “Cadabra,” as in abracadabra. But that sounded too much like “cadaver.” Then came a suggestion he really, really, connected with: “Relentless.” How perfect that would’ve been! But wiser heads prevailed. So Bezos finally settled on Amazon, noting with typical modesty that the mighty Amazon River is the largest, most powerful river in the world—literally a force of nature.
                          also kind of interesting how this/Mr J's concept of FIre is starting to 'bubble up' here n there - esp when the writer/publisher types start to really focus on whats happening (esp when it starts happening to THEM, eh mr don? ;)

                          never mind when ole wallywhirld - "the beast of bentonville" - is now considered the 'old model' - and how the 'new model' is being subsidized by sales taxes? (NOT collected)

                          seen on the above story/link:


                          Such ruthlessness is standard operating procedure at Amazon, which exerts it against any gazelle it chooses to eliminate. Small retailers everywhere are experiencing an ugly practice dubbed “showrooming.” For example, John Crandall, owner of Old Town Bike Shop in Colorado Springs, has seen a surge of shoppers who come in, check out the bikes he sells, ask a lot of questions, try out some bikes—and leave without buying anything. Then, some days later, they’ll show up at the store with the parts for a new bike and ask Old Town to assemble it for them! These shoppers have used their smartphones in Crandall’s store to scan the barcode of a product they like and then gone online to buy it from Amazon at a discounted price—lower than Crandall’s wholesale price.
                          Amazon’s new smartphone, called Fire (apparently meant in the sense of “shoot to kill”), is specifically designed to make showrooming fast and easy. Amazon has even offered $5 rebates to shoppers who scan items at stores, then buy them from the online brute. This is corporate murder. After 38 years in business, Old Town is hanging on, but it’s endangered. Crandall employs 11 people, pays rent and local taxes, supports all sorts of community events and is fully involved in Colorado Springs—a place Bezos couldn’t care less about.

                          Monopoly, For Real

                          Producers need the marketplace, the marketplace needs products. You’d think this would be a felicitous, symbiotic relationship, but when the market grows into a virtual monopoly, the monopolist can turn on suppliers with a vengeance. Amazon has done precisely that to book publishers. While Amazon’s fight with international publishing giant Hachette has been well publicized, it’s medium-sized and small publishers who are especially vulnerable. They don’t have splashy marketing budgets, so they’re largely dependent on access to the buyers coming to Amazon’s online market.
                          but ya really ought to read the whole thing - i'd repost all of it, but methinks the 'main st view' (vs wall st's) should get their share of the cliks/hits

                          of particular interest is the 'close to home' inset piece at the bottom - this is quite illuminating reading (which eye always appreciate, mr don)
                          Last edited by lektrode; 10-13-14, 10:40 AM.


                          • #14
                            Re: The Everything Store

                            Good article. Amazon now collects sales tax on Arizona sales.

                            Two customers are suing Amazon for jacking up prices to Prime members to pay for the promised "Free Shipping". Prime members pay $99/year to receive free shipping on "Prime" orders. Without Prime membership, orders must be $35 or more to qualify for free shipping. But Amazon encourages its Prime vendors to raise the price of items to equal the item+shipping charge charged by non-Prime vendors. So if an item costs $10 + $3.99 shipping, with free shipping if the order totals over $35, the same item under Amazon Prime will cost $13.99. Prime members are still paying for shipping, only it's hidden in the total price:

                            Amazon Accused of Cheating Customers Through Shipping Costs

                            Be kinder than necessary because everyone you meet is fighting some kind of battle.


                            • #15
                              Re: The Everything Store

                              We have been prime members since the beginning of prime and we do order a lot from Amazon. However, we almost always check other prices and the majority of the time the Prime price is better than other prices + shipping. We also get amazing service. However, if the price elsewhere is better including shipping we often buy elsewhere. We also take advantage of the prime instant video. We have a cabin on a fishing lake in Tennessee and we have internet there, but no cable. We use Amazon Prime Video there. In NC Amazon now charges sales tax, which is fine. NC had a use tax that you were supposed to pay which was to replace the sales tax and we did pay it. All in all we are very happy with Amazon Prime.