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Comment by mabbo | Hacker News Reader

> The king of money-losers, of course, is Amazon, which went years without turning a profit. Instead, it plowed billions of dollars back into its business

The key difference with Amazon is that Amazon could choose to be profitable at any time- just raise prices ever so slightly, reducing growth in customer demand, and the stop building out its enormous logistics empire and new businesses. Amazon could have had profits for a very long time, but Bezos understands that re-investing money in the company grows the value quickly. Plus, you only pay taxes on profits.

MoviePass can't really do that. They don't have potential profits that they can just stop re-investing. They aren't spending money on investments- they just don't have income high enough to cover the costs of their product. And lots of other start-ups have the same problem right now.

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No, I think the key difference with Amazon is that they aren't losing money on each individual transaction - ie selling everything at a loss. Amazon's non-profits were due to aggressive reinvestment, not pricing.

Exactly! It's the difference between losing money on a macro-level and losing it on a micro-level. You can't lose money on every transaction and make it up in volume, as the old joke says. But you can make money on every transaction and choose to invest it in expansion, so that you lose money overall.

It appears that moviepass is mostly an arbitrage play,where amazon is not....

I wouldn’t even call it arbitrage. There is usually some gain in the difference in price with an arbitrage

It’s not arbitrage, it’s “let’s burn all our runway til the next round”.

There's a key flaw in the wording that might lead to confusion if trying to explain this to someone new to investing.

Amazon stopped making /losses/ rather quickly. They /invested/ in the health of their business and future opportunities instead of delivering profits to outside investors.

Arguably, a better structure for incorporation does exactly that; it provides benefits to it's employees and the community it serves.

As Sliceline discovered, you can't make up for losing money on each order with volume.

To a limited extent large retailers like Amazon and Walmart actually can lose money on every transaction and make it up in volume. By delaying payments to their suppliers they get 2 - 3 months of float and can earn extra income by investing that capital. Of course in today's low interest rate environment it isn't much, but at their scale it adds up.

> You can't lose money on every transaction and make it up in volume, as the old joke says.

You actually can. It's the oldest trick of the industrial age, mass production and economies of scale. A good rule of thumb is that increasing production of a physical good by a factor of 10 will drop the unit cost by half. For non-tangible goods the effect is even more pronounced. The fist copy of Microsoft Windows might cost 1 billion dollars to produce, while every next copy is essentially free.

What this new breed of money loosing company signifies is a shift of business models to the software-eat-world paradigm: high upfront capital investment, zero marginal cost, exceptionally strong consumer lock-in (thus profits) once you break through and dominate the market. There is nothing fundamentally different between Amazon Prime and MoviePass, they are both loss leaders designed to increase foothold in the market, with a view to later use that dominance to dictate the rules. One was built on good economics and well executed, the other is not and will fail, but it's essentially the same business move.

But what you're saying is that eventually you'll make money on every transaction which just goes along with the comment made before. The joke is really about goods where you can't lower the cost or increase the price enough to make the economics work.

> The fist copy of Microsoft Windows might cost 1 billion dollars to produce, while every next copy is essentially free

You'd have to split R&D costs by the units sold here. If you spend 1B and sell 1000 copies a price of 100$ per copy won't help you.

You are of course correct in your math, but the point is that it reverses the equation. Windows doesn't cheaper to make if you plan to sell fewer copies: the production cost is set (Roughly) so you have to target volume.

Then you have the secondary effects of lock in (with software/services) that makes every sale also reduce the cost of a future sale or economies of scale (physical goods) that again make volume more desirable.

This doesn't contradict the adage about having to sell at a per unit profit, but it complicates figuring out what number that is and can lead to some non-intuitive results, which does trash the value of the adage as a simple way of looking at things.

Not saying every company that is selling at a loss to get customers in hopes that they'll mysteriously figure out how to later profit is doing so correctly, but some are. Oversimplification adds little value to these problems.

MoviePass and Amazon Prime aren't the same, because Amazon Prime produces a lot of its own content, and is the consumption point for the other content it serves. Amazon buys the rights to shows, and produces shows - so it has a fixed cost. It then sells access which has practically 0 marginal costs.

MoviePass sells subscriptions and then buys tickets. For each extra subscriber they've got an increase in marginal cost. You might argue they can make a profit by charging more for the subscription than they pay for the tickets, but there's lots of factors working against that:

1. When they IPO their suppliers will know their revenue and can demand high prices to match, seriously threatening their marginal cost.

2. Their suppliers already have scale and so will be difficult to leverage - further hitting marginal cost.

3. Their suppliers are extremely capable of producing a competing product undercutting them- destroying the lock-in component. The suppliers control access to the content not MoviePass.

The saying isn't about economies of scale eventually turning money-losing transactions into money-earning transactions, though.

This is so suspicious though. Apple somehow managed to become a bigger company by revenue and profit while being profitable most of the way up.

There is a lot of trust here that Amazon is secretly really profitable not just growing because their profit margins are unsustainably low. It wouldn't be the first time a large company engaged in questionable accounting if it turns out their unit numbers are actually not as good as they claim because of some accounting shenanigans.

I don't think Amazon is cooking the books, investors think that Amazon has a better more sustainable business and that Apple is just one misfire away on the next iPhone from imploding. Most of Apples money either comes from the iPhone or services based on iPhone sells.

I'm not saying I necessarily agree with this assessment.

Apple invented and brought to market a revolutionary new product at the right time (3G mobile internet), and their products are obviously high quality that can't be matched by others due to extremely high barriers of entry.

It's completely different to retail, which historically has low margins and has to compete with Walmart.

Apple and Amazon operate completely different businesses, your comparison doesn't make sense. Walmart has more than double the revenue of Apple (or Amazon) and yet has less than a 2% profit margin [1]. Is that suspicious? If anyone is an outlier I'd say it's Apple selling luxury priced goods (along with their fat margins) at consumer like scale.

[1] https://ycharts.com/companies/WMT/profit_margin

Plus Amazon is Amazon. They've essentially been saying to investors for years "sure, we could make more money for YOU, or give YOU dividends, but WE can do better with your money than YOU could." It's worked, of course, enabling them to grow into the gargantuan enterprise they are today. A smaller company without that proven track record wouldn't get such a license from investors for long.

Wasn't Amazon doing that in their early days, when they didn't have a track record?

And didn't the share price reflect that at the time, which has now grown considerably now that the market has more confidence in them.

Sort of?

I mean unlike 99.9% of the first wave of DotCom startups they managed to avoid actually going bankrupt.

They got lucky and secured a line of credit right before the bust.

That was a dark time. I was living and working near Seattle, and there were basically seven big employers for techies:

* Microsoft * Boeing * T-Mobile * WaMu * Amazon * Concur * Real Networks

And three of the seven were in severe financial distress. It was like, "hmmm is it time to leave Seattle?"

"Will the last person leaving Seattle - Turn out the lights"

https://static.seattletimes.com/wp-content/uploads/2017/04/c...

I'm sure they ran a lot of experiments in the earlier wild west days of e-commerce that wouldn't look so great today, but we've learned a lot about what a successful e-commerce business looks like since then.

This argument is funny to me mainly because I hear it all the time, about how different they are because they don't want to be profitable. The other thing management is supposed to do is manage cash flow and profit in such a way as to reduce risk (by piling up cash, not too much of course, but just enough...). They also survived the dot com crash because they were thrifty and always kind of cash flow break even.

Amazon simply does not need to have cash on hand. They can attain massive profits at literally any point by just increasing their margins ever so slightly across whatever business lines they operate in. This is the benefit of the scale they operate at.

They would have profits if they stopped reinvesting the proceeds from retail into new businesses. They wouldn't need to increase their margins or reduce costs, just stop willfully adding new costs.

Stopping adding costs is effectively increasing margins.

They wouldn't need to increase their marginal margins, or increase their margins in existing business ventures. However you'd like to view it.

I also think there is a key difference between re-investing in the business and simply bribing customers. I'm sure Amazon sold plenty of products at a loss but they also ruthlessly cut costs and found places where they could truly make money.

I feel like a lot of startups are simply using investor money to give unreasonably inexpensive products to customers.

For software companies, there is often a point where growth simply makes you profitable because your costs are relatively fixed. For my own B2B startup, we had plenty of graphs that showed at exactly the point where we no longer subsidizing our customers businesses and instead making a profit. Sadly we ran into a few road blocks and ran out of cash before hitting that golden mark. But, when your costs rise linearly to the number of customers you have, then you can never achieve profitably through growth alone.

My Amazonian friends commonly mock or complain about the Amazon "frugality" practices that mean things like no mechanical pencils, just wooden ones.

I believe "frupidity" is the in house nickname for this.

Actually the biggest key is a distinction between profitability and cash flow. Amazon has been cash flow positive since 2001. Sure, it spent huge number of years burning cash building it's revenue from $2 billion in 2001 to $200 billion today, but because they have a structure where they don't have to pay their suppliers until close to 3-4 months after the collect from their customers, they can sustain that without needing to raise outside cash.

That's a huge distinction, if you start having to raise more debt or equity in order to fund your growth it's going to negatively impact the long term free cash flow per share of your business and will make it harder for your to generate outsized returns.

Amazon makes weird non-GAAP claims. In terms of GAAP, Amazon had negative free cash flow of $4.2 billion in Q1.

I'm talking on a yearly basis, not a quarterly basis. Due to the seasonal nature of their business, I'm sure the quarterly numbers are more choppy. I think the general point, that they've been able to self-finance this enormous growth (save for some certain real estate purchases or acquisitions), stands.

“Self-finance” may not be the best term to use, given that their asset growth of $90bn (from $40bn in 2013 to $131bn in 2017) is mostly coming from the increase in liabilities (equity has increased less than $20bn, from $10bn to $28bn).

Long-term debt was $3bn in 2013, increasing to $8bn in 2014 and $25bn in 2017. Capital leases have also gradually increased from $2bn in 2013 to $8bn in 2016 and $13bn in 2017.

If you are referring to the cash flow statement, which I think you are, there are no "weird non-GAAP claims" involved.

Their latest 10Q shows GAAP pretax income of $1.9 billion.

If you're referring to total change in cash which was -$4.2 billion, that's because they reduced their accounts payable by $10.2 billion from paying all the suppliers after the holiday season. Looking at the consolidated statement of cash flows of a seasonal business very, very easily leads to misunderstanding the business.

Operating cash flow was $18 billion for the year ending 3/31.

Free cash flow is a non-GAAP metric. Amazon provides three different free cash flow calculations (depending on how leases are accounted for). In 2015-2017 the corresponding figures are $26.4bn (7.5+10.5+8.4), $14.8bn (4.9+6.5+3.4) and $5.8bn (2.6+4.7-1.5).

A 2015 commentary on this issue: https://www.ft.com/content/cfb6975d-4503-3fb5-85f4-5c11c142b...

The three different cash flow calculations in 2012-2015 were $4.4bn (0.4+2+2), $1.7bn (-0.1+1.3+0.5) and -$2.4bn (-0.4+0.2-2.2).

As forecasted, the divergence of these metrics has continued.

It is even more basic than that. Amazon, Uber, Netflix, and almost any other successful and established business creates value. MoviePass is not creating value and is simply trying to purchase its way into being a middleman between theaters and theater goers. If their pricing structure ends up showing the slightest chance of generating more revenue for the theater industry as a whole, there is nothing stopping the theaters themselves from adopting the pricing structure themselves and cutting MoviePass out.

And some are even beginning to experiment as it is, such as Cinemark’s Movie Club.

As a Moviepass subscriber, they create a lot of value for me.

I can go to any movie I want at any local theater. That is a lot better than subscribing to five different plans, one for each theater.

Well you can just subscribe to the theater closest to you. Why would you want to go to the ones across town?

This may not be common outside urban areas, but I have theaters from 4 different chains all within a 40 minute walk, and I've visited them all within the last few months. If I were asked to pick just one to subscribe to, I'm not sure how I'd choose.

Why don't you buy the tickets online whe you want to go to the cinema? what do you get by subscribing? how much would it cost?

In the UK, several cinema chains offer subscriptions where, by buying an annual subscription, you can see as many films as you like. The fee is equivalent to somewhere between 2 and 4 movies per month.

If you're visiting the cinema very regularly, this saves money.

They can do this because they own the theatre, so when a subscription is used, it only costs them the _opportunity_ cost of one seat - which is very little, unless the showing is sold out, and they still make money on snacks. As MoviePass doesn't own the theatres, they pay the _retail_ price for every ticket a subscriber uses.

1) theaters pay a sliding percentage of the ticket to the distributor, as high as 90% in the first week(s) a film is out, dropping the longer the film has been in theaters. This means (unless the chain is cheating the distributor, which admittedly has happened for brief periods) that seat is a very real cost to the theater.

2) with reserved seating, I'm much less likely to buy a ticket if the showing is almost full, so those filled seats can reduce additional ticket sales.

Different movies.

I have 3 theaters within a 20 minute drive. I might choose one over the other because of movie availability and showtimes.

I'd counter that MoviePass is not creating any value for you, they're literally just paying for you. That's not anything special.

I disagree. They are saving me a ton of money. To me as a customer, that is a lot of value.

I sure hope that Moviepass and the theaters can figure out a way to make it work.

You are misunderstanding the point. We aren't saying that MoviePass doesn't provide value for customers. We are saying that MoviePass doesn't create any value for customers. They are not increasing supply. They are not increasing demand. They are not adding efficiency. They are simply paying for the money you save with capital from investors. Every dollar you save on a movie ticket is a dollar that MoviePass pays to the theater. That is great for quick growth but I can't think of a single successful business that works that way.

Exactly, "years without turning a profit" is very different than "years burning through rounds of investor cash without hope of ever turning a profit".

Exactly! Cash flow =/= profit.

Building out warehouses does not hurt earnings. The whole point of accounting is to try to match revenue with cost. If you build a warehouse you don't expense it one time. It gets expensed over time.

If they develop software than that is treated as expense or buy movies that gets expensed.

Their core retail business is not that profitable. It goes from 0-3%. Its pretty much the same as walmart or any other retailer.

AWS is more profitable than their entire retail business.

If true, wouldn’t that just be a sign that AWS is not reinvesting fast enough?

Reinvestment is only good when there are profitable investments to be made. AWS already dominates its market; maybe investing more wouldn't help it make any more money, in which case it would be better to start paying dividends.

In one quarterly earrings reports, Amazon as a whole earned $500m- of that, AWS earned $600m of it.

> The king of money-losers, of course, is Amazon, which went years without turning a profit. Instead, it plowed billions of dollars back into its business

Because Amazon isn't about making short term profits. Amazon is about becoming the middleman for as much of the economy as possible by facilitating the transformation of the economy into its network/computation intermediated version. Amazon isn't so much a money loser as it is an economy absorber. It has been that since before day zero. That idea predated the notion that Amazon would sell books.

> Amazon, which went years without turning a profit.

This is semantics. If I make $100 on a $60 spend, and then choose, like Amazon, to reinvest the $40 in the knowledge that it will improve efficiency next year, my "profit" is technically $0, but my company is not worth a lot more than $40.

If like MoviePass, I spend $100 (of borrowed money) on revenues of $60, with no clear explanation of how I've added $40 of value to the company, that's a bit of a red flag. Saying "I'll figure it out eventually" is a bit touch and go.

In accounting it is known as contribution. Any sale that covers its variable costs is worth making.

Your sink costs are sunk and your investment costs are optional.

there is a very solid argument that what Amazon is doing IS an antitrust issue. http://www.yalelawjournal.org/note/amazons-antitrust-paradox

Except it is not, because US is near full employment, so bribes go long way to avert the looks. Until a solid recession hits, and double digit unemployment is in, corps like Amazon will never be on the quartering table by the masses.

It is not just that Amazon could or could not turn profits at will.

Turning a profit (paying dividends) or reinvesting is a decision every investor relations team must make, simplifying the subject it is based on whether you predict your company will get the investor more money (by stock price growth/future dividends) than if he invested in other equaly risky set of assets.

I don't believe this is the case for Moviepass.

It’s funny to think of IR departments deciding on one of the most strategic capital allocation issues at any company (or maybe you consider that the CFO is part of the investor relations team, that wouldn’t be completely wrong but it’s not the usual definition).

Yes, IR doesn't make the actual decision. That was said to me by a IR I knew in a previous company. Granted the decision making was obviously above his head and included other strategic decisions and the intents of the key stockholders, to say IR makes this decision is an exageration, but he produced the data to support and justify that decision. How much is that number flexible I guess depends on market regulation.

Nearly all of the most profitable Internet companies are platforms:

* eBay is a platform for sellers to connect with buyers

* Many think that Amazon is a online retailer, but it's not; it's a platform. A huge percentage of the items sold on Amazon are owned by small businesses who are leveraging Amazon's platform (website, warehouses, logistics, delivery.) If eBay had been more ambitious, eBay could've replicated what Amazon has done.

* Facebook is a platform for people to connect with other people

* even Google is a platform; it's basically taken the entire Internet and added ads to it. The Internet itself is Google's content, and that content was created by other people

And that's why MoviePass is doomed. If MoviePass had become a platform where movie theaters could unload excess inventory, then it could succeed, but the current model is simply selling movie tickets at a loss.

It seems to me that Amazon the business doesn't really need to turn a profit as long as it's stock price stays high because then its investors are still making money.

Now the thing that Amazon has for it that Moviepass does not is that Amazon gets to collect user data and use that to sell more for itself. Moviepass seems to get to collect user data, however it doesn't own the theaters so it must find partnerships with the bigger theater chains. They're hedging that they can create such a large user base and show that they can bring a lot more traffic to theaters and with that increased traffic (and lower ticket price for the customer) will sell more concessions.

For Moviepass to work ticket prices must go down (at least for them) while theaters still make more money because of larger concession sales.

But MoviePass "could also choose to raise prices ever so slightly". It seems very likely it would not work.

What's the categorical difference between the two business models? Guess it's the fact that when MoviePass tries to change prices it will force every user to opt in all over again. Opting in is part of the everyday user interaction for Amazon.

MoviePass doesn't have to raise prices ever so slightly to be a viable business. It has to raise prices by significant integer multiples.

(And heck, Amazon don't even need to raise prices, they could be very profitable just by investing in growth less. But their investors are clearly happy with the current state of affairs).

Not really could just have tiered prices 6.99 for weekdays before 5:30, 9.99 after - and say 12.99 at the weekends/holidays.

For example my local VUE in the UK I can get a ticket on Mondays for less than $6 full price is $16

I suspect that its the paying up front for a year when a substantial majority of its customers wont goto the cinema

I think you are misreading the business model.

The MoviePass price is per month. There is NO cost per viewing.

You could in theory see up to 31 movies for your single $10 payment.

I can't think of a month in which I wanted to see three movies in current release...

If you live in a city with many independent theaters showing limited releases and foreign films, 31 movies per month isn't enough to scratch the surface.

PS. Staff at indie theaters tell me that 70-80% of tickets are purchased with Moviepass cards.

jessaustin, I don't often see more than a movie or two per month, but back when I had a MoviePass (before they cut the price so low!), I found myself seeing movies I wouldn't otherwise have bothered to see. When the marginal cost is zero, it becomes a lot easier to drop by a theater and see what's playing, and even walk out if the movie's no good, feeling no sense of loss.

I was paying $40/month for MoviePass, and most months they still lost money and me, and I saw a lot of movies in a theater that I would normally have waited to see at home.

But normal people wont they will see 1 or 2

I live in an area with a cheap cost of living and even if I only went to one movie a month a MP is still about a buck cheaper.

You have to pay for a year up front + another fee

Moviepass is an all you can eat subscription. The UK has those - Cineworld and Odeon both do them. But the point is that they're significantly more expensive than Moviepass is, and the price of quite a few individual tickets (they're usually £35/40pm, which is $50-60 US). And they're run by the chains themselves so they have less infrastructure cost to check for fraud.

That's what I meant by integer multiples. If Moviepass was $60 a month it might be sustainable. But it's not, it's $10.

If the all-you-can-eat subscription is run by the chains they might also be hoping to make back what they lose on ticket sales in concession sales.

Moviepass doesn't get any of that sweet concession stand money and they'd have a hard time convincing theaters that they should unless they start leveraging their user base (i.e. threatening to drop MoviePass from working at Cineplex) to pressure theaters. Even then they add so little value to the system that it'd be hard for them to do that while sustaining a competitive advantage against new market entrants.

MoviePass is just a terrible idea to be in as an independent business.

Cineworld is £18/month, not 35/40.

Raising prices may even make things worse, as it will just narrow their customer base to those that are most expensive to service.

How are higher-paying customers more expensive to service?

More likely to use their service regularly. At $10 you have a certain percentage which will go once a month. At $50 you only attract the people who go twice a week.

Amazon was making profit on every incremental sale, but invested more money than the sum of that profit.

This is the key. Amazon was profitable in the unit economics, Moviepass is not.

Raising prices would solve lots of problems for Amazon. They’d lose some market share, reducing the monopoly accusations. Most likely companies are going to face increasing pressure to do something about inequality levels, so maybe a $5 / hour (hopefully more) pay raise for their 28k a year warehouse workers could also be in the store.

Not sure how many workers would be impacted but it could cost more than a billion dollar per year. Salary is probably is primary expense of Amazon, like any large company.

Are Amazon's prices really that much lower than Walmart's? I shop at Amazon for the convenience and selection, I rarely do a price comparison. In other words is price really thier competitive advantage?

On the other hand, I don't think AWS is the low cost leader for equivalent services. I use AWS because of the breadth of services.

I'm not a lawyer, but I think if you are accused of being a monopoly, suddenly increasing your prices is a bad legal strategy because it proves you have pricing power, which is the classic sign of a Sherman-style monopoly that regulators like to break up.

Yeah, I wouldn’t be surprised if they ended up the way CyberRebate ended up way back when they’d reimburse your purchase 100% on marked items (supposedly they’d take the money reinvest and then make enough to reimburse you completely..., ha!)

In the state of Washington you pay Business tax on revenue.

Amazon already is very profitable. For a certain group of people. And on the backs of other people.

It's a matter of how you define profit. Or rather, whose profit you're looking at. (And, ergo, what profit is actually driving the business forward.)

> The key difference with Amazon is that Amazon could choose to be profitable at any time

Wait what? No. They were a loss leader because they kept doubling down on a bad business models until they made headway on the reseller market to push themselves as an online retailer, which brought them out of the red. Only after the massive success of AWS, did they solidify as the most successful retailer because THAT got reinvested.

Notice, Google tries to follow this EXACT model, as it has for decades. It has little profit to show for chasing this fable-strategy because it doesn't work. Grabbing Doubleclick was a minor misstep (there were far superior companies to choose from), but at least they got youtube and were able to keep the boat floating (with a little Ad Tech dust). Riding their search engine product as far as it will go and then building an ad network on top of their search+youtube is where Google has settled.

Amazon has been looking into advertising for the last couple years and will probably be less successful than Google without a big new thing, which is unlikely to come from this mythic "reinvestment". Why does this fairytale story about Bezos keep getting pushed? Successfully keeping a company running is not the same as him being nigh prescient about how to manage the resources.

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