Who’s afraid of Jeff Bezos?
blog.samgerstenzang.com
blog.samgerstenzang.com
While a lot of technology leaders might admire Bezos for his leadership of Amazon, I wonder how many fear him. Most of what Amazon does, does not compete with technology companies. In the few places they do, they're not a juggernaut.
For example, despite years of effort, the Kindle Fire has not significantly harmed the market share or margin of the iPad. Google and Samsung have done far more damage to Apple. And Amazon's media sales are not much of a threat to Apple: they haven't stolen significant share, and Apple does not try to make money on content anyway.
I think there are a lot of people who do fear Bezos, but they are mostly retailers and hosting companies.
Since when is AWS not a juggernaut...
And slowly eating up AWS? No. That's Digital Ocean eating the lower end of the market. Rackspace outsources their CDN to Akamai, and their Cloud experience is damn near abysmal.
So, yeah, AWS is awesome. But its not like others can't/aren't catching up.
Tomorrow AWS is a $10 billion sales business, with offerings that are 10 times more powerful at 1/3rd the cost that they are now. And that is what Bezos has his eye on.
You're not Reddit? The value proposition will continue to skyrocket for smaller entities too, and it will swamp most of the market. That is the Amazon model, and they're clearly going to stick to it. At scale (AWS is probably only 5% to 10% the scale it'll be in just five years), very few will stand a chance at keeping up.
The culture (from what we can glean from the excerpts of the new book on Bezo's) is also toxic and is unlikely to produce an enduring successful company. Senior execs can't pass gas without Bezos' permission? When he steps down, there is unlikely to be the continuity that produces great enduring companies.
Amazon's cash flow is insane, if they put the brakes on reinvestment right now, they would be making billions and billions per quarter.
2. Unlike SaaS companies that sign multi-year contracts as their main source of revenue, the vast majority of Amazon's revenue is products, for which revenue is recognized almost immediately. Over time, then, the cash the company collects should roughly correspond to its GAAP income, unless services that are paid up-front for consumption over time increase as a % of its revenue (e.g., reserved instances, annual subscription fees, etc). In other words, it is unlikely to profitlessly generate cash; the two should rise or fall together.
3. Amazon is a fearsome competitor. But ORCL makes vastly more money. In fact, when Walmart's revenues were the size Amazon's are today (in the early 80s, roughly, adjusting for inflation), it was far more profitable then than Amazon is today--despite having to operate stores and truck fleets.
[1] http://edgar.sec.gov/Archives/edgar/data/1018724/00011931251...
The whole eCommerce business of Amazon is very supply chain heavy, and here they are among the best (along companies like Apple and McDonalds).
On the other hand I know more than one company with incredible margins who are bleeding money for years now. And they are not doing well. Agreed, Amazon will be facing the challenge of slower growth. Wether they can pull another strategy and execute on it only time will tell. But untill they hit this point Amazon is in very strong position.
Maybe a little anecdote regarding Wal-Mart. Back the day, Wal-Mart invented things like cross-docking. That basically reduced the inventory levels in their warehouses to zero (well, not quite, but in theory items were no longer stocked but transfered from on truck to another). Things like that made Wal-Mart the giant they used to be. And then Amazon recruited a lot of Wal-Marts supply chain and logistics people when they started to built there own network of fullfillment centers.
Regarding the operation of a private fleet of trucks, well back in the 80s it was quite common. But these days are more or less gone. That was replaced by specialised 3rd and even 4th party logistcs providers.
Regarding point 2: These two metrics (cash flow and profit) and as much related as you think. Imagine you sell a product for 100 on day one. Your customer pays you on day 2. And you pay your supplier 80 for that product on day 30. Perfect from a cash-flow perspective, now you can invest without going to a bank.
Profit is a completely different matter now. Imagine your operating cost is 10, then you are cash-flow positive AND profitable. If your operating cost is 30, then you are still cash-flow positive but you are losing money. In theory, a company can live eternally on a positive cash-flow and zero profit (or very low profit). As long as shareholders buy it, that is.
Excuses for the very simple explanation, but I hope the general point more or less came across.
My point regarding Walmart was that, even with many of the historical expenses (like trucks) that they no longer bear, they were still more profitable throughout their history than Amazon has ever been. Why?
Point 2. I don't think we disagree, as I'm referring to the long term, not the short term. In most circumstances, a business can't be both unprofitable and cash-flow positive indefinitely, unless there is something very strange happening with the accounting (like unusual tax losses a la GE Capital).
Profits and free cash flow can and do diverge for short periods in the company's lifecycle, but they ultimately must converge in terms of sign/direction.
Regarding Amazon, they are profitable enough. Cool thimg is they are building the fullfillment centers by the dozens, payed from free cash flow. And thats pretty amazing I think. But you are right, in the long run Amazon will most likly hit a growzh cieling. When they do they will have to changw strategy.
The 10-Q you just posted says AMZN pulled in $4 Billion in cash equivalents for the quarter which is almost double what they did the last equivalent quarter. It also says they have $8 billion in the last 6 month period whereas the year before they had $5 billion in the same 6 month period.
My point wasn't that they are making a profit, my point is that they are pumping enormous amounts of money into their own infrastructure. Looks at the capital investments section of the report.
You are essentially arguing that the investment expenditures will fade over time, leaving Amazon strongly free-cash-flow positive.
I am saying that, at present, the only reason they generate cash is that they issued debt, and that we need to look carefully at the nature of the cash expenditures on investments, as I believe many will likely continue (and that some of them are really recharacterized operating expenses).
The question is whether those investment expenses are truly optional/one-time. Neither of us knows for sure.
Funnily enough, there is one Exec whose 40 year strategy is almost identical despite radically different markets and tactics...namely the "reinvest until you are blue in the face" strategy. You may have heard of him, his name is Warren Buffet. Bezos has the advantage that with his company, he doesn't have to realize any profits.
First of all, there isn't even a remote threat to their retail empire. Everybody else is a drastically distant joke. They're already the size of Target, and they're still growing rapidly. Nobody stands a chance at catching them. Walmart.com continues to just flail in the wind. That means they're going to end up with a monster position that can't be assaulted in the next decade. A simple extrapolation reveals that in a matter of seconds. Just toss a mere 5 years onto their growth and they'll do nothing but pad their crazy lead over the competition.
They paid off billions in debt post dotcom bubble. How do you suppose they dug themselves out of that hole without generating tons of cash?
Where'd they get the $11.3b in cash they ended fiscal '12 with? How'd they pay for all those warehouses?
Answer: they produce plenty of cash courtesy of a very healthy business model
How about Alibaba? They already have more revenue than Amazon and eBay combined.
I'll start paying attention when Taobao actually competes outside of China before proclaiming it's success over eBay.
Think about how much you heard about Yahoo in 2011.
Say what you will about Marissa Mayer(I don't know enough about her). But she's making right decision on who her market is and although growth may be slower, I can see a larger number of people retiring that are going to be spending all sorts of time on Yahoo. Since HN is the anti-thesis of the Yahoo demographic, I think there is a more nuanced and emotional approach that Yahoo is taking. But I could be wrong.
edit: Also if anyone from Yahoo read this, please fix the problem with Yahoo mail and Chromium in Linux. My mom is annoyed by being asked to upgrade(Safari or Firefox) and asked to change the theme.
Tumblr will pay for itself? Not a chance they're going to earn a billion dollars off of that, much less turn a healthy profit. As such, at it seems like all Mayer is doing is burning value on a spend $3 get $1 back exchange. Works great in a stock market bubble of course.
/s
What she has going in her favor is that Yahoo was mismanaged to an utterly stunning degree before her time. I don't doubt that a more sensible approach is going to do net-good things for them.
But there's just no way she's going to be included in the same chapter of history as the other names given.
I think she's going to go down as the first female major player in the Big Tech realm -- which is not to disparage Meg Whitman or Carly Fiorina, but they haven't achieved the same level of household recognition that Marissa has.
(I'm not really familiar with her goings-on at Google, but everything she's done at Yahoo seems incredibly positive. Like you said, though, that could just be a 'going from awful to merely okay' effect.)
& Google is far more feature proof company
Amazon
- Solves easy problems at large scale
- Solves complex problems at large scale
Furthermore, brick and mortar problems are hard -- things break, rot, get lost, require staff to move them around, etc. Not to poo-poo Google or any other pure software company, but it isn't harder because its on a computer, it's actually easier.
So you are "unexcited" by Glass, Loons, Earth/map/streetview, Go, etc.?
This is a common misconception. Google didn't "make" Android. They acquired it by purchasing Android, Inc.
Car producers - Complex manufacturing at large scale
I wouldn't say one is necessarily better than the other.
Logistics is an easy problem? AWS is an easy problem? Overturning the publishing industry is an easy problem?
Put another way: Google has one product (search) that makes them money. Amazon has several.
This is not an easy problem to solve while being profitable. And they are working on introducing perishables into the problem statement. Hardly easy.
Solves easy problems at large scale
Oh, and getting your customers to become more loyal to you? Easy peazy. Combine those little warehouses with two day shipping literally anywhere in the United States and offer it to customers for under a hundred bucks a year. Trivial optimization problem, if you ask me.
And Amazon Web Services? Pbbbt. Just get some servers and make software that separates them into virtualized storage, computing, DNS, long-term storage, etc into different sizes and make the uptime not suck. That's like CS101
Don't even get me started on the Kindle. Just switch your entire focus from eCommerce and other industries to hardware and make a tablet and integrate it with your other media services (music, video, books, etc) and offer it for cheaper than anyone else. Super easy.
#shitthatHNsays
Google solves information problems.
Twitter and Facebook solve communication problems.
So many of these silos have similar solutions, but approaches are so incredibly different that it can be difficult to compare them at first blush.
They're far more vulnerable than most people think.
> Congratulations, sir
The tone seems like that of a Bozo fanboy.
Edit: Also, is it normal for a post to get so many of its comments deleted? I thought we collectively moderated through scorn and disapproval, some of those comments were interesting.
(I would argue the best alternative is ownership by individuals/organizations who have no financial stake whatsoever in journalism.)
State-funded is not terribly far off, either: if funding depends to any real degree on the political climate, then the conflicts are unavoidable.
The line between state-owned and state-controlled is incredibly thin, and is only one catastrophe away from being wiped out.
And I actually wrote this post a week before Bezos bought the WaPo, although I think it only underscores the point.
The sweatshop warehouses, yeah. And you really think when you order a bokk by your local book store the people in the warehouse sending are treated any better? In this part of logistics, and I'm not at all proud of that, one of the easiest ways to cut costs (and everyone operating a warehouse will do that since logistics is regarded by most people as costs) is HR. The part of being ordered around by a computer, welcome to logistics in the 21st century. And that part is true for truck drivers, too. How are books delivered to your local book store again? If you think the boys and girls delivereing parcels for UPS and the like are treated any better, forget it. Most of them aren't even employed by these companies anymore, they are mere sub-contractors.
And at least were I live, the credit of killing local, independant book stores goes to big bookstore chains and not Amazon. Quite ironic that these chains are now trying to get a share of the eBook market using the same DRM techniques everybody is blaming Amazon for.
And this tax evading scheme. Hell I worked for big company that operated at the same site for more tha a decade before they payed ANY taxes there. The COO was quite sad they finally had to. Most european big corps are doing the very same thing with branches in, say, Delaware.
All that is not to say I consider all this to be good or even OK. It's just the way it is. Classical case of hate the game, not the player. But I don't think Benzos is troubled a lot by all this.