...and why it makes no (traditional) profits...
https://a16z.com/2014/09/05/why-amaz...-why-it-works/
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Amazon discloses revenue in three segments – Media, Electronics & General Merchandise (‘EGM’) and ‘Other’, which is mostly AWS. As this chart shows, these look very different (this and most of the following ones use ’TTM’ – trailing 12 months, which smooths out the seasonal fluctuations and makes it easier to see the underlying trends). The media business is still growing, but it’s the general merchandise that has powered the explosion in revenue in the past few years. Meanwhile, the ‘Other’ line is growing but is still much smaller.
It seems pretty likely that these businesses, selling very different products bought with different bargaining positions to different people with different shipping costs, have different margin potential.
This still doesn’t really give an accurate picture, though. Amazon is in fact organized not just in these segments, but in dozens and dozens of separate teams, each with their own internal P&L and a high degree of autonomy. So, say, shoes in Germany, electronics in France or makeup in the USA are all different teams. Each of these businesses, incidentally, sets its own prices. Meanwhile, all of these businesses are at different stages of maturity. Some are relatively old and well established. And while these mature businesses are growing slower, they are profitable. Others are new startups building their business and losing money as they do so, like any other new business. Some are very profitable, and some sell at cost or as loss-leaders to drive traffic and loyalty to the site. Books are a good example. There’s a widespread perception that Amazon sells books at a loss, but the average sales price actually seems to be very close to physical retailers – it discounts some books, but not all, and despite all the argument in the Agency lawsuits, quite how many and how much is (deliberately) as clear as mud.
Amazon is a bundle.
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All of this brings us back to the beginning – Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss – it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex.
How long will this investment go on for? Well, do we believe that the conversion of products and businesses to online commerce is finished? Let’s rebase that revenue chart, and look at it as share of US retail revenue. Excluding gasoline, food and things like timber and plants,all hard to ship, at least for now, Amazon has about 1%.
https://a16z.files.wordpress.com/2014/09/16.png
Overall, US commerce is growing very consistently:
https://a16z.files.wordpress.com/2014/09/17.png
And Amazon is taking an accelerating share of it.
https://a16z.files.wordpress.com/2014/09/18.png
Amazon has perhaps 1% of the US retail market by value. Should it stop entering new categories and markets and instead take profit, and by extension leave those segments and markets for other companies? Or should it keep investing to sweep them into the platform? Jeff Bezos’s view is pretty clear: keep investing, because to take profit out of the business would be to waste the opportunity. He seems very happy to keep seizing new opportunities, creating new businesses, and using every last penny to do it.
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Amazon makes no reportable profits because Bezos, his shareholders, and board of directors all agree it would be a huge lost opportunity.
As commerce keeps on moving online, many of the old entrenched players from the B&M world will be left behind and their share of the economy will be up for grabs by whoever is best positioned to grab it.
Amazon has 1% of the total market.
They have an opportunity to grab some more and Bezos intends to get as much as possible.
His immediate target?
The $8T industrial Business-to-Business market. Which is twice the size of the consumer retail business.
What he's done for consumer products, like books, he is going to do for industry and professional businesses like doctors and dentists.
http://www.forbes.com/sites/clareoco...llion-b2b-bet/
All those new warehouses he's building?
The drones?
Same day delivery?
Not for books or toasters but for valves and pumps, rubber gloves and janitorial supplies.