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Analysis

Is Amazon eating itself?

Posted on 15 Feb 2013 at 08:45

Tax scandals, DRM controversies and no sign of a profit: Stewart Mitchell investigates Amazon's increasingly choppy waters

For millions of us, Amazon long ago replaced the high street as the first port of call for everything from books and consumer gadgets to DVDs and digital content.

The company has it all, and at low prices; it’s so big it’s almost synonymous with online shopping – yet somehow this global behemoth still fails to make ends meet.

The company’s focus on winning customers through ever-lower prices has, on the face of it, been a success. Last year’s company results showed revenues of $48 billion, which, if it were a country, would nestle Amazon neatly between the GDP of Slovenia and Guatemala.

If you looked at Amazon financially and you didn’t know what it did, you wouldn’t want to own it

Yet in its latest quarterly figures, the company recorded a loss of $274 million on earnings of $13 billion. Heavy spending on Kindle hardware has led to higher costs, even as it has emerged that the company paid woefully little in UK taxes.

A flood of negative publicity has opened Amazon up to further questions over how it could possibly fail to make money when paying minimal sales tax in so many jurisdictions. Could it be that Amazon’s business model is fundamentally flawed?

"$50 billion start-up"

The Amazon model – an online version of stack ’em high, sell ’em cheap – has been brilliant in growing its customer base. The problem for investors in the company is that the constant push into new markets makes it difficult to assess its real value.

"Amazon doesn’t disclose its margins, so we’re flying blind," says Lawrence Haverty, a portfolio manager with publishing and media investment company Gabelli Multimedia Trust. "If you looked at Amazon financially and you didn’t know what it did, you wouldn’t want to own it. It makes a very inadequate return on investment capital."

Haverty believes Amazon makes such thin margins on its huge inventory that there’s little wonder the business isn’t making money in many of its activities, which now range from retail and cloud hosting to hardware and platform design with its Kindle range.

"It’s hard to conclude that in any of its non-cloud businesses it makes anything resembling an economic profit," he says. "The market doesn’t hold [CEO] Jeff Bezos accountable to earn a competitive return – it gives Amazon a free pass to get into these markets with a very low margin structure and then do something else."

Haverty suspects that, considering how Amazon is running its business, the company isn’t ever going to make enough of a profit to justify its stock price. "Right now this is a $50 billion start-up – it isn't making a return against $50 billion of volume."

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User comments

Land grab

Amazon is engaged in a land-grab for customers with the other eco-systems and the market is reflecting the fact that it is best placed to challenge Apple. In the long run, selling cheap devices and making money from purchases is a strategy much more likely to succeed than trying to compete at the high end with Apple.

Apple's business model whilst clearly successful isn't the only possible commercial model so a direct financial comparison at any one point is not necessarily helpful. Apple is reaping at the moment, Amazon is sowing.

By KevPartner on 15 Feb 2013

A Possible Answer

I suspect that Amazon is indeed doing a loss leading land grab.Once it has achieved its target Turnover, it will raise margins...not by much, just enough to make a sizeable profit.
EG if they raise prices to take say £1 profit on a billion items sold over a year, then it would be very easy to turn a nice profit.

By Jaberwocky on 15 Feb 2013

Any books I want to keep I buy as paper versions. If its a throwaway book I just plan to read once I might buy it on Kindle or 2nd hand paperback .

I have books from my childhood some decades ago. But my bet is a book bought on Kindle for a child won't be with them decades years later.

Even if Amazon doesn't go bust and you lose your books - it may change its "rental terms" or simply the technology may change and older purchases cease to be available.

It often amazes me how Amazon make any money. I have a Prime membership and so pay nothing for delivery. And often an order for multiple items placed at the same time is split in to multiple parts with multiple delivery companies.

And if its a low value item - I'm sure what Amazon pay in postage must exceed their profit on the item.

By cyberindie on 15 Feb 2013

Amazon - Eat Yourself

If amazon allegedly can't make a profit in the UK, then they should just clear off, because they are destroying UK companies. They should let UK companies go about their business and pay their taxes. I'm pretty sure that Amazon are onto a dodgy tax weeze riding on the back of UK taxpayers.

By Manuel on 15 Feb 2013

And employing slave labour

There is a big scandal in Germany now, after ARD's exposé documentary earlier this week.

They found that the Christmas workers brought in to cope with the extra demand were conned.

At present, it isn't clear how involved Amazon are, directly.

They subcontracted an employment agency to bring in the workers. They workers, mainly from Spain and Poland, were flown in on the promise of a decent wage, then faced with a contract for less money or pay for a flight home...

They were accommodated in a holiday part a few kilometres away from the warehouse and had to rely on a bus service that ran once per shift between the warehouse and the holiday homes, so if they finished early / late, they'd have to wait, possibly hours.

The security firm, that the subcontractor used, made random inspections, not only of staff leaving the warehouse, but also of the holiday homes.

Amazon have promised to look into the allegations and the employment minister is talking about revoking the licence of the subcontractor.

Time will see, if Amazon will also face a fine or legal action.

In the meantime, people are leaving the service in droves.

The irony is, people want the cheapest bargain possible, but then they complain when companies are forced to use slave labour, either at home or in Chinese, Indian etc. sweatshops...

By big_D on 18 Feb 2013

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For more details about purchasing this feature and/or images for editorial usage, please contact Jasmine Samra on pictures@dennis.co.uk

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