Is Amazon eating itself?

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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