Shock. Surprise. Wonderment. Those words pretty fairly sum up the reaction to Amazon releasing its second quarterly earnings report in a row that showed a clear profit. (I mentioned the first one back in July.) The biggest reason behind it is the Amazon Web Services division, which earned almost as much as its North American e-commerce business ($521 million versus $528 million) but had a considerably greater profit margin (25% as opposed to 3%).
Amazon is a weird company from the perspective of investors. They frequently don’t seem to know what to make of it—it’s gone on for over twenty years without ever turning a significant profit, which is usually a sign that a business is barely hanging on by its fingernails and about to go under, but it’s hard to imagine that description applying to Amazon. Even now, it’s still not uncommon to see articles on investor-advice sites pop up advising people that they should short Amazon because sooner or later they’ll be right. But meanwhile, an article on investor-advice site Seeking Alpha from an investor who has been “long in Amazon.com ever since 1998” points out that reinvesting in growth is actually a clever idea, because it lets the company get bigger while avoiding those pesky taxes on profits.
It’s easy to imagine that reporting a profit two quarters in a row constitutes Jeff Bezos symbolically sticking his tongue out at detractors, proving that Amazon can easily turn a profit if it wants to. Its star isn’t even tied exclusively to books and retail—that’s just the part everybody notices. Meanwhile, Amazon Web Services has been chugging away behind the scenes, gobbling up a bigger and bigger portion of the web and earning more and more money for Amazon with less capital outlay required. The list of Amazon’s biggest AWS customers reads like a who’s-who of popular businesses on the Internet right now, including some of its own services’ competitors: Netflix, Expedia, Yelp, Samsung, AirBNB, and so on.
Will Amazon keep turning profits now that it’s shown it can? More to the point, does it really matter whether it does or not? These will be interesting things to watch in the future. But profits or not, Amazon seems unlikely to go bankrupt any time soon—which is undoubtedly good news for all the people who buy e-books from them.
Amazon isn’t making or not making profits. That’s just media chatter, silly and ill-informed. Given the complexities of retail sales, its profits and losses are suspiciously small. That doesn’t happen by accident. It’s planned.
The company, including Bezos absolutely hates paying taxes. It’s no accident that it’s headquartered in Washington State, which doesn’t have an income tax. It’s no accident that for years it fought charging sales tax in states where it doesn’t have a business presence. It’s no accident that, like Apple and Google, it has been using various complex schemes to avoid EU taxes. It squabbles over every penny of taxes it pays, knowing that’s one of its main advantages over local businesses.
The reality is that Amazon makes business decisions and uses clever accounting to minimize its taxes. In that context and given the company’s secrecy, discussing its profits and losses makes as much sense and discussing civil liberties in the Stalinist Soviet Union. What we see isn’t what’s really going on.
That’s as may be. But whatever they’re doing, they don’t seem to be playing by the same rules as most other corporations, which is what’s giving the investor advice sites (and investors and even financial analysts) so much trouble trying to figure them out. The usual indicators don’t seem to apply.
The odd thing is, you would think other companies would have used this same approach in the past–Amazon hardly has a monopoly on secrecy or trying to minimize taxation–but everyone seems to be behaving as if Amazon’s behavior is entirely unique. They’ve never seen anything like it, and it has them flummoxed. Weird.
Any company managed well tries to minimize taxes, as do private citizens, the government is NOT a charity.
Our small company has used AWS for years, and what’s not said is the 10s of thousands of dollars it saves over traditional data services. It’s also VERY secure and has many automated services to allow you detailed control to save costs. Unexpected traffic coming in? New servers automatically spin up, then back down once they’re not needed, saving money. Need disaster planning? Replicate your site to another Amazon hub on the other side of the country or the world. Instead of having test servers available 24/7, we only spin them up when needed and shut them down each night when not in use.
It makes sense when you think about the technical expertise it takes to run Amazon’s own business. Why not leverage that and sell it as well?