Of all the things that are "too good to be true,"
) may top the list. Back in the halcyon days of the dot-com boom,
the company built its reputation on allowing customers to duck one
of life's great certainties: taxes. Later, in the heady euphoria of
the housing bubble, Amazon introduced its Prime membership program
- unlimited 2-day delivery for a fixed annual cost - and made
shipping costs vanish, too.
Today, the spirit of optimism is alive and well. The post-PC era is
supposed to change everything we thought we knew about computing.
Speculators are flipping social media startups faster than they
ever flipped houses, and the cloud,
according to one Amazon exec
, "has changed what is fundamentally possible." This company is
leaping into this brave new world with both feet. The Kindle line
of eReaders is six years old now, and in 2011, Amazon introduced a
NASDAQ:GOOG) tablet called the Kindle Fire. The company also offers
a comprehensive array of cloud products - its 2012 annual report
boasted of 159 new services and features - and it is one of the
dominant cloud infrastructure providers.
True to form, Amazon is selling its newest products for a bargain
price. Amazon Web Services (AWS) has cut prices
31 times in the last seven years
, and CEO Jeff Bezos has admitted that the company
sells its Kindles at cost
. This is all the result of Amazon's obsession with customer
satisfaction - so the story goes - and surveys
that customers are indeed happy. After all, who wouldn't love a
retailer that basically gives you the product? And what investor
wouldn't love a trendy tech giant that's growing 30% annually?
Unfortunately, love is blind, and prone to missing details. For
instance, Amazon may sell its hardware at cost, but this doesn't
take into account R&D and marketing expenses. The Prime program
may be a reasonable deal at $79/year, which
to be a profitable price point; but many "guest" members - myself
included - pay nothing. (Amazon allows paying individual members to
share their Prime accounts with family members.) Amazon may have
impressed Wall Street with its rapid build-out of fulfillment
centers, intended to store and ship items for its growing roster of
third-party vendors, but the company's shipping business is a
perennial black hole, losing nearly $3 billion last year.
To be sure, Amazon claims that the Kindle leads consumers to buy
digital content, and Prime drives the sale of retail merchandise,
but Amazon refuses to provide the direct revenue figures from these
products, much less the indirect. We're left with a series of stark
facts: Media sales are growing only tepidly (12% last year, vs. 35%
for Amazon's core business); shipping costs continue to outpace
shipping revenue; and two years after posting its best year ever,
Amazon is no longer profitable. Net income was negative in 2012.
Gross margins improved in the first quarter of 2013, but operating
margins continued to deteriorate both sequentially and year over
year. The expenses of doing business are simply moving from one
line of the ledger to another - but because Amazon calls them
"investments," an unpleasant cost is - once again - made to
disappear. Nevertheless investors, like customers, seem happy; the
company's stock has generally outperformed that of more profitable
), and even
Kindle and AWS are interesting because, with a little legwork, we
can arrive at an idea of their profitability. IDC estimates that,
in 2012, Amazon sold 10.5 million Kindle Fires. For converting that
into revenue, the company's online store is more helpful than its
earnings reports. If we assume that the number of customer reviews
is proportional to sales - for instance, the 7-inch Kindle Fire
gets about 1,500 reviews each month, while the 9-inch receives
roughly 1,000 - we can arrive at a few (very general) numbers.
Currently, the average Kindle Fire sells for $225, the average
eReader for $141, and the ratio between them is about 2-to-1. Taken
together, this would indicate tablet revenue of $3.2 billion for
2012. Since Amazon has cut prices over the last year, and its
product mix has shifted, actual revenue would have been higher. $4
billion is as good a guess as any.
AWS, on the other hand, is lumped into Amazon's "other" earnings
category. It earned some portion of $2.5 billion, shared with other
miscellaneous revenues like Amazon's credit card and its online
advertising. Before the introduction of AWS in 2006, this earnings
category provided a fairly consistent 2% of sales. That figure now
stands at 4.1%, implying - all things equal - AWS revenue of $1.3
In sum, we're looking at $5.5 billion in revenue from Amazon's new
products. About half of that has been swallowed by the company's
R&D and marketing budgets, which grew from a combined 8.1% of
revenue in 2010 to 12.5% in 2012 -- a growth that coincided with
the expansion of AWS and Kindle, and can hardly be attributed to
anything else. Factor in the costs to manufacture and other
expenses, and Amazon is in the red by well over $1 billion.
Fortunately, we live in a "fundamentally" different world, where
the top line matters more than the bottom one. Amazon isn't the
only tech firm driving its growth by selling at a loss. As I wrote
several weeks ago,
this is routine in the cloud
. We're told that, when they reach scale, these companies will turn
a profit -- and if they're not turning a profit, well, that's just
because they haven't reached scale. In this strange, rabbit-hole
universe, businesses lose more money as they become more
profitable, and heretical concepts like "innovation disruption"
the stuff of mass orthodoxy
. We should not be surprised, then, if "too good to be true" no
longer inspires a healthy skepticism. These days, it's simply
another way of saying "too good to pass up."
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