Amazon and the “Profitless Business Model” Fallacy(eugenewei.com)
eugenewei.com
Amazon and the “Profitless Business Model” Fallacy
https://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-business-model-narrative
11 comments
Please update the title with "(2013)". This article was published on October 26, 2013.
Yeah, it's hardly worth reading anymore
Amazon generates a ton of cash and the strategy of rolling that back into the business has, broadly, worked well. The challenge now as the company gets on in years is that there’s some bits making cash and a whole lot that’s not. That OK so long as the cash keeps coming in to subsidize things but if that changes things will get messy quickly. They’re clearly trying to start rationalizing that now, including with AWS where they’re starting to address some of the bloat there and lack of a coherent strategy at scale outside EC2, storage, and a few other core services.
> They’re clearly trying to start rationalizing that now, including with AWS where they’re starting to address some of the bloat there and lack of a coherent strategy at scale outside EC2, storage, and a few other core services.
So, now that they have a defacto monopoly they will jack up prices and profit from companies being slow to move out. IBM did the same thing.
So, now that they have a defacto monopoly they will jack up prices and profit from companies being slow to move out. IBM did the same thing.
Since then, Amazon kept growing and eating other markets (see AWS), or failing to eat markets (see Alexa) while still producing a shitton of money to finance all of that.
However, most of the rest of the industry simply collectively decided that profits don't matter. Most companies of past 10-15 years stopped caring about profits, and only talk about revenue. The are now only two goals in mind:
- survive long enough on unlimited investor money to be sold to the highest bidder and be immediately shutdown
- survive long enough on unlimited investor money to try and corner a market through investor-subdidized price dumping and near-illegal business practices, and then maybe look at how to get some of the lost money back, maybe
However, most of the rest of the industry simply collectively decided that profits don't matter. Most companies of past 10-15 years stopped caring about profits, and only talk about revenue. The are now only two goals in mind:
- survive long enough on unlimited investor money to be sold to the highest bidder and be immediately shutdown
- survive long enough on unlimited investor money to try and corner a market through investor-subdidized price dumping and near-illegal business practices, and then maybe look at how to get some of the lost money back, maybe
Get bought by IBM, Oracle, or Broadcom, and let them be the villains.
Once the exit is finalized, who cares about the customers? That’s not my department, says Wernher von Braun.
Thanks for the reminder!
https://www.youtube.com/watch?v=TjDEsGZLbio
You may not be aware that Tom Lehrer has released all his songs into the public domain:
https://tomlehrersongs.com/
https://tomlehrersongs.com/wernher-von-braun/
https://tomlehrersongs.com/
https://tomlehrersongs.com/wernher-von-braun/
"Profits don't matter" only worked during the period of zero interest rates.
AMZN started to become profitable in 2021.[1] By 2023, it was very profitable. $17 billion in Q1 2025.
[1] https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-in...
AMZN started to become profitable in 2021.[1] By 2023, it was very profitable. $17 billion in Q1 2025.
[1] https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-in...
Cable companies and other infrastructure companies have been focusing on free cash flow and revenue over profit for generations. Interest rates have fluctuated a lot in that time.
Amazon started to be very profitable because they couldn’t reinvest all that money into growing the business in a meaningful way. The timing aligning with when they stopped their Covid-buildout because sales behavior returned to in-store, they started scaling back the billions a year they wasted on Alexa, and started scaling back various moonshot ideas like Amazon Go stores.
Amazon started to be very profitable because they couldn’t reinvest all that money into growing the business in a meaningful way. The timing aligning with when they stopped their Covid-buildout because sales behavior returned to in-store, they started scaling back the billions a year they wasted on Alexa, and started scaling back various moonshot ideas like Amazon Go stores.
It's weird because revenue can easily be gamed. I could set up a shell company and quickly sell expensive goods back and forth between the two companies and achieve any revenue number I want. Profits are much harder to fake however, especially in the long run.
(2013)
An important note, because Amazon is now profitable (though not wildly so, given their revenue)
$651 billion in revenue, $71 billion in operating income. They're approaching wildly profitable for an extremely large business. To be that big and to eclipse a 10% op income margin is exceptional. It's closing in on three times the margin of Walmart (obviously Amazon is making their margin in AWS and ads, not retail).
$71 billion in operating income is so exceptional only seven other companies in history have gotten that large: Apple, Microsoft, Google, Nvidia, Facebook, Exxon and Aramco (if you count them as a company). And importantly, that $71 billion is rapidly expanding - it has doubled just since fiscal 2023. In 15 months sales increased $76 billion and op income increased by $35 billion.
The spigot is flowing. $100b in op income is likely not far away.
$71 billion in operating income is so exceptional only seven other companies in history have gotten that large: Apple, Microsoft, Google, Nvidia, Facebook, Exxon and Aramco (if you count them as a company). And importantly, that $71 billion is rapidly expanding - it has doubled just since fiscal 2023. In 15 months sales increased $76 billion and op income increased by $35 billion.
The spigot is flowing. $100b in op income is likely not far away.
I guess that’s fair—10% is impressive at that scale
At the time (231 points, 2013, 137 comments) https://news.ycombinator.com/item?id=6620598
Previously (95 points, 2021, 105 comments) https://news.ycombinator.com/item?id=29661261
Previously (95 points, 2021, 105 comments) https://news.ycombinator.com/item?id=29661261
Even though this article is seriously out of date, there is one thing missing in the analysis: Jeff Bezos was worth almost $30 billion in 2013, and is worth about $240 billion today. That money (value? worth?) comes from somewhere. So, yes, Amazon IS profitable (especially for Bezos)
That’s not what profit is
I'm sure you are right. Bezos hasn't 'profited' from Amazon. I was making a different point.
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I think you were deliberately being obtuse. Bezos' net worth is not realizable in full and what he does have is directly the result of Amazon being profitable as a business.
The 2013 me wouldn’t make any sense out of this article. I’m glad the Theseus ship worked a fair bit on me
Is the whole gist of this article basically, "start with your fixed cost business model and reinvest all proceeds into growth and scale"? What else am I missing?
They bury the important point halfway through the article: Amazon is a free-cash-flow machine and it has almost always been so. The distinction is subtle [1], but consistent (and ideally ever-growing) free-cash-flow is what really matters in valuing a highly capitalized company, even if the firm has always re-invested it each quarter to date. The important point to investors is that the firm's re-investment is a decision -- the company is not brittle to economic downturn and any quarter could decide to payout investors through share buyback etc.
Copious free-cash-flow every quarter is why software companies generally have higher valuations than traditional industries and why it was novel that Amazon, which is not obviously a software company, behaves as one financially.
[1] https://www.investopedia.com/terms/f/freecashflow.asp
Copious free-cash-flow every quarter is why software companies generally have higher valuations than traditional industries and why it was novel that Amazon, which is not obviously a software company, behaves as one financially.
[1] https://www.investopedia.com/terms/f/freecashflow.asp
> any quarter could decide to payout investors through share buyback etc.
Your etc. is layoffs. In this example, the "free-cash-flow" is people's salaries. I'm not personally comfortable with it being considered such a liquid asset.
Your etc. is layoffs. In this example, the "free-cash-flow" is people's salaries. I'm not personally comfortable with it being considered such a liquid asset.
> Your etc. is layoffs. In this example, the "free-cash-flow" is people's salaries. I'm not personally comfortable with it being considered such a liquid asset.
It’s almost certainly, in the case of Amazon, data centers and fulfillment centers and trucks and planes and heavy equipment.
Unfortunately, you are probably viewed as a liquid asset by your management.
It’s almost certainly, in the case of Amazon, data centers and fulfillment centers and trucks and planes and heavy equipment.
Unfortunately, you are probably viewed as a liquid asset by your management.
> Unfortunately, you are probably viewed as a liquid asset by your management.
What a rotten world we live in
What a rotten world we live in
For the record, I wasn't justifying the world that has created these incentives. In order to understand (maybe even someday change) the rottenness of the world, it's important to avoid the sort of reasoning that the OP critiques, which sees everything as just a sort of arbitrary maliciousness, rather than understanding the very concrete institutional mechanisms by which it has perversely become 'rational' to view everything outside a few profit centers as a 'liquid asset.' If a firm doesn't generate free-cash-flow, which is very very difficult outside the software industry, it will not receive significant capital investment and will be dependent on debt/profits. This impacts not just the life of employees, but limits what endeavors are funded at all, i.e. in part why it is that "software is eating the world." How to change those incentives is a much more difficult, but real problem.
Makes sense thanks. Software isnt the only industry where FCF matters most either
What else?
Anything capital intensive. Telecom was a good example. Oil & gas (they often have dividends tho) , real estate, anything that is a PE target, really every company though since we are living in a "post P/E" world
This business model was made famous by cable companies. They’d undergo expensive built-out to be the cable provider in a town, then benefit from a continuous subscription revenue for literally decades.
insurance
Famously Warren buffet.
Famously Warren buffet.
You're missing the strategic focus on long-term unit economics and customer lifetime value, where Amazon prioritizes sustainable margin structures within each business unit while accepting delayed profitability at the consolidated level.
This post tracks well with much analysis of some (emphasis some) AI companies in this particular audience.
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"Revenue solves all problems"