Profit's are such a volatile metric. Amazon's been spending like crazy in the last few months on producing new Kindle products - most of which are being sold as a loss leader in an effort to push book sales.
"Business Wire is a company that disseminates full-text news releases from thousands of companies and organizations worldwide to news media, financial markets, disclosure systems, investors, information web sites, databases and other audiences"
Does the press have an incentive to talk about the plunge in profits? Yes
Does the company itself have an incentive to spin things by touting increased revenues? Yes
It is a document released to the press by Amazon, but it isn't an ad, it is a copy/summary of their official earnings report, plus some ignorable color.
On the other hand, revenues can mean nothing as well, since profits are what count, and huge revenues do not always translate, and could be a sign of a spending problem.
It can be hard to tease out from the fancy accounting, but marginal profit (that is presumably sustainable) should be distinguished from new investment (which can be stopped if needed) and not just added together to get a profit number.
That said, the buck should eventually stop at Free Cash Flow to prove shareholder value, which is then paid as dividend or invested sensibly.
For what it's worth, that's the company press release you just linked to. (Business Wire is a service that broadcasts press releases and regulatory filings.)
I'm pretty sure they wouldn't, since that's how GAAP accounting works. For revenues and costs directly related to a product, you don't book them until the product is shipped to a customer.
Its been awhile since I took an accounting class, but lets say my cost of producing the kindle fire was $20 and my expected ability to sell it was at $15, I would book my kindle inventory at $15 on the books even though its acquisition cost was higher (i.e. you put it on your books at the lower of acquisition cost and expected disposal value). This has only been part a GAAP since 1990 though.
I'm not sure why you're being downmodded, you're absolutely correct.
IAS 2[1] states "inventories shall be measured at the lower of cost and net realizable value", which is exactly what you said.
IAS is the International Accounting Standards, which is what pretty much all accounts meet. Inventories mean stock. Net realizable value means what you can get for them. US GAAP covers this as well (though I can't find a reference right now).
Showing your inventory at $20 per unit, when you can only expect to make $15 per unit selling them, would be overestimating the value of your stock. A competent auditor wouldn't sign off on your accounts like that.
Not exactly. While you are correct that their profits would not necessarily be impacted, it's because the purchased goods or raw materials are booked as inventory (asset), and not part of COGS (liability).
The cost of constructing the new Kindles is still booked, just under a different part of the book. Once the devices are sold, the amount changes from an asset to a liability.
That's the point - we're talking about their Q3 profit. The parent post suggested that the Kindle Fire might have depressed Q3 profits, which is impossible given that it's not being sold yet.
FYI, once it's sold, it's neither an asset or a liability - it's no longer reflected on the company's balance sheet. The revenue and COGS show up on the income statement, and may also be reflected on the cash flow statement. But they're off the balance sheet.
You may be surprised. Amazon is expert at "ship now, pay vendors later". In many areas, Amazon maintains a negative layover from when they pay vendors to when customers pay Amazon.
"Very importantly, we are willing to be misunderstood for long periods of time.... I believe if you don’t have that set of things in your corporate culture, then you can’t do large-scale invention. You can do incremental invention, which is critically important for any company. But it is very difficult — if you are not willing to be misunderstood. People will misunderstand you."
For years I though Bezos was crazy and that Amazon could never, ever repay all the billions it had raised/spent. I was so, so wrong... I wouldn't bet against Bezos.
From all I've heard, Bezos is more "crazy like a fox" than Jobs was.
There's a lot to hate about Amazon. Apparently, it's a totally caustic work environment, that's only making money because Bezos is such a brilliant strategist.
Like A/B testing everything, before it was popular.
Like telling everyone they need web APIs for everything they do, and will be fired if they use non-web APIs to other team's apps. Way to shove SOA down people's throats! The pay-off is modular systems.
EC2. Margins will drop, but he'll make money on up-selling special Amazon services.
As with most big companies, whether its a caustic environment or not really depends on which team you're working for. The culture instilled by your manager or manager's manager is more powerful than the corporate culture as a whole.
You really think JeffB is walking around interviewing thousands of individual contributors and line managers, and firing the ones who are nice to each other?
Senior management creates a culture for middle management. Middle management decides how to transmute that into the lower management community.
You just said it - senior managmenent creates a culture for middle management, and that culture creates the culture for the techies. If it's corrosive at the top, it tends to end up corrosive at the bottom.
If "culture" means anything, it refers to something self-sustaining. Initial conditions, which come from the founders, have a large influence. So do the values and behavior of leaders. Any development which is too deviant within an organization is eventually rejected the way an immune system rejects a foreign body. Culture is the agent in that process. That the rejection is executed by middle managers doesn't mean that they invented the culture any more than I personally manage my antibodies.
Crazy moves like "heavy spending on warehouses, data centers and digital-content offerings"
An online store buying stock and building infrastructure !!!!! Crazy , they should be borrowing money and paying themselves bonuses before going bust - that's what Wall St wants
Back in the day, "heavy spending on warehouses, data centers, and digital content offerings" would be labeled what it is: plowback.
The company is reinvesting some of its earnings back into the business, rather than using those profits simply to reward shareholders. It's a long-term move, and Wall Street analysts these days seem wholly incapable of thinking further out than a quarter or two.
A tried and true strategy. That has worked for (in no particular order) : ATM's, Printers, Razors, Mobile Phones, Gaming Platforms and probably even cars in some cases.
If Sony had cottoned onto this strategy, Beta would have been the worldwide video standard and they would have been paid back massively in royalties.
Shifting hardware at a loss to lock in consumers is the oldest trick in the book. Nowhere is it more important than when introducing a new technology and a new way of working. I can see that in 10 years time a Kindle will be almost free.
My understanding is Apple doesn't make all that much money off the iTunes Store using a similar model. Does it really work for digital media? (besides console games)
Apple doesn't use a similar model, they use the exact opposite model. They sell content at minimal profit to enhance the ecosystem for their devices, which they make a very tidy profit on.
It's still pretty true for the App Store. Apple hit the $2B paid out to developers mark early this year, IIRC, which means about $1B of revenue for Apple for the entirety of the App Store's existence. Their latest quarter saw nearly $30B revenue, so it's still a pretty tiny part of their business.
Its a tried and true strategy if there wasnt a better strategy. Amazon doesnt need to create their own hardware. They are doing just fine selling Ebooks via their iPad and android apps. Low overhead, more profit. Selling their own hardware does not provide any value add to the customers, all it does it reduce their margins and profit. People already buy ebooks via their apps.
People are talking like this is a good move by bezos. It's not.
You obviously don't have a Kindle. I would never try and read an ebook on an iPad after having a Kindle. It is chalk and cheese.
Once you setup your account on your Kindle, it is 1-click purchasing to get yourself a new book.
Sure, you might shop around for an ebook, but most people aren't going to. They'll just search on the Kindle, click the 'yes I want it' button, and you're finished. Total platform lock-in. Tech people might get sniffy but to the average person it's like going from vinyl to iPod.
There are two Kindles in this household. Since their arrival, the yearly book spend has probably tripled. Previously most reading was re-reading older books and taking trips to book exchanges.
All this is possible with other platforms, yes, but the Kindle is just the physical part of an entire delivery system. The margins on ebooks has to be better than print by an order of magnitude, even though the price is lower.
More profit selling for iPad and android apps is not a given. People that buy Kindles probably end up buying more books -- and there's also more lock-in.
While the Kindle can handle ebooks from other sources, there's an Amazon logo on every one, and the 3G versions makes it so convenient to buy from Amazon that most customers probably won't shop around. For the iPad and Android they're facing off against a wide range of other players.
By selling Kindles, Amazon can secure their place in the ebook market. Without it they'd be just another player. And they probably get better margins on ebooks, since distribution (bandwidth) is cheap.
The PS3 is the poster child for this type of tactic, at their beginning they sold for $300 less than their cost of goods.[1] Their failure has nothing to do with locking in a market due to price. [1]http://www.gamasutra.com/php-bin/news_index.php?story=11740
It wasn't enough. They may have been selling at a loss, but the introductory PS3 prices were at least twice as much as the Wii. When Sony began to cut prices, sales jumped. A $100 price cut in 2009 doubled sales: http://kotaku.com/5356885/npd-ps3-sales-gain-ground-on-price...
As far as I remember, Nintendo always did that, selling each console at profit, however small that may be, starting from NES, to Super NES, N64, Gamecube and now Wii (and I guess, soon WiiU).
So Nintendo was the only manufacturer who did not apply the "razorblade" model of the other console makers, which is understandable since they were and are a videogame company only and thus never had any other branches which could have been able to subsidize their console business in the beginning (unlike for example Microsoft).
I think the first console Nintendo made that actually sold at a loss is the current 3DS handheld and that may be after the very fast initial price cut after the slow reception on the market.
Sony's problem there was that the PS had very expensive parts, so they had a harder choice to make on pricing to be competitive.
Nintendo, meanwhile, couldn't keep Wii in stock for more than half a day until something like 2 years after launch, so they could have raised the price about $100 and not lost a sale
This number is meaningless(and probably wrong) if you don't know the extra profits it would generate, and what's at stake here.
Some estimates(read:guesses) think that 50% of kindle users will subscribe to to amazon prime. Prime users are extremely loyal to amazon, do all their online shopping in amazon and use brick and mortar shops much less than before signing with prime.They tend to buy 3x-4x than before, in amazon.
Prime is a very hard service to provide. It requires a big and expensive logistics chain. It's a monopoly level competitive advantage. It can make amazon a monopoly in the range of walmart (maybe).
Also the kindle fire is a great advertising unit. Better than TV - because the ads can be much more targeted, And you can buy with a single click from the ad.
Combine the two, and amazon gets almost total control of the customer.
And given Bezos's brilliance that's probably only the tip of the iceberg.
So what's a little discount on a little gadget to get all of this ?
And when they (we) are in store they break out the Amazon app, scan barcodes and have items shipped next day at a sizable discount over the store cost + sales tax.
That 50% number seems high to me. Seems chicken-and-egg. Do they buy a Kindle then subscribe to Amazon Prime or do they use Amazon a lot and thus get both a Kindle and Amazon Prime?
And like most chicken-and-egg questions, the answer is both and neither.
As someone who has spent far too much time puttering around brick-and-mortar stores recently, before walking away in disgust and just buying it on Amazon, I can't help but think Amazon is just spending to widen an already vast competitive edge.
This isn't apples versus oranges. This is sailboat versus steamboat.
Has that been confirmed? I've heard anywhere from $5 to $50, and its always been from analysists trying to estimate the cost from parts. As far as I know, the only people who really know how much the Kindle costs to make are Amazon.
Interesting. To summarize, it looks like the $50 loss comes from an analyst comparing it to the iPad, whereas the $50 profit claim comes from a firm comparing it to the more-similar BlackBerry Playbook. The research firm that did a tear-down estimated it at about a $10 loss.
In other words, no-one really knows, but it looks like they're probably closer to breaking even than chugger claims. Chugger is taking the worst-case estimate here, and also the one that seems the most unsubstantiated.
It is a tried and tested method for selling technology. Look at the history of the Sony Playstation. Sell the hardware at a loss and make double your money back from software and content.
First, you need to prove beyond any doubt that the Fire is being sold at a loss. Once you know this, set up some dummy stores and invest the billions of dollars you have laying around in buying as many as you can. Once you have them, put them all in a compactor. Make sure each one is destroyed without anyone having laid a finger on it. See how long Amazon can sell these things at a loss without making anything from them.
Amazon has never said no to paying a dollar of fixed overhead to generate $1.01 in lifetime marginal profit. Amazon is also willing to write down the first 5 years of a product's life as overhead. That is JeffB's genius (along with the ability to get the accounting right on these razor thin margins).
Given that it's specs aren't much more than $100 chinese Android 2.3 tablets I doubt they are losing anything. Especially since they don't have a retailer taking 30%
Their policy for the other Kindles was to recover the R&D initially and then sell them at not much more than cost.
Seems Amazon is taking the long view, and reinvesting their revenues. The opportunity for them is huge. Wall street doesnt care and would rather see quarterly profits. Good buying opportunity if you're interested in watching them take over everything in the next 5 years.
They should do more for less, like magically store all 8 billion items they have in stock in the back of my car or something. Warehouses housing wares. How extravagant. Where's the innovation.
(And to answer my sarcastic comment, the innovation is "order from your suppliers and have them ship directly to the customer, then you don't need warehouses". But the reason people pay Amazon's prices is because the item shows up at their house the same day they buy it, which means that 1990s mail-order model doesn't work anymore. Investors shouldn't be allowed to invest until they've purchased at least one product from Amazon.)
> Investors shouldn't be allowed to invest until they've purchased at least one product from Amazon.
Seriously. My wife gets Amazon Prime for free through school. Within the first month I was looking for the best opportunity to buy stock. The service is quite literally amazing, and handing it out free to students is just damn genius. That's just one small thing on top of all the other things they do really well at.
I will second this. The free student prime has moved purchase of Amazon Prime from the "it seems cool but not worth category" to "must have" for me. You get things that you would normally have to run all over town to get with minimal effort. It's a huge time saver.
I've found myself ordering tiny stuff like a single pack of caffeine pills (we're talking 24 pills here, not exactly bulk buying) rather than walking 10 minutes to the nearest pharmacy... It's scary.
In all fairness, they did miss on revenue as well (albeit not by much). Given how highly valued Amazon is (something like 5x Walmart on a price/revs basis), exceeding estimates is expected. That's not to say they aren't an amazing company, but their valuation is extremely high.
Stock prices adjust to news. If this plunge was higher than expected, then it's news, and the stock price falls. It doesn't necessarily imply the investors disapprove of Amazon's management.
To restate the obvious, this is a case of reinvesting in the company's future growth. Net profits (distributable to shareholders) are diminished when a company reinvests, so yes, "profits" are down. However, a more meaningful metric is net sales - cost of goods sold. Amazon had to make a choice of what to do with their meaningful profits (what's sold - what it cost to create, sell, and support it). They could give it to shareholders, reinvest it in future growth, hand out bonuses, or burn it. All of those activities (except dividends) will lower their net profit on the income statement. The market is a fickle beast. Amazon will do fine, but given the company's history, I pity those who bet against it.
Spending on day-to-day expenses is termed revenue expenditure. This shows up in the income statement and affects profits.
Spending on future investment is termed capital expenditure. This is not shown on the income statement and does not affect profits. (It's on the balance sheet instead)
Eg. Buying a new warehouse does not decrease profits (but it will of course affect your cash).
Blue-sky R&D is also recorded as an asset (and depreciated as normal).
At least, that's what I was taught as a trainee accountant. Though I've learnt in practice that things are reclassified for tax purposes. Lower profits mean lower tax after all.
But depreciation is an expense, yes? So Amazon gets to average their investments for a 7-year rolling window or whatever, not postpone them indefinitely. Unless there is a way to claim that the software/IP has some resale value remotely approaching its cost to build?
true, depreciation is an expense but one that accountants can fiddle with. I am only a trainee accountant and UK accounts are different from US accounts in ways I am not familiar, so don't take this as legal advice or anything.
For start though, the deprecation policy itself can be changed. So as long as there is a note in the accounts giving some justification, I can say "I am not depreciating these assets". This is a crude way to manipulate depreciation and generally any competent auditor would flag it.
Buying a new warehouse for example you generally wouldn't depreciate at all (usually holding it at cost and revaluing it every so often). So apportion all costs relating to buying the warehouse (including cost of machinery in the warehouse, connecting it to your IT network, legal and admin work) as a one line item Fixed Asset: Warehouse, and you just avoided all depreciation. (It will still be shown on the accounts, but doesn't touch the income statement.)
Or you can decide to put it as a 5-year rolling investment as you put it and you're charging 20% depreciation.
Or you can decide that this investment is not a one-off thing and is part of the core business (perhaps you're buying warehouses all the time). So then you can charge the whole lost as an expense.
I suppose my point (back to the topic) is that Amazon's profits have gone down largely because of how Amazon's accountants have decided the best way of presenting their investment costs in their accounts. It makes sense to reduce book profits as that reduces your taxes. (Generally true, though I know in UK corporation tax calculations we don't take into account depreciation for the very reason that its manipulatable). A profit dive is especially fine if you have continued impressive revenue growth to point to and can claim that these investments are clearly worth it. Nobody is going to claim that Amazon is in serious trouble.
True, but the article can still be viewed via the old 'first click free' technique of googling the article title and navigating to the page from the search results.
Their Q4 earnings don't matter because they are transitioning to a much different business model... quarter-to-quarter analysts don't take that into account.
Isn't the plunge in stocks due to the fact that the Kindle Fire has a very low profit margin? I don't think this article is correct with what the cause-and-effect is.
Note that Amazon's overall Revenues are up 44%
Less sensational, more nuts and bolts article http://www.marketwatch.com/story/amazoncom-announces-third-q...