Why Amazon's Not Worried About Profits

A blog about business and economics.
Oct. 22 2013 10:24 AM

Why Amazon's Not Worried About Profits

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Photo by Larry Busacca/Getty Images for Amazon Fashion

David Streitfeld at the New York Times has a feature piece about how despite Amazon's surging stock it isn't turning a profit that I think fundamentally miscasts the situation. Streitfeld seems to see a business failing that the stock market is forgiving for irrational reasons. The term "bubble" gets bandied about. But the key sentence in the article comes way at the end isn't framed correctly. It's this: "Amazon is reportedly losing up to $1 billion a year on its streaming video service."

This is important, because it's a reminder that when we say Amazon is a nonprofitable company that doesn't mean they have no profitable businesses. Instead what's happening is that Amazon is taking money from its profitable businesses and investing it in new ventures.

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Only some of these investments actually count as "investment" according to accounting and tax rules, but that's still clearly what's going on. Amazon could easily become profitable by ceasing these efforts to expand aggressively. But the question is why would that be a good idea? They could do what Apple and Google and Microsoft do and stockpile large sums of cash for strategic flexibility. But Amazon already took advantage of today's ultra-low interest rates to sell bonds and obtain cash flexibility. So the practical choices facing Amazon are to invest profits in new business ventures, or to hand cash over to shareholders as dividends or as share buybacks. What makes Jeff Bezos a strong CEO and an important business leader is that he's been able to fend off shareholder demands to get their grubby hands on this money. Instead he's deploying it to grow the franchise.

A counterpoint to Bezos' strategy is perhaps offered by the fate of Apple under Tim Cook. With charismatic leader Steve Jobs dead, Cook keeps trying to appease the Gods of Wall Street with various dividend and share buyback schemes. But Wall Street is voracious. Carl Icahn is scooping up Apple shares and demanding that Apple return even more cash to shareholders. These kind of demands will never cease and at some point asking the CEO to take meetings to talk about these demands is going to erode Cook's ability to focus on what makes Apple great—Apple products.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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