Amazon's Business Model Is a Performance

by Doctor Science

Yesterday was Amazon "Prime Day", and workers for Amazon in Spain and other European countries were on strike (I don't know if this had anything to do with the site's technical problems). Amazon is a notoriously terrible employer, but when I look at how CEO Jeff Bezos is running the company and what his business model seems to be, the bad working conditions and low pay aren't there for the usual spreadsheet reasons. Amazon isn't a scam, exactly, but it's not a business in the traditional sense: it's a performance.

There are two factors that make Amazon distinctive:

1. Jeff Bezos gets essentially no income from Amazon.

2. Amazon deliberately does not run a profit.

Bezos is not unique in not getting direct income from his company. His official salary is $80K, plus $1.6M for security. Mark Zuckerberg gets $8.8M for security from Facebook, on top of a salary of ... $1. Larry Page and Sergei Brin also get only $1/year from Alphabet (Google).

In all these cases, the company founders are taking no salary, but getting all their benefit from the value of their stock. They sell some of their stock (in 2016 Bezos sold 2 million shares for a total of $1.4B, for instance) and presumably invest that in something that actually returns an income. The important thing is that (they claim) this makes their interests align with those of stockholders, and also ensures that most of their income is taxed at the lower rate for capital gains.

American corporations are supposedly run for the benefit of the stockholders. They say they're also working for the benefit of their customers or of the world in general, but that's just so much advertising piffle. It's long seemed to me that they're actually run for the personal benefit and enrichment of the C-level execs, while the stockholders try to keep the execs' interests aligned with theirs--with varying degrees of success.

The other tech companies show profit margins on the order of 20-30% per year, but it's very rare for them to pay dividends. They plow their profits back into the company, in R&D or acquisitions or new projects. Though they don't pay out, their price/earnings ratios are not unlike those of non-tech stocks.

In contrast, it's clearly Bezos' policy for Amazon to make no significant profit, and to have a P/E ratio that is way out of line with traditional investment goals.

Forward P/E ratios for Apple, Google, Facebook, Amazon, Netflix, compared to the S&P 500. source.

So why are Amazon workers underpaid? This really hit me when I was helping Sprog #2 look for a job this past spring. She was about to graduate from college with a degree in linguistics, so I urged her to look at working for Alexa in the Boston area. Alexa hires a lot of linguists, but with starting salaries in the low $40s, and frankly terrible reviews on glassdoor.com. Sprog ended up being hired at another firm, starting at over $60k. I am not surprised that people have found that Amazon tends to lower salaries in its region, using its monopsony power.

Pay at Amazon can't be low for the sake of profits, because there are no profits. Why have low salaries (and the high turnover and employee dissatisfaction that goes with them) when there's no fiscal need to? Why not treat and pay people decently, and continue to not-show a profit?

The traditional reason to do something like this is that you keep prices so low others can't compete (which is one of the reasons for Amazon's success), and then when you've driven them out you give the villain laugh Bwa-Ha-Ha-Ha! and raise prices to the ceiling.

Painting by Alec Monopoly.

I don't see any indication that this is actually Bezos' plan, though a lot of investors seem to assume that it is. Remember what I said about companies being run for the personal benefit of the CEO? Bezos' wealth is not based directly on what Amazon *does*, it's based on what "the Market" perceives the stock to be worth now and in the future. Amazon stock isn't an investment in the traditional stock-market sense, it's a speculation, like buying fine art. Stockholders (and Bezos) don't expect to be paid by Amazon itself now or in the future, they'll get money from third parties to whom they may sell their stock.

Bezos and Amazon are engaged in a performance, not a directly profitable business. Bezos acts like a hard-nosed businessman, focused on the bottom line, because that's what "Wall Street" likes to see. He keeps pay low and working conditions poor because Wall Street sees that as showing Seriousness--and because it's a promise, that should he decide to let Amazon be profitable, the rewards won't go the workers, they'll go to his fellow stockholders.

How do I know that Wall Street likes low pay and poor working conditions? Because of the experience of Costco, a company well-known for insisting on paying a living wage. (You can tell by going into one of their stores, and observing that the staff includes few immigrants or very young workers. Costco jobs are taken by American workers with job experience.)

Costco went public in 1985, and over the years, Wall Street repeatedly asked it to reduce wages and health benefits. [Founder] Sinegal instead boosted them every three years.

This is from Bloomberg, echoing something I've heard many times. I don't know how Wall Street "asks" these things: smoke signals? a quiet word over brandy in the club? interpretive dance?

In any event, Bezos is much better at understanding Wall Street than the other tech billionaires, because before he started Amazon he was a hedge fund manager. So when he says

It’s the absolute dollar free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.

This is bullshit: he doesn't intend for Amazon to give investors anything they can spend, because dividends (aka spending money) are not in his plans. But it sounds good, it's reassuring to investors who are expecting a conventional company, and it serves his overriding purpose: increasing the perceived value of Amazon stock.

Amazon is not a scam: the people in the company do a great deal of useful work providing goods and services. But the fact that there's no tight connection between Amazon's work and Amazon's market value gives it an unstable, scam-like aura. The disconnect makes it feel almost like Amazon is a bubble, despite the real work it does. It's a failure of the capitalistic ideal that money corresponds to effort.

I'm pretty sure that Bezos' strategy (not unlike Warren Buffett's similar approach) is largely driven by the way the tax code favors capital gains over the money earned by mere work. If the tax code is changed to put capital gains and salaries on an even keel, then Bezos and his ilk might change their strategies to come closer to the capitalistic ideal of value for money. As it is, though, Bezos' staggering wealth keeps growing because he's acting out the ideal of many capitalists: enormous wealth for those at the top, while workers are just an expense that needs to be tightly controlled.

In sum: workers need unions, the ratio of CEO pay to worker pay can be meaningless, the tax code needs to be overhauled, and no-one needs a billion dollars.

Painting by Capt. Edwin Jones of Charles Waterton capturing a caiman. One of the first images I got searching for "Amazon painting".

Comments

[bobbyp]

In sum: workers need unions, the ratio of CEO pay to worker pay can be meaningless, the tax code needs to be overhauled, and no-one needs a billion dollars.

my name is bobbyp, and I approve of this message.

[Michael Cain]

So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.

You call this bullshit because you don't realize that he means "investors" in the sense of investors inside Amazon. This is a standard practice for many companies. For many, many years, Warren Buffett's Berkshire-Hathaway bought companies in order to acquire their cash flow, profitable or not. The entire cable TV industry has always been valued on its cash flow, not its profits. Large cash flow makes the lenders happy because they know you can meet the interest payments. Happy lenders mean you can borrow and invest, in either your existing business, or by buying up others.

[hairshirthedonist]

Perhaps a further discussion of "free cash flow" versus "cash flow" would help people (like me) better understand what's going on here.

[Nigel]

The picture is further complicated by some very high margin businesses (Amazon web services, for example) within the company.

The strange thing is how they have managed to build a very competitive tech company with far less attractive employment conditions than many of their competitors.

[cleek]

Google tells me that the average developer salary at Amazon is $102K.

[Doctor Science]

cleek:

Not sure what point you're making unless it's:

Nigel:
Their core *tech* workers (developers, etc.) are paid reasonably well. Amazon has no monopsony power at their HQ, because Microsoft is also Seattle-area. I'm sure one of the goals of the big HQ2 Search is to find a place where they can be the biggest tech company and keep those salaries down as well as they do in the warehouses.

[CharlesWT]

Can't blame them for looking for a HQ2 with Seattle doing things like trying to shake them down with an employee head tax. The warehouse jobs are being automated out of existence.

[Doctor Science]

Seattle is trying to "shake them down" because Amazon doesn't pay its fair share in taxes (on account of the whole "not much profit" thing).

[bobbyp]

HSH: You ask. Bobbyp answers.

Seattle head tax: Note how Charles cannot resist calling a tax a "shakedown". For libertarians, this is a feature, not a bug. Just like union members are always "thugs". It's a tell. It's a dead giveaway that you are in the presence of somebody deep deep into the epistemological bubble of libertarian fantasy.

The head tax was a tax duly passed by the democratically elected city council, who then cravenly bowed to ginned up public pressure to "save jobs". Watching this craven display of political cowardice was was worse than watching the Orange One bow and scrape to a despot.

It was pathetic.

[CharlesWT]

Watching this craven display of political cowardice...

Funny how political cowardice seems to go along with political greed.

[Pro Bono]

Pay at Amazon can't be low for the sake of profits, because there are no profits...

This reasoning is wrong. A dollar is a dollar whatever all the dollars add up to. Amazon's share price is what it is because of investors' expectation of future profits, which would be lower if warehousing costs were higher.

The important thing is that (they claim) this makes their interests align with those of stockholders...

I don't understand "they claim". How could the financial interests of the CEOs be more closely aligned with those of the shareholders?

[Doctor Science]

Pro Bono:

investors' expectation of future profits -- in what form? do you mean their expectation of future dividends?

If they're expecting future profits (and my skimming of the investment press suggests many are), they're fooling themselves. Bezos has done NOTHING to suggest that there will ever be future profits. That's what I mean by it having a scam-like quality, even though it's not a scam.

What investors are getting from AMZN isn't a share in any profits, present or future. They're betting on AMZN's reputation, not on any direct financial recompense from AMZN. They'll get their spending money from other people who are willing to trust AMZN too.

future profits, which would be lower if warehousing costs were higher
*There are no future profits*. This also assumes that the $ spent on staff turnover (v high) and theft (also high) won't decrease those hypothetical future profits.

Bezos is performing a bait-and-switch: "I oppress the workers so there will be more profits for you, fellow investors!" But there are and are not planned to be any profits; he's oppressing the workers to display his class solidarity.

How could the financial interests of the CEOs be more closely aligned with those of the shareholders?

I don't know, it's just my cynical instincts. It certainly *looks* like these companies have found their way around the classic principal agent conflict, but I don't know enough about the weeds of executive compensation to be sure.

[wj]

What investors are getting from AMZN isn't a share in any profits, present or future. They're betting on AMZN's reputation, not on any direct financial recompense from AMZN. They'll get their spending money from other people who are willing to trust AMZN too.

In short, what we are looking at is a classic example of the bigger fool theory of stock prices. Which is not, alas, unique to Amazon. And it is true, if perhaps regrettable, that it is all but impossible to save people from themselves.

As for Amazon's employees, that's a different problem. But it may, possibly, at least be one that admits of a solution.

[Pro Bono]

There are no future profits

Amazon has reported profits north of $1bn for the last two quarters. That's not a lot of margin, but it's certainly a profit.

It will make more when it slows down investment.

I remember when sceptics would look at Microsoft's share price and say how ridiculous it was for a company which had never paid a dividend.

[Nigel]

I agree with Pro Bono here.

There are plenty of criticisms to be made of Amazon (many of which apply equally to plenty of other large corporations), and one might be sceptical about the stock valuation, but I think it’s wholly inaccurate to call it a scam or a Ponzi scheme.

Indeed one could argue that Amazon addresses head on the usual complaint about public companies, which is that they are obsessed with short term profit growth.

Their core *tech* workers (developers, etc.) are paid reasonably well
I don’t dispute that, but they do have the reputation (which I think they’ve probably taken some steps to address, if only because it might affect their ability to recruit the best talent) of being one of the less pleasant places amongst the large tech companies for developers to work.

[byomtov]

Amazon made a net profit of about $3 billion in 2017.

Amazon's cash flow from operations was over $18 billion in 2017. This means that they had about $15 billion in non-cash expenses.

[byomtov]

I don't think it is plausible that the holders of 480 million Amazon shares - nearly 60% of which are held by institutions - are mostly fools. It is plausible that they are mistaken about future operations, dividends, and profitability, but no more so than you or I.

[CharlesWT]

Being obsessed with customer satisfaction seems to have paid off rather well for Amazon.

[byomtov]

Perhaps a further discussion of "free cash flow" versus "cash flow" would help people (like me) better understand what's going on here.

Cash flow, in general, is the amount of cash the company generates from its operations(1). This differs from profits because some expenses are not actual cash outlays. Depreciation is the prime example here, but there are others, including equity compensation and who knows what else. These items come off of revenue for the purpose of calculating profits, but you get to keep the actual cash.

When you work through the arithmetic you find that adding these non-cash items to net profit (after tax) you get the cash flow.

But just as there are expenses that are not cash outlays, there are cash outlays that do not fully show up as expenses. These include, notably, investments in expanding the business, or maintaining it at current levels - new equipment, what have you.

Subtract these outlays from "cash flow" and you get "free cash flow," money available for whatever.

(1) I am ignoring cash flows associated with borrowing, lending, selling stock, etc.

[Countme-a-Demon]

I own shares of Amazon and Costco. I buy Amazon products, almost exclusively books, though I patronize local bookstores as well.

I am not currently a Costco member, because I don't buy in bulk, being single with one mouth to feed.

I believe Amazon's warehouse workforce should fully unionize and receive amply pay increases across the board, though to Amazon's credit, their part time workers do receive medical insurance, though I would have to look into its quality and coverage.

Amazon's employs 566,000 worldwide. I can't locate figures, but many are part time workers and there are enough reports of their poor treatment to not dismiss it as commie propaganda.

The latter do not receive shares of Amazon as a part of their employment remuneration, like the full time workers do.

That should change as well and would, if not for Wall Street, and this absurd American bullshit that part time and low paid workers in a capitalist system should be deprived of the financial incentives of ... a capitalist system and the financial chicanery that I benefit from sitting on my ass reading.

The reversal of the homeless head tax by the City Council was shit, because one of the unintended consequences of Amazon's success and workforce growth is the lack of affordable housing.

As to Amazon's share price and the extent of its abracadabra underpinnings, the stock market is a confidence game and I'm a fool, or as Mark Twain defined a gold mine: A hole in the ground with a liar standing next to it, though the American innovation is to pay the liars handsomely before they leave town in the middle of the night.

As to Amazon's reporting of earnings profitability, a couple of years ago money managers and Wall Street analysts complained to Bezos about the lack of profitability and one quarter later, ipso fatso, as Archie Bunker said, earnings growth commenced and deficits halted.

Accounting is a black art.

But if so, they can see their way clear to paying their part time workers more.

I'm willing to pay more for my books and less for my shares.

Think of those motivated employees making customer service even better.

Or is the key ruling by the lash?

[Countme-a-Demon]

"to dismiss", not "not to dismiss"

What am I, Russian mafia?

[Countme-a-Demon]

Here we go with "let's close all of the libraries again".

http://www.lawyersgunsmoneyblog.com/2018/07/new-gilded-age-gets-quality-writing-argumentation-deserves

I'm laying down a marker, as with health insurance.

Shut down my libraries and I'll burn Amazon to the ground and and I'll light the fire with my shares and a can of gasoline.

[Countme-a-Demon]

Whatever Amazon is up to, it pales in comparison to this:

https://www.msn.com/en-us/money/markets/decade-after-crisis-a-dollar600-trillion-market-remains-murky-to-regulators/ar-BBKWSK3

All because Americans refuse to let America govern.

[russell]

let's close all of the libraries

Right up there with "shut down the post office, everybody uses email now".

I know folks who use the free wifi at the library because they have no fucking money to spare. They don't have a Starbucks reward card, because they don't go to Starbucks. Because they have no fucking money to spare. Spending $3 for coffee so they can sit and check their email is just something that fits in their universe.

If you can imagine that.

The concept of providing basic services through public means so that everyone can have access to them is, for some reason, freaking kryptonite to (R)'s and libertarians. I find their point of view not just harmful, but toxic. Misanthropic.

If you divide the average annual local tax burden in my town by the percent of the total budget that is spent on the library, it comes to about $70 a year. A dollar and change a week. On average, it costs a household in my town a dollar and change a week to keep the lights on at the library.

I'll bet it's not that much different where you live. It might even be less.

If you don't want to go the library, don't go. If you want to buy all of your books, videos, wifi access, and all of the other services the library provides, fine with me. Live it up. Buy it from Amazon, they'll deliver it to your door, you don't even have to get up off your butt and leave the house.

If you want to take all of that away from everyone else, to save yourself $70 a year, then IMO you are one sad excuse for a human being.

Just saying.

[bc]

The conclusion on wages isn't supported by the links. The Economist points out several other factors that could be leading to lower wages, including better benefits by Amazon (health care/retirement/SHARES!!), and a younger and less experienced work force. "Monopsony" is held out as a "possibility."

The Sprog #2 anecdote is interesting only in that despite Amazon paying $40k there was another company paying $60k. No evidence of a negative impact on salary in that market, unless I am missing something. I mean if $40k is well below the going rate (and I truly hope it is) and all Sprog #2 could find in the area was $40k but in other areas where Amazon is not it is higher there might be something there.

FWIW, my UPS driver hates Prime Day. I live in the sticks and Amazon has made living here much, much easier. And it keeps my UPS driver employed. And did I say he is a union employee? So when we say "employees need unions ..."

But the monopsony argument does make me think. Economists differ, but most think it takes a LOT of players to have a true market (some say 50+). I think it could be a good thing to break up some of the omnipresent enterprises in our current economy (Amazon, Google, etc.). But the evidence on depressed wages due to "monopsony" seems inconclusive from those links.

[byomtov]

The conclusion on wages isn't supported by the links.

It's not exactly unsupported. I'd say it's more likely to be correct than not, based on the Economist article. A 30% drop in nominal wages since 2010, in a time of economic growth, for example, is pretty dramatic, and needs a strong explanation.

The monopsony argument is persuasive to me, though I would like to see some analysis of employment effects. This requires some pretty careful work.

[Countme-a-Demon]

I own shares of Google too.

This is what they are up to:

https://theweek.com/articles/785738/google-not-american-company

They, these fake liberals, need to pay their fucking taxes instead of sending their profits thru a dozen international spin cycles.

But, it's legal, the bipartisan tax haters will you.

Yeah, think about that.

I own Alibaba as well. Their accounting is Chinese, which is to say impenetrable.

Both of these stocks, along with Amazon, are in everyone's 401K and IRA, if you invest in mutual funds via those tax dodges for the little people.

I live in the world that believes PAYING taxes is immoral and thus I am full of shit by implication, despite my opposite view on taxes.

I've been cogitating on Putin's real motives for wanting better relations with the West, on his terms, of course, and I've concluded that the vast, worldwide financial web constructed by the West, with all its remunerative hiding places for dark, misbegotten spider money is what he wants access to for himself and fellow kleptocrats.

mp is merely a low level entry point to the main prize.

You got loot? Well, Wall Street and London's City are full of fuckers who can wash and dry it for you the world over.

I don't buy gun stocks on an individual basis because I think those companies, public and private, should be raided, put out of business, and their facilities and inventory melted down but look, there they are in every passive index fund.

Men are wolves and wolf accountants to men.

I could enter a religious monastery and cleanse myself spiritually and physically, but one day I would be poking around in its catacombs and stumble across evidence that they hoarded gold and gems from Jewish victims of the Holocaust.

Rod Dreher, the outraged teenager over at the American Conservative can't sit still as he tries so valiantly to be a moral person, and yet, after reading nearly every word he's written for the past three years, my unavoidable conclusion is that his entire oeuvre is predicated on denying LGBT human beings their human rights and their equality before his God.

When they raid the Benedict Option decades from now, what evidence will be found of what happened to the gay men and women who dared to join him and his fellow Benedictines while keeping their sexual identity closeted, because, unless he a total fool, there will be gay human beings among them?

It won't be pretty.

Just a rant about trying to be moral, and failing, in a den full of motherfucking wolves.

[bc]

A 30% drop in nominal wages since 2010

In one county. Gov't averages show a 3% drop when Amazon shows up.

I've read the news stories about "bad Amazon" and unhappy workers, etc. It is entirely possible that wages do go down when a big employer displaces the field. It seems logical due to lack of competition. I was simply saying the Economist doesn't find it more likely than not that it is true. It is possible. But "careful work" would be taking into account benefits and it didn't look like that had been done.

[wj]

I've been cogitating on Putin's real motives for wanting better relations with the West, on his terms, of course, and I've concluded that the vast, worldwide financial web constructed by the West, with all its remunerative hiding places for dark, misbegotten spider money is what he wants access to for himself and fellow kleptocrats.

Which, of course, is why he gets so exercised about the Magnitsky Act. If his fellow kleptocrats can't move their money safely to the West, their patience with him is going to drop significantly. Any one or two of them he can just disappear, but if the whole bunch lose patience, he's the one who's likely to be gone.

[Countme-a-Demon]

https://www.fastcompany.com/90208299/aclu-amazons-controversial-rekognition-program-mistakes-members-of-congress-for-mugshot-subjects

Some might opine that the technology is spot-on.

[wj]

Depends on just which members of Congress it fingered. (Even if you want to argue that they are all crooks, there's no doubt some are much bigger ones than others. And you'd want the software to catch those first.)