Amazon makes no profit loans

 

amazon makes no profit loans

Mr Bezos made the comments as his firm launched its new Paperwhite e-reader and an associated book lending scheme in the UK, Germany and France.

The latest e-ink powered device features a built-in light that will help the firm compete against Barnes & Noble's Nook Glowlight and Kobo's Glo, which offer a similar feature.

Amazon is seeking to distinguish its line-up by offering a subscription package that includes access to the Kindle Owners' Lending Library.

Amazon makes no profit loans

Amazon Chief Executive Jeff Bezos confirmed that the online retail giant makes no profit on its new Kindle tablet and e-readers.

Bezos told the BBC that Amazon sells the new Kindle Fire HD tablets as well as the Kindle Paperwhite e-reader at the company's cost.

"We want to make money when people use our devices, not when people buy our devices," Bezos said. He also said: "What we find is that when people buy a Kindle they read four times as much as they did before they bought the Kindle."

Mr Bezos made the comments as his firm launched its new Paperwhite e-reader and an associated book lending scheme in the UK, Germany and France.

The latest e-ink powered device features a built-in light that will help the firm compete against Barnes & Noble's Nook Glowlight and Kobo's Glo, which offer a similar feature.

Amazon is seeking to distinguish its line-up by offering a subscription package that includes access to the Kindle Owners' Lending Library.

The company, founded by Jeff Bezos in 1995, has revolutionised the entertainment and publishing industries, as well as retail itself. Amazon's growth has reshaped high streets in the UK and even caused supermarkets to rethink what they sell.

However, for all Amazon's remarkable revenue growth, the company has still not demonstrated that it can generate profits consistently. Now, investors in the company may finally be running out of patience.

However, it also produced a net loss of $126m and warned there would be worse to come in the third quarter of 2014. As a result, shares in Amazon dropped 10pc in after-hours trading.

Meager as last year’s profits were, they represented a small improvement from 2012, when Amazon actually lost money. Even with the slight uptick in 2013, Amazon earned substantially less profit than it did back in 2008, when it posted a net income of $645 million on relatively modest sales of $19.17 billion. Over the past five years, in other words, the retailer of the future managed to more than triple its sales while slicing profits by more than half. It’s a business success story like no other in the world. 

To understand the significance of Amazon’s lack of profits, you need to distinguish it from another class of unprofitable company: the high-tech startup. Technology companies backed by venture capitalists often rise to prominence without showing profits. This often becomes a source of amusement or confusion when, for example, Instagram sells for $1 billion to Facebook with no revenue, or when Snapchat turns down a $3 billion buyout offer with, again, no revenue. 

In other words, “growth first, revenue later” is a risky business strategy, but a proven one. (The high level of risk is one reason the returns can be so great.)

If a large retailer announced a loss of a few hundred million dollars in quarter three, about half related to its core retail business and about half related to its investment in a high-tech startup the culprit would be obvious—competition from Amazon. And if a tablet manufacturer announced a loss in quarter three, the culprit would again be obvious—competition from Amazon. Except the company in question is Amazon itself which beneath a press release of "Amazon.com Announces Third Quarter Sales up 27% to $13.81" said it lost $274 million about half of it related to Living Social .

And this is what makes Amazon the most amazing company in the world today. Obviously it can't keep losing money like that every quarter, and it probably won't. But most quarters it earns very low profits, with margins so thin that happenstance can force it into things like its Q3 loss. As deliverer of services to consumers, it's incredible but as a generator of income and earnings it totally sucks.

But what makes Amazon not just amazing but downright dangerous is that as a financial matter it has something even better than profits—the boundless faith of the investment community. You can think of a company's stock price as jointly determined by its profits ("earnings") and by Wall Street's level of optimism about the future, expressed as a price-to-earnings ratio.