Amazon Goes Back to the Long Term

Investors bought it before, they'll buy it again

This was an earnings week for Amazon, and the earnings didn’t make everyone happy.

The numbers are huge, but they didn’t match expectations.

  • EPS: $5.22 vs. $5.57, according to analysts surveyed by Refinitiv

  • Revenue: $63.4 billion vs. $62.5 billion, according to Refinitiv

  • AWS: $8.38 billion vs. $8.5 billion, according to analysts surveyed by FactSet

One culprit: more than a promised $800 million spent in the second quarter to get infrastructure ready for one-day shipping. I mean, one-day shipping is going to cost a lot. So, Amazon is going back to its old message of eschewing short-term profits in favor of long-term growth.

I think part of the problem might be that this isn’t just a message of Amazon’s, something they dangle for the rubes, but a guiding business philosophy. And that’s something that Wall Street understands, but only up to a point. You sell out at a loss for a while, crush your competition, and then you squeeze everybody — that’s what Wall Street understands. Amazon is a little more radical than that. The squeezing, it comes, but there’s no safe phase where we know what Amazon’s ordinary profits are. It’s always building to get on to the next thing.

Sour Grapes

Ben Thompson wonders whether the next thing is worth it. One-day shipping doesn’t get you that much more than two-day shipping, and it still doesn’t beat a ride in the car for something you absolutely need ASAP.

AWS is also not growing as fast as the rest of the cloud sector, and some of that might be because of the way Amazon is tooled and might be because Amazon competes with so many other businesses that companies are reluctant to put all their eggs in the AWS basket. Here’s one full-throated case for why Amazon should spin off AWS (although the author doesn’t think they’ll do it); here’s one very sotto voce case for splitting up Amazon (not so much a case as a repetition of a phrase, Amazon should explore whether it should remain a single company).

I don’t know. Amazon has managed to create a very diversified business that nevertheless all fits together. The profits from one sector help pay for investments in others. You could probably build a successful set of companies based on the pieces of Amazon, but it wouldn’t be Amazon. Barring an antitrust-motivated breakup, I don’t see why it should happen.

The DOJ is Coming, and other Bad News

Then again, nuttier things have happened, and the Department of Justice and the US Congress is coming for Amazon, along with its tech giant friends. That’s hanging over Amazon as well, and is another reason why the missed-expectation earnings were magnified.

Congress is going to want to know how a former AWS employee was able to hack over 100 million people’s data from Capitol One’s AWS server. Investigators are going to want to know how Amazon managers used eBay’s own messaging system to poach eBay sellers off its platform. Customers and reporters are going to want to know more about Amazon’s secret deals with police departments to promote Ring home surveillance systems, that require police departments to get statements from Ring whenever they say anything in public.

There Is Some Good News, Right?

It’s an enormous company. There’s always some “good” news for Amazon.

Okay, this is too many bullet points.

Thanks for reading, and we’ll see you next week.

Amazon Under Pressure

On all sides, the company's being pushed to do what it doesn't want to do

Welcome back to the Amazon Chronicles, a weekly update on the retail, logistics, and media giant. I’m still easing in after recovering from shoulder surgery, and still, to be honest, trying to figure out what this newsletter ought to be. It’s not as self-evident as it might seem.

I have a few rules. For instance, I don’t, to the best of my ability, help Amazon sell anything, so there’s no news about sales, no affiliate links, and relatively little product news.

If I were smart, I’d probably have a rule about whether or not I likewise help advertise other products, including other media products. But it turns out that I don’t, so I have to play it by feel. And here, feel tells me that it’s worth telling you about two new media projects that deal directly and look extremely promising.

A podcast and a newsletter

The first is Land of the Giants, a new podcast by Vox & Recode, the first season of which deals directly with Amazon. It’s hosted by Jason Del Rey, one of the best tech and retail reporters out there, so I feel comfortable recommending it. Here’s a quick look at where the podcast is headed:

Let’s start with Amazon’s power. Its roots can be traced back to a potent cocktail of vision, fortuitous timing, relentlessness, and a knack for exploiting loopholes — from state tax laws to a dearth of regulation that could have prevented it from acting simultaneously as retailer, retail platform, and consumer brand kingmaker…

Amazon is also the host of a giant online bazaar, a movie studio, a book publisher, a cloud computing giant, a leading developer of artificial intelligence tech, a grocery store chain ... and on and on and on.

What reporting Land of the Giants helped crystallize for me is that Amazon sees its mission as solving customer problems, no matter the industry. That’s impressive, but it’s also kind of scary. How many roles should one corporation fill in our lives? How much control do we give up if a single for-profit entity becomes a main source of our commerce, entertainment, communication, and, maybe someday, health care?

Del Rey and co. seem interested in exploring the company’s (and customers’) blind spots, the ways in which an obsessive focus on X necessarily lead to the preclusion of Y. That’s a valuable narrative in any story, but a particularly useful one for Amazon.

The second new media project worth noting this week on the Amazon beat is Tom Krazit’s new newsletter, Mostly Cloudy. Here’s Krazit on what it’s all going to be about:

For the most part, this newsletter will focus on the services sold by the Big Three public cloud providers and the impact cloud computing has had on the practice of software development. Expect to also hear about hardware, open source, enterprise software trends, security, interesting startups, emerging technologies, and maybe even the blockchain on a slow week.

With AWS and its range of attendant services playing a bigger and bigger role in the future of computing and the future of Amazon, I’m sure we could all use some big-picture perspective on where things are headed. And Tom is thankfully using the summer to offer a free preview of the site, so readers can get a chance to see whether or not they want to plunk down their dollars for the full version going forward. Marvelous.

Governments don’t like Amazon

The US Justice Department announced it’s opening “a wide-ranging antitrust review of ‘market-leading online platforms,” including Amazon. Treasury secretary Steve Mnuchin added that he believed Amazon had restricted competition and destroyed the US retail industry. So that’s not looking so good. Meanwhile, House Republicans are mad that Amazon doesn’t sell gay conversion therapy books. I would maybe buy direct? Or find another bookstore? The perils of market dominance are plentiful.

Publishers don’t like Amazon

This has longstanding animus, but the current issue is a new Audible feature, Audible Captions, which transcribes an audiobook so a reader can read along while they listen. This sounds useful, but just might be a copyright violation, and as usual, publishers are having to opt out rather than opt in.

Amazon’s other retail partners don’t like Amazon

Ditto, but here the issue are new rules governing when and how third-party retailers can be suspended from selling on the platform. It’s part of an antitrust settlement Amazon agreed to with Germany, to make these rules more explicit and allow for more give-and-take between the two parties, but the third-party sellers still feel like the power balance tips too sharply in Amazon’s favor. With Amazon dealing with broader European investigations into antitrust behavior, it has to show that it can play fair. But playing tough is more firmly ensconced in the company’s DNA.

Privacy advocates don’t like Amazon

It is probably fair to call Amazon a surveillance company. It operates on many scales; the devices that log all speech events in customers’ rooms, the newfangled convenience stores where customers forego lines in favor of having all of one’s movements watched and recorded, or, at its limits, the products it offers explicitly for surveillance, like its Ring doorbells and Rekognition face-recognition application that it uses with law enforcement and government agencies. Slate’s Future Tense recently found that Amazon was having more luck approaching surveillance from the civilian side, through programs like Ring, than through the government side, via programs like Rekognition.

Your Must-Read

Chronicles reader Chris Gillett suggested this thoughtful but provocative article from Palladium, “How Amazon Is Beating Antitrust Before It Happens.” A lot of it is not new if you’ve been reading along for a while, but I was struck by this section, on how Amazon ultimately has to seek an alliance with government power in order to stay on the successful side of the antitrust question.

If Amazon doesn’t want its wings clipped by antitrust agencies, it must decide whether to exercise its power aggressively and decisively to remain independent, or to broadly align itself with the government. If it opts for the latter, this presents the opportunity to hijack the state’s power through regulatory capture, while preserving its own….

To avoid antitrust action, Amazon must integrate with the state, and in doing so, would seek to come off the better—winning more new power than it loses in the coalition. If it coordinates with the state, it could protect its existing businesses from competition, stave off antitrust enforcement, and influence national policy. Even if Amazon doesn’t wish to use a coalition with government advantageously, it is still under pressure to coordinate to protect itself from government action.

Amazon and Bezos have taken action in recent years that can be interpreted as attempting to integrate with the state. Amazon and Blue Origin, Bezos’ rocket company, have contracts with government agencies. As one of the country’s top lobbying spenders, Amazon has sway with elected officials. The company’s second headquarters will be built across the Potomac from the National Mall. Employing a planned 50,000 people, this would make Amazon the largest non-federal employer in the DC area. This could build significant influence over the long-term by bringing the DC social scene within Amazon’s gravitational sway. A similar objective may motivate Bezos’ recent purchase of a Washington museum, which he plans to convert into a private residence and, the Washingtonian reports, “a veritable Death Star of Washington entertaining.” Most notably, Bezos purchased the Washington Post in 2013.

Sure enough, Amazon, along with Facebook, is spending more than ever before on its lobbying efforts in an effort to stay in legislators’ good graces. But there’s political pressure on both the left and the right to push Amazon places it doesn’t want to go.

Thanks for tuning in this week. We’ll see you again soon. And please, if you have tips or ideas for coverage, just hit reply; I’m always interested to know what you think is worth covering.

Amazon's Counterfeiting Problem

Going back in order to go forward

Welcome back to the Amazon Chronicles. Thanks for your patience these weeks while I’ve been recovering from shoulder replacement surgery. For those wondering how it’s going — it sucks! They try to make a completely different part of your shoulder do the work the rotator cuff used to do. It’s exactly as hard as that sounds. I’m doing rehab twice a week, and I’m sore all the time, and it’s impossible to get comfortable, and nothing works the way it should.

However.

I am getting better, and there’s discussion about Amazon to be had.

This week was Prime Day, which was, of course, two days, and also including a Prime Day strike of warehouse workers in both Minnesota and Germany. Other retailers got in on it, having their own sales, turning the first-quarter news-lite summer doldrums into a regular secular feast day over here. Amazon announced that the two Prime Days together passed last year’s Black Friday and Cyber Monday combined. (By what metric, exactly, wasn’t extremely clear. It looks like total items sold rather than total revenue, but, who knows.)

I’m still hung up on a slightly older story, though, and since I wasn’t around to write about it then, I hope you’ll forgive me for writing about it now. It’s David Streitfeld’s “What Happens After Amazon’s Domination Is Complete? Its Bookstore Offers Clues.” Despite that somewhat circuitous headline, what Streitfeld’s article is really about is counterfeit goods on Amazon’s platform, a root problem that affects everything from books to medical equipment.

This article touches on all the Big Amazon Questions we’ve discussed here at the Chronicles, like Is Amazon A Monopoly? Is Amazon A Good Partner? and Is Amazon Good For Its Customers? There’s probably a labor-rights and a real estate angle to this too, but it was cut for space. (Exaggerating only slightly.)

The World Cup, too, offered plenty of opportunities for counterfeiters, including on Amazon’s platform. This is not a problem that’s going away. All those new Prime subscribers are going to have to learn how to navigate between the real and the fake right on Amazon’s own website.

Meanwhile, entrants like StockX and The Real Real, which offer used but authenticated goods, are finding their own successes. Authentic goods may turn out to be a better business than being the Everything Store.

This is why I think that Amazon will continue to push its anti-counterfeiting efforts and try to control more of its own product stream. Streitfeld’s own article even shows this logic at work:

As AMT was getting ready this spring to release the 2019 guide, it proposed an even deeper integration with Amazon.

“To eliminate the possibility of Amazon facilitating the sale of counterfeit books, we would like to offer Amazon the opportunity to serve as a wholesaler of our titles, cutting out the middle man,” Mr. Kelly wrote to the company.

It was, in essence, rewarding Amazon by surrendering to its dominance.

“We’d rather not be on Amazon,” Mr. Kelly said. “But we felt like we didn’t have a choice.”

All of Amazon’s anti-counterfeiting efforts involve surrendering a measure of control to the platform. Amazon does have enough market power that it can make this demand, and most partners will acquiesce.

The other side is whether Amazon will take a reputational hit for selling counterfeit products. Most Amazon customers seem to carve around potential counterfeits, as they’ve learned how to do so on eBay and other websites. They’ll say, “oh, I just don’t buy _____ on Amazon any more,” but continue to use the site. What would happen if Amazon acquired a general, not just a specific, reputation for selling counterfeit goods?

I think it would be a total disaster. For one thing, it would be profoundly anti-customer. As we’ve seen before, Amazon has been able to skate on ethically slippery waters because it’s so resolutely pro-customer.

But as the range of goods Amazon sells gets wider and wider, it opens itself up to more and more abuse. I don’t know if that logic is avoidable either, despite all the checks Amazon may put in place.

Suffice it to say, this is Amazon’s greatest existential threat right now, and its greatest market opportunity. If it can turn itself into the world’s biggest market of authenticated goods, selling everything from books to cosmetics to electronics to luxury apparel and more, then its potential is limitless. The seedier it gets, the more limited it stays.

More thoughts next week.

Putting the Chronicles on Hiatus

Yeah, this sucks

After long deliberation, I’ve decided to put this newsletter on a temporary hiatus until I can recover from my shoulder surgery. It sucks! There’s a ton to write about and I really want to write it. But physically, I can’t get it done, and setting myself up to fail again and again was putting me in a downward spiral that wasn’t going anywhere good.

How this works

If you’re a free subscriber, very little will change. You just won’t get the Amazon Chronicles in your Inbox weekly-ish for a little while. If you’re a paid subscriber, then payments will stop for two months until the site resumes in early July, at which point they’ll pick up again. Annual subscribers should have their subscriptions extended by two months. Then after two months, everything will come back. We pressed pause, and we’ll press unpause again.

With luck, I will come back with a replaced shoulder and renewed verve to write about all things Amazon. Thanks, friends, for your kindness and patience. I’ll see you again soon.

Tim

https://tim-carmody.glitch.me

How Much Can Amazon Make Free?

The answer is: a lot, and still make money

Welcome back to the Amazon Chronicles, and thanks for your patience in getting this issue to you. A couple of things have happen since I wrote to you last: I went on what was supposed to be a working vacation, and I managed to dislocate my shoulder again. It turns out I am going to need shoulder replacement surgery, so I am typing what I can while I can. (Dictation will probably be the name of the game afterwards.) A lot’s been happening with Amazon while I’ve been out, so let’s get to it.

Amazon Might Add A Free, Ad-Supported Tier to Amazon Music

This is potentially a really powerful idea. The reporting comes from Billboard, which says the following:

Amazon has entered into discussions to launch a free, ad-supported music service, sources familiar with the plan tell Billboard -- intensifying its competitive threat to global streaming leader Spotify.

The world’s biggest e-retailer would market the free music service through its voice-activated Echo speakers, sources say, and would offer a limited catalog. It could become available as early as next week.

That actually tells us very little! It doesn’t tell us whether it’s radio or station-based, like Pandora, or album-and-artist based like Spotify. It’s not clear whether the free music tier would be Echo- or Alexa-only, or available via other devices or the web. All of these things affect the nature of the service, how robust it will be, what its actual competition is, and how successful it might become.

But: whatever! Let’s go back to general principles here, and the ultimate general principle is that a free, ad-supported media offering by Amazon could be supremely disruptive. Audio is probably the most natural market to give this a try, because, get this: Amazon already has a pretty successful music service, and some of the most successful audio-based hardware devices on the market. It’s also got a huge marketplace for ads and could use more portals for discovery. A free music tier feels like a no-brainer.

And if that works well, could you also expect to see ad-supported television from Amazon too? Why not? Keep those subscription costs low, and those sales margins and user numbers high. Makes sense to me!

Amazon Might Be Making Earbuds With Alexa In Them

This reporting comes from Bloomberg’s Mark Gurman, who writes:

The Seattle-based e-commerce giant is readying earbuds with built-in Alexa access for as early as the second half of this year, according to people with knowledge of the plans. The headphones will look and act similar to AirPods, but people working on the product inside Amazon are striving for better audio quality, the people said. Like the AirPods, the Amazon earbuds are designed to sit inside users’ ears without clips around the ear…

The headphones will let people use their voice to order goods, access music, weather and other information on the go. The Amazon digital assistant will be summoned by saying "Alexa." There will be physical gesture controls, such as tapping to pick up and end calls and switch between songs, the people said. Amazon declined to comment.

Oooooh is this going to be execution-dependent. I mean, we’re talking really tricky stuff. Half the success of Echo devices so far has been because you don’t have to wear or control anything to make them work. Earbuds might be the most complex wearable around. You’ve got comfort issues, audio quality, durability and resilience, etc., etc. There are reasons Apple hasn’t been able to make these things as popular as the other stuff they sell, even after buying Beats. It’s a tricky piece of hardware.

But if it can work, there’s a huge upside. You take Alexa outside the home, and it becomes an information layer for your life. At a minimum, you’ve got a killer product to sell music, audiobooks, podcasts, and whatever else you’ve got that you can squeeze in a speaker. You’ve got the foundation for multimodal interfaces you can build on later, with screens or projectors as well as audio. But Amazon has to come correct with this; it probably can’t launch with what it has and fix it later. It’s got to create a compelling product out of the gate.

SPACE INTERNET, via Project Kuiper

The ultimate limit on Amazon’s product line from e-retail to smart earbuds, is the penetration of the global internet. So it makes sense that Amazon is one of several companies pursuing a satellite-based solution.

Amazon’s effort is called Project Kuiper. The reporting here comes from Alan Boyle at GeekWire, who says Amazon is intent on putting 3,236 satellites in low earth orbit, all to provide internet access everywhere that doesn’t have it.

“Project Kuiper is a new initiative to launch a constellation of low Earth orbit satellites that will provide low-latency, high-speed broadband connectivity to unserved and underserved communities around the world,” an Amazon spokesperson said in an emailed statement. “This is a long-term project that envisions serving tens of millions of people who lack basic access to broadband internet. We look forward to partnering on this initiative with companies that share this common vision.”

Amazon said the satellites would provide data coverage for spots on Earth ranging in latitude from 56 degrees north to 56 degrees south. About 95 percent of the world’s population lives within that wide swath of the planet.

This is one of the rare cases where Amazon’s mundane terrestrial ambitions and Jeff Bezos’s fascination with building and owning the basic infrastructure of space (and building things to last generations, not just years or decades) come together. Amazon needs future customers and doesn’t want to have to rely on any state’s infrastructure to get them. This is years-out thinking, but it’s very shrewd, and frankly, quite realistic.

Amazon’s Future Also Needs A Healthy Planet, Maybe It Should Work On That

Amazon workers are pushing the company to get serious about taking action to stop climate change. More than 3500 employees signed a letter urging Jeff Bezos to create a comprehensive climate change plan for their company, transitioning away from fossil fuels rather than relying on carbon offsets, and making climate impact a priority when making business decisions.

Jason Del Rey at ReCode says it’s unusual for Amazon employees to go public with their names and faces when it comes to matters of internal dissent at the company. But Amazon had already been accused of backsliding on its publicly-stated environmental goals, and had publicly touted its partnership with fossil fuel companies, and generally had left itself open to this kind of criticism.

Humans Listen to Alexa Recordings

At its basic level, this is not especially controversial. Amazon’s Alexa group has a voice review team that “listens to voice recordings captured in Echo owners’ homes and offices. The recordings are transcribed, annotated and then fed back into the software as part of an effort to eliminate gaps in Alexa’s understanding of human speech and help it better respond to commands,” according to Bloomberg.

It gets tricky in the details. For example:

Sometimes they hear recordings they find upsetting, or possibly criminal. Two of the workers said they picked up what they believe was a sexual assault. When something like that happens, they may share the experience in the internal chat room as a way of relieving stress. Amazon says it has procedures in place for workers to follow when they hear something distressing, but two Romania-based employees said that, after requesting guidance for such cases, they were told it wasn’t Amazon’s job to interfere.

Amazon should probably also review their anonymization procedures, because this isn’t cutting it:

A screenshot reviewed by Bloomberg shows that the recordings sent to the Alexa reviewers don’t provide a user’s full name and address but are associated with an account number, as well as the user’s first name and the device’s serial number.

It needn’t be sinister on Amazon’s part; imagine a government requesting recordings of a user’s device. If Amazon’s going to be collecting this data and making it available to anyone, it needs to be properly anonymized.

Your Must-Read: Jeff Bezos’s 2018 Letter to Shareholders

This whole letter could use an annotation (and I still might do one), but let’s focus on this section for now:

As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.

Development of the Fire phone and Echo was started around the same time. While the Fire phone was a failure, we were able to take our learnings (as well as the developers) and accelerate our efforts building Echo and Alexa. The vision for Echo and Alexa was inspired by the Star Trek computer. The idea also had origins in two other arenas where we’d been building and wandering for years: machine learning and the cloud. From Amazon’s early days, machine learning was an essential part of our product recommendations, and AWS gave us a front row seat to the capabilities of the cloud. After many years of development, Echo debuted in 2014, powered by Alexa, who lives in the AWS cloud.

No customer was asking for Echo. This was definitely us wandering. Market research doesn’t help. If you had gone to a customer in 2013 and said “Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?” I guarantee you they’d have looked at you strangely and said “No, thank you.”

It’s unclear what’s being subtweeted (sublettered?) in this letter. Amazon-does-Pandora doesn’t seem to cut it. Project Kuiper probably counts. But there are a couple of lessons one can draw from it:

  1. Ideas for future Amazon products can come from anywhere;

  2. The me-too products aren’t always the most successful;

  3. That doesn’t mean Amazon’s going to stop doing them.

Like, okay, Amazon made an unsuccessful phone; Jeff Bezos’s lesson from this is MAKE MORE PHONES. Even if we don’t win in phones, we might win doing something else. That is an intriguing idea! It’s the kind of idea a company might come up with if they were going to launch some earbuds.

Bezos Watch

Jeff and MacKenzie Bezos announced their divorce settlement last week. Jeff Bezos retains 75 percent of the couple’s Amazon stock, voting rights over their full joint share, and full ownership of The Washington Post and Blue Origin, his spaceflight company. MacKenzie Bezos will now own about 4 percent of Amazon, a share worth about $36 billion, making her one of the wealthiest women in the world.

Keeping Myself From Embarrassing Myself

There’s plenty more to say about Amazon, but I promised I would not go all Moby Dick on this newsletter, and instead keep it relatively simple. All I can promise you is more next week.

Until then,

Tim Carmody

https://tim-carmody.glitch.me

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