Jeff Bezos poses on a lorry after handing over a two billion dollar cheque to Indian Vice President and Country Manager of Amazon.in, Amit Agarwal, in Bangalore. Photo: Manjunath Kiran/AFP/Getty
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The party is over for Amazon

The retail giant was unstoppable – until this year. What happened?

At Business Insider’s annual Ignition conference Tuesday, CEO Jeff Bezos explained why Amazon’s stock price keeps rising despite almost zero profits: the company continues to invest in new businesses, and Amazon’s investors are OK with that. “If you’re going to take bold bets, they’re going to be experiments,” he said. “And if they’re experiments, you don't know ahead of time if they're going to work. Experiments are by their very nature prone to failure. But a few big successes compensate for dozens and dozens of things that didn’t work.”

But Amazon hit a road bump in 2014: its stock is down 18 per cent, and investors are no longer optimistic about the company’s outlook. This year has exposed the limitations of Bezos’s business strategy.

For most of Amazon’s existence, the company has been barely profitable. From 2007 through 2013, its revenues quintupled from $14.8bn to $74.45bn, but profits dropped from $436m to $273m. Note: that's billions in revenue, and just hundreds of millions in profits. Meanwhile, Amazon’s stock has consistently risen because investors didn't care about the dwindling profit margins. Bezos’s strategy worked: Amazon is now the US leader in online retail. It’s so big that the editor of the New Republic, Franklin Foer, wrote a cover story declaring the company a monopoly.

Then 2014 hit, and investors turned on the company. When Amazon announced on Monday that it would issue new unsecured debt, Moody’s downgraded the company’s outlook to negative. There are two reasons for this change in investor sentiment.

1. Revenue growth has slowed from 40 per cent in 2010 and 2011, to 27 per cent in 2012, to 22 per cent in 2013. This year it is projected to be between 16 and 20 per cent.

2. Amazon’s newest investments aren’t paying off. The most notable failure has been the Fire phone, which has received terrible reviews. In October, the firm took a $170m write-down loss as its inventory piled up and the company cut the cost of the phone from $200 to 99 cents. The Fire’s failure, at least so far, does not necessarily reveal a flaw in Bezos’s strategy. After all, if you make big bets, you’re going to have some major failures as well. “What really matters is that companies that don’t continue to experiment – companies that don’t embrace failurethey eventually get in a desperate position, where the only thing they can do is make a ‘Hail Mary’ bet at the very end,” Bezos said on Tuesday. Of course, not all of Amazon’s recent investments have failed. Fire TV, for instance, has been a success. But investors get nervous when those bets fail to pay off at the same time the core business’ growth slows. And the Fire phone was a big bet that has not worked.

Matt Yglesias, then writing for Slate, predicted this in January. “Amazon gets away with relentlessly investing in the future only because, for now, investors have faith in Bezos and his strategy,” he wrote. “But that faith has been tested in the past, and it’s likely that some future convulsion in markets will cause it to wane again.” Yglesias didn’t see any reason for this strategy to fail soon, much less this year. “For the foreseeable future, the party can – and willgo on, crushing everything in its path and generating mighty gains for consumers.”

On that point, Yglesias was wrong: investors have turned the lights on. The party is over. And yet, if his comments on Tuesday are any indication, Bezos isn’t planning to change his strategy anytime soon. That’s good news for Amazon’s penny-pinching customers, but could mean a rocky 2015 for the retail giant.

This article first appeared on newrepublic.com

Photo: Getty
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PMQs review: Jeremy Corbyn prompts Tory outrage as he blames Grenfell Tower fire on austerity

To Conservative cries of "shame on you!", the Labour leader warned that "we all pay a price in public safety" for spending cuts.

A fortnight after the Grenfell Tower fire erupted, the tragedy continues to cast a shadow over British politics. Rather than probing Theresa May on the DUP deal, Jeremy Corbyn asked a series of forensic questions on the incident, in which at least 79 people are confirmed to have died.

In the first PMQs of the new parliament, May revealed that the number of buildings that had failed fire safety tests had risen to 120 (a 100 per cent failure rate) and that the cladding used on Grenfell Tower was "non-compliant" with building regulations (Corbyn had asked whether it was "legal").

After several factual questions, the Labour leader rose to his political argument. To cries of "shame on you!" from Tory MPs, he warned that local authority cuts of 40 per cent meant "we all pay a price in public safety". Corbyn added: “What the tragedy of Grenfell Tower has exposed is the disastrous effects of austerity. The disregard for working-class communities, the terrible consequences of deregulation and cutting corners." Corbyn noted that 11,000 firefighters had been cut and that the public sector pay cap (which Labour has tabled a Queen's Speech amendment against) was hindering recruitment. "This disaster must be a wake-up call," he concluded.

But May, who fared better than many expected, had a ready retort. "The cladding of tower blocks did not start under this government, it did not start under the previous coalition governments, the cladding of tower blocks began under the Blair government," she said. “In 2005 it was a Labour government that introduced the regulatory reform fire safety order which changed the requirements to inspect a building on fire safety from the local fire authority to a 'responsible person'." In this regard, however, Corbyn's lack of frontbench experience is a virtue – no action by the last Labour government can be pinned on him. 

Whether or not the Conservatives accept the link between Grenfell and austerity, their reluctance to defend continued cuts shows an awareness of how politically vulnerable they have become (No10 has announced that the public sector pay cap is under review).

Though Tory MP Philip Davies accused May of having an "aversion" to policies "that might be popular with the public" (he demanded the abolition of the 0.7 per cent foreign aid target), there was little dissent from the backbenches – reflecting the new consensus that the Prime Minister is safe (in the absence of an attractive alternative).

And May, whose jokes sometimes fall painfully flat, was able to accuse Corbyn of saying "one thing to the many and another thing to the few" in reference to his alleged Trident comments to Glastonbury festival founder Michael Eavis. But the Labour leader, no longer looking fearfully over his shoulder, displayed his increased authority today. Though the Conservatives may jeer him, the lingering fear in Tory minds is that they and the country are on divergent paths. 

George Eaton is political editor of the New Statesman.

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