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

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Why Angela Merkel's comments about the UK and US shouldn't be given too much weight

The Chancellor's comments are aimed at a domestic and European audience, and she won't be abandoning Anglo-German relationships just yet.

Angela Merkel’s latest remarks do not seem well-judged but should not be given undue significance. Speaking as part of a rally in Munich for her sister party, the CSU, the German Chancellor claimed “we Europeans must really take our own fate into our hands”.

The comments should be read in the context of September's German elections and Merkel’s determination to restrain the fortune of her main political rival, Martin Schulz – obviously a strong Europhile and a committed Trump critic. Sigmar Gabriel - previously seen as a candidate to lead the left-wing SPD - has for some time been pressing for Germany and Europe to have “enough self-confidence” to stand up to Trump. He called for a “self-confident position, not just on behalf of us Germans but all Europeans”. Merkel is in part responding to this pressure.

Her words were well received by her audience. The beer hall crowd erupted into sustained applause. But taking an implicit pop at Donald Trump is hardly likely to be a divisive tactic at such a gathering. Criticising the UK post-Brexit and the US under Trump is the sort of virtue signalling guaranteed to ensure a good clap.

It’s not clear that the comments represent that much of a new departure, as she herself has since claimed. She said something similar earlier this year. In January, after the publication of Donald Trump’s interview with The Times and Bild, she said that “we Europeans have our fate in our own hands”.

At one level what Merkel said is something of a truism: in two year’s time Britain will no longer be directly deciding the fate of the EU. In future no British Prime Minister will attend the European Council, and British MEPs will leave the Parliament at the next round of European elections in 2019. Yet Merkel’s words “we Europeans”, conflate Europe and the EU, something she has previously rejected. Back in July last year, at a joint press conference with Theresa May, she said: “the UK after all remains part of Europe, if not of the Union”.

At the same press conference, Merkel also confirmed that the EU and the UK would need to continue to work together. At that time she even used the first person plural to include Britain, saying “we have certain missions also to fulfil with the rest of the world” – there the ‘we’ meant Britain and the EU, now the 'we' excludes Britain.

Her comments surely also mark a frustration born of difficulties at the G7 summit over climate change, but Britain and Germany agreed at the meeting in Sicily on the Paris Accord. More broadly, the next few months will be crucial for determining the future relationship between Britain and the EU. There will be many difficult negotiations ahead.

Merkel is widely expected to remain the German Chancellor after this autumn’s election. As the single most powerful individual in the EU27, she is the most crucial person in determining future relations between the UK and the EU. Indeed, to some extent, it was her intransigence during Cameron’s ‘renegotiation’ which precipitated Brexit itself. She also needs to watch with care growing irritation across the EU at the (perceived) extent of German influence and control over the institutions and direction of the European project. Recent reports in the Frankfurter Allgemeine Zeitung which suggested a Merkel plan for Jens Weidmann of the Bundesbank to succeed Mario Draghi at the ECB have not gone down well across southern Europe. For those critics, the hands controlling the fate of Europe are Merkel’s.

Brexit remains a crucial challenge for the EU. How the issue is handled will shape the future of the Union. Many across Europe’s capitals are worried that Brussels risks driving Britain further away than Brexit will require; they are worried lest the Channel becomes metaphorically wider and Britain turns its back on the continent. On the UK side, Theresa May has accepted the EU, and particularly Merkel’s, insistence, that there can be no cherry picking, and therefore she has committed to leaving the single market as well as the EU. May has offered a “deep and special” partnership and a comprehensive free trading arrangement. Merkel should welcome Britain’s clarity. She must work with new French President Emmanuel Macron and others to lead the EU towards a new relationship with Britain – a close partnership which protects free trade, security and the other forms of cooperation which benefit all Europeans.

Henry Newman is the director of Open Europe. He tweets @henrynewman.

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