Amazon: the backlash backlash

Minuscule profits might be a sign of health.

The backlash against the backlash against Amazon is upon us. The question, you will recall, is why don't Amazon's shareholders care that the company makes no money, and has never stated any plans as to how it will make money?

Part of the answer to that is that it's pretty obvious what investors are hoping Amazon's actual plan is: use its razor-thin margins to drive all competitors out of business, then exploit barriers to market to extort monopoly profits from customers. Unfortunately, that would be illegal. So investors are in a nudge-nudge, wink-wink standoff with the company as it insists that it has no plans to leverage monopolies, and its shareholders respond with exaggerated nods and over-loud exclamations of "sure you don't".

But Eugene Wei, who worked at Amazon from 1997 to 2004, has presented an alternative view of why the company's shareholders might just be acting rationally even if they don't expect monopoly profits any time soon — particularly in comparison to, say, Apple.

Wei writes:

Attacking the market with a low margin strategy has other benefits, though, ones often overlooked or undervalued. For one thing, it strongly deters others from entering your market. Study disruption in most businesses and it almost always comes from the low end. Some competitor grabs a foothold on the bottom rung of the ladder and pulls itself upstream. But if you're already sitting on that lowest rung as the incumbent, it's tough for a disruptor to cling to anything to gain traction.

An incumbent with high margins, especially in technology, is like a deer that wears a bullseye on its flank. Assuming a company doesn't have a monopoly, its high margin structure screams for a competitor to come in and compete on price, if nothing else, and it also hints at potential complacency. If the company is public, how willing will they be to lower their own margins and take a beating on their public valuation?

In other words, Amazon's low margins may mean that it's making virtually no profit. But they also mean that it's guaranteed to continue making at worst virtually no profit forever — because who is seriously going to try and undercut them? Meanwhile, Apple, with its notoriously high profitability, is an obvious target for competitors who think they could do the same thing but charge less for it.

That clearly can't be the whole story. No matter how much you think Apple is a target for low-end disruption (and I'm skeptical of such claims — much of the company's margin comes from astonishing returns to scale, which isn't something a start-up can match), it's clear that its 10:1 price:earnings ratio undervalues it compared to Amazon's 3000:1. The market is implicitly predicting not just competition, but ruinous, game-changing disruption for the former, or a hundred-fold increase in profits for the latter. Or both.

But nonetheless, Wei's argument goes a long way to explaining some of what Amazon shareholders might be thinking — and maybe they aren't as bamboozled by Jeff Bezos as they seem.

Amazon's Jeff Bezos. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Richmond is a wake-up call for Labour's Brexit strategy

No one made Labour stand in Richmond Park. 

Oh, Labour Party. There was a way through.

No one made you stand in Richmond Park. You could have "struck a blow against the government", you could have shared the Lib Dem success. Instead, you lost both your dignity and your deposit. And to cap it all (Christian Wolmar, take a bow) you self-nominated for a Nobel Prize for Mansplaining.

It’s like the party strategist is locked in the bowels of HQ, endlessly looping in reverse Olivia Newton John’s "Making a Good Thing Better".

And no one can think that today marks the end of the party’s problems on Brexit.

But the thing is: there’s no need to Labour on. You can fix it.

Set the government some tests. Table some amendments: “The government shall negotiate having regard to…”

  • What would be good for our economy (boost investment, trade and jobs).
  • What would enhance fairness (help individuals and communities who have missed out over the last decades).
  • What would deliver sovereignty (magnify our democratic control over our destiny).
  • What would improve finances (what Brexit makes us better off, individually and collectively). 

And say that, if the government does not meet those tests, the Labour party will not support the Article 50 deal. You’ll take some pain today – but no matter, the general election is not for years. And if the tests are well crafted they will be easy to defend.

Then wait for the negotiations to conclude. If in 2019, Boris Johnson returns bearing cake for all, if the tests are achieved, Labour will, and rightly, support the government’s Brexit deal. There will be no second referendum. And MPs in Leave voting constituencies will bear no Brexit penalty at the polls.

But if he returns with thin gruel? If the economy has tanked, if inflation is rising and living standards have slumped, and the deficit has ballooned – what then? The only winners will be door manufacturers. Across the country they will be hard at work replacing those kicked down at constituency offices by voters demanding a fix. Labour will be joined in rejecting the deal from all across the floor: Labour will have shown the way.

Because the party reads the electorate today as wanting Brexit, it concludes it must deliver it. But, even for those who think a politician’s job is to channel the electorate, this thinking discloses an error in logic. The task is not to read the political dynamic of today. It is to position itself for the dynamic when it matters - at the next general election

And by setting some economic tests for a good Brexit, Labour can buy an option on that for free.

An earlier version of this argument appeared on Jolyon Maugham's blog Waiting For Tax.

Jolyon Maugham is a barrister who advised Ed Miliband on tax policy. He blogs at Waiting for Tax, and writes for the NS on tax and legal issues.