business news in context, analysis with attitude

by Kevin Coupe

Amazon yesterday, in yet another sobering demonstration that its business model is flawed, unsustainable, and doomed to collapse sooner rather than later, announced that its Q2 sales were up 31% to $30.4 billion, compared with $23.2 billion in second quarter 2015 ... that its Q2 operating income was $1.3 billion in the second quarter, compared with $464 million in second quarter 2015 ... and that its second quarter net income was $857 million, compared with $92 million during the same period a year ago.

And yes, I was being sarcastic with that "in yet another sobering demonstration that its business model is flawed, unsustainable, and doomed to collapse sooner rather than later" stuff.

In its story about Amazon's results, the New York Times writes that "for most of its life, Amazon sacrificed profits if it could build another few warehouses to ship orders to customers more quickly or find some other investment to fuel its growth. Now, it cannot avoid showing big profits thanks to the lucrative cloud computing business in which it has improbably become a leader."

And while Amazon's approach to business generally has been to sacrifice profit for the sake of making continued investments in technologies that it has felt would keep it relevant and ahead of the competition, the Times writes that "what is most striking about its recent habit of showing profits is that Amazon has not suddenly become stingy about making investments. In a conference call, Amazon’s chief financial officer, Brian Olsavsky, said that the company would open 18 new fulfillment centers — the warehouses from which it processes customer orders — in the third quarter of this year, three times the number it opened in the same period last year.

"Amazon plans to nearly double its spending on digital video during the second half of the year as it expands the offerings of its Netflix-like streaming service, he said. That spending increase reflects a nearly tripling in the number of original television shows and movies financed by Amazon."

Benzinga notes in its coverage that Amazon's market cap this week passed $355.5 billion, which is more that the market caps for Walmart, Costco and Target combined. Now, this story also notes that those three companies combined generate almost seven times as much revenue as Amazon, so one has to wonder if "Amazon being valued as a retailer or as a tech company?"

However, the fact is that it may not matter, especially to shoppers ... if Amazon is able to use its web services business to help support narrow margins achieved in its retail business, and use other facets - like original series - to expand and solidify its ecosystem.

By the way, just as a point of comparison, it is worth nothing that Whole Foods yesterday said that it just had its fourth straight quarter of same-store sales declines, as they were down 2.6 percent ... and that for the current quarter, same store sales so far are down 2.4 percent.

I'm not suggesting that Amazon will never run into business model problems, though for the moment its ecosystem approach to business seems to be working pretty well. And I'm not suggesting that Whole Foods can't and won't come back from its current issues, though to be honest, I'm not wild about the current iteration of the "365" concept that it is starting to unveil.

I am just saying that this is all an Eye-Opener.

I was talking to a friend of mine, Craig Ostbo, at the MNB get-together last night here in Portland, and he said that he's been using a new phrase to describe businesses that "get it" and businesses that don't.

You're either at the table or you're on the menu.

I think that's true ... and it is a metaphor that every business needs to think about when considering the short-term and long-term viability of their models.
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