Is Amazon's business model profitable?

Discussion in 'Economics' started by Pekelo, Dec 16, 2007.

  1. Pekelo


    Please note this thread is about's core business model and not about the stock's price.

    Personally I don't think Amazon's core model is a profitable one. As a costumer I like it, but had I financed it from the beginning, I would have thrown in the towel long time ago.
    Took 7 years for the company to turn a profit finally, and although they have been profitable since 2002, I suspect the bigger chunk of the profits come from sidebusinesses (Web Services, powering other sites) and not from the core model, which is online shopping.

    Anyway, I am not an economist, so I am curious how others see the business, I might have overlooked some aspects.

    I know only 2 similar websites and, and they are not doing that well either. If the business model was profitable, I would expect more competition.

    "For the fiscal year 2006, Overstock suffered a 6% decrease in overall sales and lost over $100 million on less than $800 million in sales."


    "For the nine months ending September 30, 2007, reported total sales (based on gross merchandise value) of more than $300,000,000 and net income of $2,148,000 (excluding $401,000 of stock-based compensation).

    "Just as has begun celebrating its 10-year anniversary, these earnings cap one of our most successful 12-month runs in company history," said Neel Grover, CEO and president of"

    So after 10 years they finally did 1% profit of revenues and they are shitting themselves of happiness....
  2. First economics is not about profits ;)

    Amazon was the first to do this when the internet was new so it took time to become profitable. They are the leader with the learning curve experience, infrastructure, systems and competitive advantage in place already. Anyone coming now to the game has a serious uphill battle. AMZN is stil maybe 85% books while and such are trying to sell everything and compete with so many stores.

    If you look at AMZN through Porters Competitiveness analyssi you can see why AMZN is profitable. It does not matter if the business model is profitable for ANY entrant, only if it is profitable for the leader and the one who still does it after many years.
  3. GTG


    If the "core business" is selling books, then I'd say yes, its a profitable business. If we are talking about all of the other crap they sell too, I'm not as confident. I suspect the E-bay model is better for most of the other stuff.
  4. Pekelo


    1. It is not really profitable. They are still in the red if you add those 12 years. And as I said, most of the current profits don't come from the core model...

    2. came only 2 years after Amazon, and as the data shows, after 10 years they are just doing so-so...

    3. also started in 1997 (was called D2: Discounts Direct) so it isn't a new kid on the block either....
  5. Pekelo


    I tend to agree. As long as an online retailer's business is specific to a particular part of the retail business (only books, only computers, only flowers,etc.) it can be profitable, but when they try to diversify and sell pretty much everything, the profitability goes down the drain....

    At one point both Amazon and the more they sold, the more they lost...

    Article from 2000:,1000000308,2078659,00.htm

    Analysis of the 3 mentioned sites from 2005:
  6. xiaodre


    The used bookstore website is most definitely a profitable model.
  7. Pekelo


    But that is not what Amazon's core model was/is...

    Just for the record, after 12 years of operation Amazon is still way in the red...

    "Nevertheless, the firm's cumulative profits remain negative. As of September 2007, the accumulated deficit stood at US$1.58 billion."
  8. I was under the impression the edge that Amazon had was a "kickback" from the publishers. If a conventional bookstore ordered 10 books, sold 7, then sent back 3 to the publisher, the publisher had a real cost here dealing with returns. With amazon, their business model was no returns to the publisher, The publisher lowered the price on the books sold to amazon because there weren't any expected returns. (They may have given away that margin with even lower prices.)

    If this model is still in place or reduced incentives I don't know, but originally that is the competitive edge Amazon had in the begining.

    As far as internet retail business models, I'd say they are all poor. The money made on the net is giving away something for free and selling ad space (or selling with e mail spam). It is exponentially big bucks with increasing page views.

    Internet retailers still need conventional paper/media ads to reach customers. Internet retailers with a brick and mortar stores may be at an advantage but stand alone, it is a tough business.

    If they tax internet sales, all cost advantages are moot. Rising shipping costs are ruining price advantage.
  9. OSTK is a flea market, I'd like to know what his insurance costs are on his inventory. That is probably a killer right there. He could probably get the goods for free and lose money on time decay.:D
  10. Pekelo



    I think the point where Bezos misscalculated his business was geography. A specified retailer might need just one distribution center, or 2-3 at most.
    Amazon ended up building 15 in the USA. And let's fill all with most everything. With so many distribution centers they killed the advantage of being an e-retailer. That must hurt the bottomline...
    #10     Dec 16, 2007