Bezos long ago figured out that the best tax strategy in modern America for a public company is to operate without profit. The company operates with a relatively (to the revenue) small loss, maintaining positive cash flow by issuing and selling additional stock. Selling new stock is (remarkably) tax free. The dilution is negligible since the stock is valued by the revenue (not profit so much). Everybody benefits: executives are now compensated mainly by the RSUs and options, and the corporate profit is only a tax drag that does not really affect this compensation.

Issuing stock is not the principle way they maintain positive cash flow. The float between the time their customers pay them and the time they have promised to pay their vendors creates enormous, ever-increasing operating cash flow:

https://hbr.org/2014/10/at-amazon-its-all-about-cash-flow/

They are essentially borrowing from their own customers (or maybe more accurately, vendors), at zero interest, to continually build the business.

Incidentally, this is pretty much how Warren Buffett made his first billions with Berkshire to the best of my understanding.

He realized that insurance generated enormous carry, and if you were able to better utilize that (say, by buying other companies and improving them) then you had a pretty winning strategy.

Most insurance companies operate this way, which long predates Buffett. In fact, it's possible for premiums to sum to less than the costs of insuring precisely because of the float.

Buffett has done well by choosing companies and people that are good at avoiding losing money.

If Amazon had a viable competitor, the profits of float investments would be the ammunition in the resulting price war. Amazon's margin is someone's opportunity.

Not even just possible, but the default of operation in the industry. Most don't turn an underwriting profit with any consistency and make all their money on their investments from that float.

I was under the impression that most insurance companies aren't part of a larger business entity that directly invests their float in other companies.

I'd assume there would be advantages on that closer relationship vs a stand-alone insurance company simply investing in a publicly traded offering.

If the point of a business is compensating its employees, that might be a strategy. However, that isn't the point of the business. The point of the business is to generate money for the shareholders. Over the short/medium term, shareholders might be content with growth and revenue. Over the long term, without profits the business has nothing for shareholders.

It really isn't a tax strategy any more than being unemployed with no income is a tax strategy. Amazon's strategy seems to be keeping margins low enough that it's hard for others to compete with them, in the hopes of great long-term profits.

While the stock may be valued on its revenue, that valuation is premised on the idea that Amazon will be making a lot of profits from that high revenue in the future. Investors aren't buying Amazon stock believing that it's avoiding profit as a tax strategy to funnel money to employees. They're buying Amazon stock believing that it's the future of retail and that being the future of retail will come with enormous profits.

The point of a business is whatever its shareholders want it to be.

>If the point of a business is compensating its employees, that might be a strategy. However, that isn't the point of the business. The point of the business is to generate money for the shareholders.

Interestingly the Bank of England's Chief Economist has today attacked that principle of company law: http://www.bbc.co.uk/news/business-33660426

To quote from the article:

The Bank of England's chief economist has expressed concern that shareholder power is leading to slower growth.

Andy Haldane told BBC Newsnight that business investment had been lower than was "desirable" for years.

One reason was that a high proportion of corporate profits were being paid out to shareholders rather than reinvested in the company.

He said that in 1970, £10 out of each £100 of profits were typically paid to shareholders through dividends.

Today, however, that figure was between £60 and £70. Mr Haldane argued that left far less cash available for growth-boosting investment and that firms risked "eating themselves".

Corporate short-termism - a focus on immediate gains rather than long-term prospects - was a rising problem for companies and pre-dated the financial crisis, he said.

I don't claim to be especially economically savvy, but isn't the fundamental premise that there's a bounded conversion between revenue and profit? Iow, that one can trade a decrease in revenue for an increase in profit by certain business decisions.

If so, then it's natural that stock price increases when revenue increases, albeit at a discount to actual profit depending on what your expected revenue:profit conversion ratio is.

The interesting part is the next step. Someone buys a stock expecting to benefit from the exchange (sell at a higher price that one purchased it for). Thus, if the stock price is correlated with revenue, and Amazon can increase revenue even without increasing profit, stockholders will still be happy.* Stockholders are looking for increased value for their stock, not any particular metric thereof.

*This is assuming Amazon finances the revenue increases through free cash flow (as mentioned elsewhere) rather than diluting stock

Isn't this pretty much the best strategy anywhere in the world? Is there any country that taxes by revenue?

Apple has this weird problem of being so profitable that they have no clue what to do with all that money. And then everyone picks on them for their loophole-based tax mitigation strategies.

There are countries with much lower corporate tax rates. E.g. Ireland is 15%, Panama is 0% (on foreign income).

I'd say the optimal strategy is what Facebook and Google do with the double Irish Dutch sandwich http://conversableeconomist.blogspot.com/2014/07/double-iris...

Many companies have that problem. They return the capital to investors to invest somewhere else. That is how equity is supposed to work: you give someone money for something and then eventually give you back more than you gave them originally.

Maybe taxes on profits were created so that companies invest their profit instead of hoarding it or giving it to shareholders, creating jobs and infrastructure in the process. As far as I'm concerned, Amazon is using its profits (or lack thereof) exactly as intended.

I don't think someone has designed taxes around incentives. In most countries wages are more heavily taxed than products, which balances the spending towards buying more things rather than employing more people. It seems very stretched, but some ecologists suggest to tax petrol more heavily and tax wages less, so it would be easier to employ more people for a task than throw more petrol at it (I use petrol in terms of fast tranports).

What about tariffs? They're designed to incentivize buying products made at home. What about "sin" taxes? They're designed to incentivize good behavior?

(Some) taxes are definitely designed around incentives.

In addition, sins are often easy to tax because consumption is rather inelastic, due to there being few alternatives.

Thus, taxes on sins can produce higher revenues than taxes on more price sensitive goods or activities would.

If you returned it to shareholders they would be reinvesting it too (just somewhere else). You can return capital to investors tax efficiently using share buybacks. Haven't looked at Amazon's annual report in detail so can't tell if they are reinvesting profit in areas that will have high return or not.

> You can return capital to investors tax efficiently using share buybacks.

What if the share price is not undervalued, the investors would get hurt if you do a buyback.

How?

The US has a system engineered around the political process. High corporate tax rates, with lots of carve-outs.

There are all sorts of strategies for optimization. Many involve lobbying Congress for special carve-outs.

profit is the key word: Amazon has historically operated w/ a profit of slim to none.

http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...

The slim overall profit is different than the operating profit, as that article explains when talking about Amazon's capex.

Amazon is notorious for capital expenditures, some of which is probably why AWS exists.

They do some kinda misleading accounting for AWS. They don't count the capital leases as expenses in "operating income" for AWS, it get's counted at the entire company level. So, because they don't have to expense any depreciation/(expense for capital expenditure in some form) at the AWS level, the "operating profit" at AWS is artificially high and would be negative if it was properly showing the economics of that business.

This isn't to suggest amazon as a whole is doing anything wrong, they are following accounting standards, but that is one place where the standards for capital leases are misleading if you don't read the fine print.

Not really. Amazon as a whole is dial-a-yield depending on the rate of profit reinvested to grow existing/new capabilities. If Bezos wanted, he could halt expansion and return more profit in the short-term, but that would delay long-term revenue (and hence profit) generation plans (however long he's able to find other business expansion directions which avoid the perils of overexpansion and also avoid plateauing for too long).

Also, some companies like Netflix and Zynga, which are AWS'es main customers, are fine to pay AWS a premium to have most of their infrastructure better managed and on-demand. Whereas most sizable businesses deploy something like OpenStack for baseline load on real, bare metal gear they buy and use AWS for traditional uses: PoCs, disaster recovery and peaking capacity. Startups tend to use AWS at first because it's easy, popular and low-risk, but it's not a panacea because it tends to get very expensive, very quickly. (It is however, clearly, a great business in itself, which probably should be spun-off.)

Disclaimer: I was with a premier enterprise AWS external consultancy shop early on that had significant access to capabilities and expanded limitation perks beyond other shops. Interestingly, they've built limitation increase requests available to most everyone now, which were manual before and depended on how much clout a customer or vendor garnered.

> it's not a panacea because it tends to get very expensive, very quickly.

I've investigated colocs near some AWS locations and found AWS to be around 20% cheaper than the cheapest viable option. With AWS's occasional price drops on top of that and general flexibility it's not a difficult choice.

One thing I found was that most providers were trying to sell vertical reliability (e.g. hardware RAID1), with a matching price. Our redundancy is horizontal at the application level (e.g. Zookeeper, Cassandra) so this has no value for us.

The bare-metal stuff I manage typically end up at 1/3 to 1/2 of AWS costs. Yes, fully loaded costs including salaries and office costs for anyone touching the servers.

You can certainly find more expensive options than AWS if you look, but similarly paying less than for AWS is easy too unless you start relying on specific AWS features.

Though, as always, your mileage may vary. Those costs have an awful lot of variables.

Is that rented gear in someone else's racks or your own gear in racks you rent? Beyond a few boxes, the TCO of buying your own gear is far, far cheaper (look at the prices of Supermicro boxes, not luxury, overpriced enterprise boxes that aren't use-case appropriate).

Someone also has to know how to negotiate with DC's (because power circuits are often the biggest cost factor) and how to separately get good deals on fiber (which is usually far cheaper than the DC's charges because most customers don't know better). DC's often nickel and dime for simple tasks if you don't do it yourself (or have hands that can do it for you). (RackSpace used to charge something $75 every time a box need to be reimaged. DC's will often take forever and charge several arms and legs to rack & stack & cable in your cage, but you will still be at their mercy for freight & delivery and pulling outside fiber, electrical circuits, cooling & rack leveling.)

Overall though, it's still cheaper for web-ops shops to do bare metal in (Google, Yahoo, Apple, etc. in their own DC's and other large/medium shops with predictable baseline loads in someone else's DC's) otherwise everyone would be using AWS. And that's clearly not the case for anyone who's ever been in a real enterprise shop.

Look at Wikia or most any other enterprise shop for baseline loads: mostly bare metal, because it's far cheaper for people whom know what they're doing. Also, BackBlaze... pretty much no way to undercut with them apart from buying an HDD manufacturer and going multi-datacenter-scale.

You'll always be able to engineer a better system for a particular known purpose.

The magic of AWS is that the transactional nature of it gives you more flexibility. I was working with somebody with about a storage requirement that will be in the 800-900TB range. But to hit the price point they want, they'd be buying a 1PB capacity solution.

The catch is, what's next? If they exceed their growth projection (a strong possibility), they need to spend $$$ in capital funds to buy some large block of capacity. That procurement takes time. Implementation requires more planning.

With Amazon, the prices are high/competitive, but the marginal cost of a unit of capacity is the cost of that capacity!

On the other hand, this user also has a large transaction system with well known performance an scaling characteristics. In their case, their buying power and size makes it much cheaper (by 3x) to host in a datacenter with customer-owned equipment.

Rented gear in someone else's racks, and it's only that cheap due to Supermicro. I did calculate what the providers premium was, and it didn't seem too unreasonable given the services such as remote hands and taking care of replacements that were being provided.

Perhaps in your use-case it was cheaper / less risk to rent than to own, but for sizable concerns, it's a no brainer that owning is far, far cheaper.

(For smaller stuff/side projects: In the UK, ByteMark.co.uk is awesome, flexible (colo/rent) and cheap. In the US, Pair.com is great. Linode is also decent.)

(For bigger stuff, there are datacenters in the middle of nowhere where power is cheap. That's the often limiting factor for green-field projects... cost of renting circuits from DC's, not the rack real-estate.)

I am brazilian and I am assuming OP is too, Amazon prices in Brazil are cheaper than the competition, simply because the local oferrings are really expensive.

That is crazy. AWS revenue is nothing compared to their total revenue, right?

AWS contributed $1.82B of the $23.18B in total revenue for the quarter.

That's way more significant than I would have expected. Still, 8% of their revenue contributes 36% of their profits. Makes you wonder why they don't run AWS at the same cutthroat prices as their other businesses.

Amazon retailer still have competitors coming behind their back, albeit at a distance, but Walmart & co. is nothing to sneeze at.

AWS have about ... zero competition where they are right now. Google CLoud, Azure and the like are not doing quite the same thing just yet.

There was a big price correction last year which was fairly clearly attributable to competition, especially Google. There will never be quite the cutthroat competition that retail brings, but Amazon is positioning itself as a logistics provider not a retailer.

The competition for cloud will be more like Intel vs. AMD. There will never be half a million different cloud providers, like there were book stores. A cloud is a huge capital asset that few can afford to build.

Agreed, but Amazon as a retail operation is so well run with such excellent customer service it's hard to imagine Walmart outcompeting them.

Walmart is cheaper. Significantly cheaper. You don't have to pay $100-$300 per year plus Amazon's typical 10-20% price premium* in exchange for "free" 2-day shipping. If you live in the right place you can pick up the goods same-day from Walmart, maybe even on your commute, so for some people it's more convenient too.

* The usual caveat about everything varying with geography applies here too, I'm sure.

Is "in-store pickup" really that popular?

When I need something in a few days (or later), I'll order it from Amazon when I think about it. If I need something "now" or today, I'll just drive to the store and go get it. I, personally, don't really see the point of the "in-store pickup" -- why order it online if I have to go there to get it anyways?

Two things: the range offered for instore pickup is far larger than the range held in stock. You don't have to pay delivery costs either. If something is the same price on Amazon as in Tesco [my local supermarket] then I'll order at Tesco and not pay delivery as I know I'll be there in the next few days.

Sometimes I'll "click and collect" just to be sure that the item is in stock. For example I did a price comparison recently to buy a bike saddle, it was cheaper (including postage) from Halfords and I can add stopping there to my journey for very close to zero cost (except time). If I'd ordered it from Amazon then I'd probably be out and end up having to travel to my local postal distribution office, less convenient and more expensive.

Here in the UK "in-store pickup" is known as "click and collect" and it's becoming very popular. In addition the on line price is often lower than the in store price.

> Is "in-store pickup" really that popular?

Yeah.

> I'll just drive to the store and go get it.

Its faster if you know what is stocked at your local Walmart. Order on your lunch break, pick it up on the way home without running around the store for 30min.

I use in-store pickup at Best Buy almost any time I buy something there. I don't have to worry about it being out of stock, and even better, I don't have to go find it in the store.

There is one advantage to ordering online for local store pickup that is worth considering. The online price can be - from my experience - cheaper than than the in-store price. I was surprised to find this on a number of different products recently.

You have to realize they have been consistently cutting prices (and pulling Google and somewhat Azure) along with them.

I think you misinterpret the causality of recent cloud price drops: Google's price drops at year pushed AWS to follow suit, and they haven't matched since (the gap is greater than 20% for GCE vs EC2 now). Microsoft is also publicly committed to matching AWS.

Huge Disclaimer: I work at Google on GCE.

Well, given that Google's support consists of an automatic E-mail reply bot, I wonder why the gap is only 20%.

You mean our Free / Bronze support listed here: https://cloud.google.com/support/ ? As people have mentioned on several threads, Google Cloud is actually a business so there are actual support people paid to help when you need it.

Correct, but as they said Amazon's retail revenue gets poured back into R&D and other projects, while AWS is left to generate profits. It's a bit like an insurance policy. AWS is definitely Amazon's most profitable "spinoff" product, besides the Kindle I can't really think of anything else they've made so far that has been that successful.