00:00hi I'm Ben Horowitz and this is the a
00:0216z podcast and I'm here with Benedict
00:05Evans who is going to explain to us
00:08everything that we need to know about
00:10Amazon Benedict so people tend to be of
00:15two minds about Amazon on the one hand
00:18there are people who say it's the
00:20greatest company in the world and Jeff
00:22Bezos is a genius and and you should put
00:25all your money in it and then there is
00:27another class of people who says it's
00:28basically a profitless Ponzi scheme and
00:31will never be worth anything so why is
00:35that and who's right well I think if you
00:38look at the revenue and the profits over
00:40the last 20 years you can see both sides
00:42of that because the revenue is a curve
00:44that's accelerating upwards as Jeff
00:47Bezos turns this into a kind of Sears
00:49Roebuck of the 21st century and converts
00:51more and more of retail to e-commerce
00:52and then the net income line has been
00:55zero effectively for fifteen or twenty
00:57years like every now and then they
00:58accidentally make a profit when they
01:00forgot forget to find something to spend
01:01money on and so you see fertile ground
01:04for both of those I think the thing that
01:06you need to understand when you dig into
01:09the company though is this isn't one I
01:11mean there's a there's a couple of
01:12dynamics here the first is this isn't
01:13one business Amazon is dozens and dozens
01:16and dozens have separate business lines
01:18the whole of physical media you know the
01:21books and the DVDs and so on is less
01:22than a quarter of their revenue and so
01:24what amazon has been doing is creating
01:27new businesses over and over and over
01:29again funding them with a cash flow from
01:31the existing ones and so you have this
01:33big mix and some of their businesses in
01:35that mix are old and profitable and some
01:38of them are old and run at breakeven or
01:40at a loss to drive traffic onto the site
01:42so they discount bestsellers to below
01:45the wholesale price to get you onto the
01:46site which is what supermarkets do as
01:48well and some of them are new and have
01:50startup losses and some of them are old
01:52and new and profitable and not
01:54profitable so you've got this mix and
01:55the only thing you can actually see is
01:57that every year they report a zero
01:59profit and the only way you prove or
02:01zero profit every year is on purpose
02:03there's no other way to get to that life
02:06yeah it's very well managed it's like
02:08when people used to beat their innings
02:09by a penny they'd just make sure they
02:11have exactly zero earnings
02:13exactly so there's somebody in the
02:14business whose job it is to make sure
02:15that every quarter there's no money left
02:17yes um what's a bit more illuminating is
02:19if you get off the net income line which
02:21is not really very helpful for kind of a
02:23low margin retail distribution business
02:25and look at the cash flow because what
02:27you see if you look at the cash flow so
02:29the opposite and you kind of unpicked
02:31this a bit if you look at the operating
02:32cash flow which is basically the money
02:33coming out of the business before capex
02:35and a few other things the operating
02:37cash flow margin has been really stable
02:40for the last decade at sort of six seven
02:42eight percent as the business has
02:45exploded in size and so the operating
02:48cash flow has gone up and up and up and
02:49up and up so economy with our I've got
02:51the numbers front of me but sort of five
02:52or six billion dollars in operating cash
02:54flow in the last twelve months
02:55but what happened since 2009-2010 is
02:59that they've suddenly plowed that into
03:00capex and so the ratio of capex to sales
03:03that purports the amount of dollars that
03:05they spend here on cap on on equipment
03:07and building and construction for every
03:10dollar that comes in the door has
03:12exploded and some of that's going on
03:14warehouses some of that's going on AWS
03:17so it's really a disis decision them to
03:22rather than putting the cash that they
03:24generate on the balance sheet to
03:26basically invest in the future of the
03:28very high-growth businesses how do you
03:32what are your thoughts on whether
03:34they've taken that too far and are
03:38investing too far into the maturity of
03:40the business given they're 20 years old
03:42and a lot of people argue that or
03:43they're really just at the beginning and
03:46investing is exactly the right thing to
03:48do um well I think the thing that you
03:53see when you you look at the macro view
03:55is ecommerce is as it might be ten
03:57percent of US retail right now by by
04:00revenue and Amazon has got maybe 15
04:02percent of that and so it's a little bit
04:05looking at Walmart in 1960 and saying
04:07well you've got five stores man how many
04:09do you need maybe you should just slow
04:10down and take some profits interesting
04:14analogy and so you would have been a
04:16mistake for a Walmart yeah so you've got
04:19this kind of you've got this sort of on
04:20the one hand on the other hand point on
04:22the one hand the purpose of a business
04:23ultimately is to produce an economic
04:25return for the shoulders
04:26and clearly at the moment Amazon isn't
04:30doing that the money is just being
04:31pumped back into the business over and
04:33over and over again and I think this is
04:35the important point it's not that they
04:36lose money on anything they do it's just
04:38that all the profits they take they put
04:39into new things so they spend business
04:41profits from yesterday's business on
04:42tomorrow's business but then you ask a
04:45que it's all very well to say you're
04:46doing that but how long are you gonna
04:48keep doing that and if you're just gonna
04:49do that for 20 or 30 years maybe I
04:52should just value this like a bridge you
04:54know like 10 billion dollars yes and I
04:56build a bridge and I don't see any money
04:58for 30 years in year in year 31 I start
05:00making a return so maybe I should value
05:02it like that um I mean I think there's
05:05an interesting contrast here with Apple
05:09if Apple had whatever it was 150 to 200
05:12billion dollars of cash on the balance
05:13sheet right right and they started
05:15giving it out shelters because they
05:16genuinely couldn't think of anything
05:18that they could do with a hundred
05:18billion dollars that they weren't
05:20already doing yes and they buy a dozen
05:21startups a quarter you very but they
05:23spend 100 million here and a hundred
05:24million there and so when they started
05:26doing dividends and buybacks a bunch of
05:28people in the valley said well this is
05:29basically a failure of imagination and
05:31you know they're saying that they should
05:33give it it's better to give it to the
05:34shelter says shelters can stick it under
05:36the bed or put it in the bank a half a
05:37percent interest than to invest it in
05:39building this amazing technology
05:40business and that seems like a really
05:42dumb thing to do and Amazon you've got
05:45exactly the opposite story that instead
05:47of taking putting 150 billion dollars in
05:49the bank he's put 150 billion dollars
05:50into building new warehouses and AWS and
05:53new countries and new categories and
05:55were robots and and and and and and into
05:58building an effect the next sears
06:00roebuck or the next Walmart and in both
06:02cases you've got you kind of got this
06:04damned if you do damned if you don't
06:05argument you know this investor said
06:08everything that's yeah exactly but I
06:10think in both cases what you see is this
06:13sort of vision for the future I mean
06:15there's a it kind of speaks to one of
06:17the things that you and Mark talked a
06:18lot about which is you know the founder
06:19of one company there are bezels has he
06:22doesn't have majority be the effect he
06:23has effective control of the company
06:25he's got a large stake in it he doesn't
06:27need to raise money from the stock
06:29market he does need the share price to
06:32be stable or at least not fall because
06:34that's how he pays people with with
06:36options but he's basically running the
06:40to what it's going to be in five 10 15
06:4220 years not with a view to quarterly
06:45earnings and how the shelter's gonna
06:46fire him next quarter if the earnings
06:48date go up five percent right and when
06:50you look at the growth of the new
06:53businesses to the extent that you can
06:55see them because as you said you can't
06:58actually see all the businesses you can
07:00only see kind of the big shadows of them
07:03would you say that those investments are
07:05like a bridge or is he truly building
07:09the future well I think AWS is this it's
07:13this funny again it's like a whole
07:16religious argument of its own as to you
07:18know what are the dynamics of scale
07:20calamus and compete with Google how does
07:23all of that stuff work but to me that's
07:25like going into shoes or diapers you
07:27know that might work or it might not
07:29that it's part of a portfolio of the
07:32whole thing and to look at I don't look
07:35at the profitability of Amazon it's a
07:37bit like looking at our firm and saying
07:40okay well let's add up a P&L of all of
07:43the companies that we've invested in yes
07:45and is it positive or negative
07:47and I don't think that would tell you
07:49anything meaningful about how well our
07:51portfolio is doing at any given time
07:52because you know we've got young
07:54companies and we've got old companies
07:55and we've got big ones that are
07:56profitable and we've got small ones that
07:57are supposed to be losing money because
07:59they're small companies and they just
08:00got started right the difference is at
08:03some point we have to get back to our
08:04LPS and say well we're kind of done with
08:06that bunch of companies and here's your
08:07three or four weights return right where
08:09as bezels doesn't have to go back to his
08:11LPS people are just willing to let him
08:13keep putting you know every time every
08:15time he sells a unicorn every time he
08:17sells a Google so to speak he gets to
08:19put all the money back into new startups
08:21yes now do you think there would be any
08:25strategic value and him saying okay
08:28we're not going to take a hundred
08:31percent of the money and put it back
08:32into the business we'll take 80% of the
08:35money and put it back in or some smaller
08:37portion of the cash flow or profits you
08:42know would that give him kind of more
08:44motivated employees a higher market
08:46capitalization more room to build the
08:48company of the future is he doing the
08:51well I think the question for him is you
08:54know why take profits and incidentally
08:57pay tax on this profits so there's a
08:59cost associated with that you take the
09:01profits out of the business
09:02so you're therefore there's an
09:04opportunity cost of taking profit which
09:06is it's another thing it's a warehouse
09:07you didn't build for its same-day
09:09shipping that you're not doing in
09:11Florida because you gave the money to
09:13the shareholders instead it's you know
09:15the drain project that doesn't happen or
09:17the entry into diapers that doesn't
09:19happen so there's an opportunity cost
09:21for taking profits and you know for bear
09:25for Jeff it's like hum you know it's
09:27like somebody asked a dinamic Ashoke if
09:28he was the richest man in the world and
09:30he said well you can only sleep on one
09:31bed at a time and you know I don't think
09:35Jeff Bezos is sitting at home feeling
09:37you know I really need to take a big
09:38dividend you know it's not like he's
09:40Larry Ellison and he wants another yacht
09:42right so why would he take the money out
09:44yeah long as the share price is stable
09:46and in the employees and he can continue
09:48staffing the business with people who
09:50want to go and work there he's doing
09:52fine I mean the employee base is kind of
09:54an interesting dynamic in its own right
09:56because the compensation is massively
09:58loaded to to stock and it's massively
10:00loaded to people who stay there for
10:02three or four or five years which is
10:03very different from the way it works in
10:05the rest of the world in the rest of the
10:06tech industry right and there's a very
10:09high attrition rate so a lot of people
10:10just can't take the pace so he's kind of
10:13running this mill if you like he's like
10:15an you know he's like a star Nicky
10:17Carnegie it's kind of burning out his
10:19staff you know beating them mercilessly
10:21until the morale improves you know
10:24paying them with stock that they only
10:25get if they stay long enough for to
10:28support that long-term investment story
10:30and I think that's the only you know the
10:32stock price and the compensation is the
10:34only risk to the strategy because
10:36there's a stock price Falls then you
10:37have a problem keeping people but as
10:39long as that otherwise there's no
10:40there's no issue here because it's not
10:42like he needs money from anybody else
10:43and so he really just needs the enough
10:47of the right kind of investors
10:50he'll never appeal to all investors
10:52clearly in your opinion that's just fine
10:55and they're on for the long ride yeah
10:58exactly as the business as it is is
11:01perfectly stable you know if for some
11:03reason investors decided you know
11:05we're going to fundamentally change your
11:06attitude to what kind of returns we want
11:08from this business we're going to stop
11:10thinking about it as a bridge it needs
11:11to start spitting out cash to us right
11:13now today then the business would be
11:15screwed because the share price would
11:16collapse but you know there's enough
11:19people who sit and look at this and said
11:20you know this is the next Walmart and
11:22the next Sears Roebuck combined why stop
11:25now right that he can just keep going
11:27right now one thing that people tend to
11:31get confused about on Amazon is that
11:34it's kind of both platform in an
11:37application in the sense that they build
11:39a big you know particularly on the
11:41Commerce item on the AWS side an
11:44infrastructure that other merchants use
11:46and so forth and how does that kind of
11:49both complicate the financials and also
11:53indicate that no no he really is making
11:57money yeah this is really interesting we
12:00all kind of know about AWS and that
12:03Amazon basically took use here internal
12:05systems and expose them to everyone else
12:07and so it's the ultimate eat your own
12:09dog food any Amazon product that gets
12:10built internally gets put on top of
12:12basically the same platform that is
12:14being sold to any other startup in the
12:16valley but also the physical
12:18infrastructure is run exactly the same
12:20way it's a platform and so if they
12:22decide that they're going to do shoes in
12:24Germany they hire a team and that team
12:26goes off and does the buying and plugs
12:28it on to the existing physical
12:29instructure platform and onto the
12:31e-commerce platform so you know again to
12:33my analogy of comparing it to it - and
12:36recent horas it is a platform that has a
12:37portfolio of companies within it sitting
12:39on top of that platform it's almost like
12:40an enormous incubator for e-commerce or
12:43an enormous accelerator for e-commerce
12:44now the funny thing about this is it
12:46affects the financials is that 40% of
12:48the unit volume is going being sold
12:51through third parties so you can you
12:54know as a retailer you know if you all
12:57want to get into the headphone business
12:58you can either run your own warehouse
13:00and your own packing and your own
13:02shipping and your own mailing business
13:04or you can use Amazon for that so you
13:06can list your products at Amazon you can
13:08put your products in an Amazon warehouse
13:09an Amazon man will pack them in an
13:12Amazon box and ship them with all the
13:14Amazon stuff and you pay Amazon a fee
13:17and this is a kind of a weird thing to
13:18get your head around because it means
13:20that Amazon is almost like eBay I mean
13:23that a lot half of their business give
13:25or take is actually taking a margin on
13:28something somebody else is selling that
13:31they don't even set the price on right
13:33so this idea that Amazon thrives by
13:34selling at below cost is is doubly
13:36nonsense because half the stuff on
13:38Amazon brace that even set the price
13:40setting the price for they're just
13:42taking a fee for packing and shipping
13:43and doing the credit card fulfillment
13:45and that is you know I think I forget
13:47the number it's something like 20% of
13:49revenue yeah 20% of revenue and is that
13:52revenue do they take the net revenue or
13:55the penalty so they're only reporting
13:58the net revenue they're not recording
13:59the value of the product so they kind of
14:02the first offer this conversation is the
14:03net income and the cash flow aren't
14:05really telling you what's going on but
14:06the revenue isn't really telling you
14:07what's going on either because the
14:08actual value of stuff that consumers are
14:11paying for the money that that's flowing
14:13through Amazon is something like double
14:15the revenue that they're reporting right
14:17so you can't you know even the revenue
14:19line doesn't actually tell you what's
14:20happening another thing that really
14:22confuses investors is the prime strategy
14:26Amazon Prime tell us a little bit about
14:30that strategy and just generally how one
14:34product line maybe they're mostly to
14:38promote other product lines and not
14:39necessarily Jennifer generate a profit
14:41itself they have a marketing mission so
14:44I haven't spent enough time looking at
14:46us supermarkets but in the UK
14:49what supermarkets do is sell books at a
14:51loss to drive footfall and so when back
14:55when have enough people know how to read
14:57here apparently yeah say back when Harry
14:59Potter was the big thing and basically
15:00produced an enormous spike in global
15:02book sales every two years so you can
15:04actually see in the global industry
15:06what UK independent booksellers would do
15:09is they would go to Tesco and buy two
15:11dozen copies of Harry Potter and take
15:13this back to their store because it was
15:14cheaper to buy at Tesco was selling it a
15:20you know that wasn't a problem for
15:23Tesco's business model that was just
15:24fine because people came in and it drew
15:26people into the store and it drew them
15:28down another while and then they sold
15:29loads but aren't loads more bananas yeah
15:31and the same thing exactly applies to
15:34Amazon Prime for and the really
15:36interesting thing is if you look at
15:37stuff like all the video content because
15:39the video content of course has fixed
15:41cost right so they buy a bunch of video
15:44they buy a bunch of TV shows they make a
15:46bunch of TV shows for a large amount of
15:48money but it doesn't cost them anymore
15:50for the number of people that are
15:51watching that so they throw that into
15:54your Prime subscription they throw as
15:55many things as they possibly can that
15:57have no marginal cost
15:58other than bandwidth which is not really
16:00the issue into their part into your
16:02Prime subscription as a way of enticing
16:05you into taking out a prime subscription
16:07and keeping it in the first place and
16:09then once you've got a prime
16:10subscription you say well I'm spending
16:12all this money on prime so I'd better
16:15make sure that everything I buy I'll go
16:17and buy on Amazon and I won't even look
16:19to see what the price is somewhere else
16:20I'll just go and buy it on Amazon and so
16:23the more value that Amazon can stuff
16:26into Prime the more the flywheel gets
16:28accelerated the more stuff gets pumped
16:30through Amazon through its logistics the
16:32more purchasing power it has with its
16:34suppliers the more warehouses it can
16:35build right most of those warehouses are
16:37and so the whole cycle accelerates and
16:39accelerates and accelerates and they
16:41pump more more money through the
16:42business and if you then turn around and
16:43say well gee look you know they're
16:45spending this much on video content and
16:47they can't possibly making a profit on
16:48that well yeah they're making a profit
16:50by selling your headphones that's how it
16:52works and that of course is well the
16:53capex is going the cataracs is going
16:55into warehouses that are down the road
16:57from you so that they can do next day
16:58delivery or same-day delivery and they
17:00have lower shipping costs and they can
17:02squeeze the competitors further and
17:04further out of the market it's a
17:05bundling business yes well and sping of
17:09which the the only cost is bound with
17:12and they can get that cheap from AWS so
17:15there you go so thank you very much
17:18Benedict that as so there it is for all
17:21of you out there Jeff Bezos is in fact a
17:23genius and you should put all your money
17:25into Amazon because it is an amazing
17:27company and don't believe the sourpusses
17:30out there so thank you very much
17:32and that was the a 16z podcast thank you
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