Last week Jeff Bezos published his latest letter to Amazon shareholders as CEO of the company, in which he discussed these points:
- How much value you had added to consumers, sellers on your platform, AWS customers, partners, and shareholders in 2020.
- From now on, in addition to continuing to be “Earth’s most customer-centric company”, they will also aim to be “Earth’s best employer” and “Earth’s safest place to work“.
- They keep advancing their dates to become “carbon-neutral”.
[Note the use of “Earth’s” instead of “World’s”. Jeff, Elon and some more already think and operate considering that Mars is a real possibility]
A few days later, Tim O’Reilly publishes this article entitled “Checking Jeff Bezos’s Maths”, in which he questions his calculations, on these points from the original letter:
- Shareholder value.
He does not question the value that Bezos says was generated for shareholders, but says that the main profit was not that, but what came from the stock market (saying strictly that this did NOT come “from Amazon”), and that also the multiple of usd79 of the share price per dollar of annual earnings per share is directly affected by how much you pay your employees. If you paid more, the multiple would be much lower, so what generated so much value for shareholders is actually a deterrent to paying people better.
Two comments.
First, if one wanted to consider what came extra-Amazon “from” the stock market domain, then take the growth of some index, remove Amazon from that group if it were included there, and deduct that from Amazon’s growth. Anyway, the market operates *on* the shares of the company, not independently of the company.
Second, Bezos never talks about value for shareholders as O’Reilly proposes because it does not make sense given that the entering share price point should be considered. Also it clearly gets into a speculative domain, much less anchored in reality than the net income it generated in 2020.
In essence, he is raising a point and then criticizing it, as if it had been raised by Bezos.
In other words, there is no ground for this.
- Value to sellers who sell on Amazon.
O’Reilly does a good estimate of overall margin values for sellers, and is even generous in considering that margin to be net when it is likely operating, but he is missing two absolutely relevant issues.
The first is that not all sellers want to be more profitable, relatively speaking. They might very well want to earn more in absolute value than in relative terms. Even more so considering that many of these sellers use the Fullfilment by Amazon system, by which basically Amazon handles practically all the logistics end-to-end and the seller operates at a comfortable distance, without even physically touching any of its products. Wouldn’t you be interested in giving up margin percentage points to earn more money in absolute terms?
The second is that in order to conclude that they indeed earned less measured by the margin percentage on sales, you have to calculate that with the same seller base year over year. How many new merchants joined in 2020, perhaps with a lower pricing strategy so as to be competitive? He does not know, with which it is not possible to conclude what it says.
I mean, there is no ground, again.
- Value to employees.
Jeff says that if the group of employees had a 2020 income statement, the total salary would be their profit.
O’Reilly says that Jeff is wrong, stating that it would instead be their gross income, because then they would have to pay their living costs.
No, Tim. Jeff says it clearly:
“If each group had an income statement representing their interactions with Amazon…“
Interactions with Amazon. All the expenses that come under that –food, rent, mortgage, car, insurance, etc– ar out of Amazon’s reach. And even if Amazon was “only” responsible for their gross income, they did a lot by raising the basic hourly wage to $ 15.
For the third time, there is no ground.
Surely, Jeff has issues to review, but these things that O’Reilly bring up simply do not fit into that category.