According to this article from the Wall Street Journal, Amazon CEO Jeff Bezos has created a winning business formula which will soon allow him to bypass all his rivals— Amazon, Apple, Facebook and Google—and leave them far behind. What is his strategy? His company does not take profits; it breaks even instead.
The analysis of Amazon’s business tactic of not taking profit, contained in this article, seems to turn all previous conjectures about the evils of “the bottom line” approach in business (“profit above all else”) on their heads. It is precisely because it takes no profit that Amazon is outstripping every other company in America—which raises its market evaluation, allows it to pay very little in taxes and to reduce employment through greater work efficiency.
What would Adam Smith have to say about this?
By SCOTT GALLOWAY, September 25, 2017 for The Wall Street Journal
Why does Amazon’s ascent matter? Aren’t lower prices and greater efficiencies better for everyone? They are, in all the obvious ways, but that’s not a complete picture. Amazon’s seemingly boundless growth forces us to wrestle with difficult questions about the reasons for its dominance.
For one, Amazon, unlike any other firm its size, has changed the basic compact with financial markets. It has replaced the expectation for profits with a focus on vision and growth, managing its business to break even while investors bid up its stock price.
This radical approach has provided the company with a staggering advantage in free-flowing capital. Google, Facebook, Wal-Mart and most Fortune 500 companies are saddled with expectations of profits. Many firms would be much more innovative if they were given a license to operate without the nuisance of profitability. Amazon has thus had enormous capital on hand to invest in delivery networks, especially the crucial last link for getting goods to the doorsteps of consumers, without having to worry that they don’t yield immediate profits.
Amazon’s strategy of break-even operations also means that it has virtually no profits to tax. Since 2008, Wal-Mart has paid $64 billion in federal income taxes, while Amazon has paid just $1.4 billion. Yet, while paying low taxes, Amazon has added $220 billion in value to the stock held by its shareholders over the past 24 months—equivalent to the entire market capitalization of Wal-Mart.
Something is deeply amiss when a company can ascend to almost a half trillion dollars in market value—becoming the fifth most valuable firm in the world—without paying any meaningful income tax. Does Amazon really owe so little to support public revenue and public needs? If a giant firm pays less than the average 24% in income taxes that the companies of the S&P 500 pay, it logically means that less-successful firms pay more. In this way, Amazon further adds to the winner-take-all tendencies plaguing our economy.
Because Amazon is more efficient than other retailers, it is able to transact the same amount of business with half the employees. If Amazon continues to grow its business by $20 billion a year, the annual toll of lost jobs for merchants, buyers and cashiers will be in the tens of thousands by my calculations. Disruption in the U.S. labor force is nothing new—we have just never dealt with a company that is so ruthless and single-minded about it.
I recently spoke at a conference the day after Jeff Bezos. During his talk, he made the case for a universal guaranteed income for all Americans. It is tempting to admire his progressive values and concern for the public welfare, but there is a dark implication here too. It appears that the most insightful mind in the business world has given up on the notion that our economy, or his firm, can support that pillar of American identity: a well-paying job.
Amazon has brought us many benefits, but we all must recognize that the rise of the One brings with it much more than free two-day delivery. “Alexa, is this a good thing?”
Scott Galloway is a professor of marketing at the NYU Stern School of Business and the author of “The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google,” to be published on Oct. 3 by Portfolio.