Credit Ãngel Franco/The New York Times
To study the graph of Amazonâs stock performance in 2015 is to witness a series of stepwise lurches toward commanding new heights. Over all, the stock market has been flat this year, and technology companies, as a group, havenât fared much better.
Then thereâs Amazon, which slipped the atmosphere. Shares of Jeff Bezosâs company have doubled in value so far in 2015, pushing Amazon into the worldâs 10 largest companies by stock market value, where it jockeys for position with General Electric and is far ahead of Walmart.
There is a simple explanation for Amazonâs rise, and also a second, more complicated one. The simple story involves Amazon Web Services, the companyâs cloud-computing business, which rents out vast amounts of server space to other companies. Amazon began disclosing A.W.S.âs financial performance in April, and the numbers showed that selling server space was a much bigger business than anyone had realized. Deutsche Bank estimates that A.W.S., which is less than a decade old, could soon be worth $ 160 billion as a stand-alone company. Thatâs more valuable than Intel.
Credit Stuart Goldenberg
Yet the disclosure of A.W.S.âs size has obscured a deeper change at Amazon. For years, observers have wondered if Amazonâs shopping business â you know, its main business â could ever really work. Investors gave Mr. Bezos enormous leeway to spend billions building out a distribution-center infrastructure, but it remained a semi-open question if the scale and pace of investments would ever pay off. Could this company ever make a whole lot of money selling so much for so little?
As we embark upon another holiday shopping season, the answer is becoming clear: Yes, Amazon can make money selling stuff. In the flood of rapturous reviews from stock analysts over the companyâs earnings report last month, several noted that Amazonâs retail operations had reached a âcritical scaleâ or an âinflection point.â They meant that Amazonâs enormous investments in infrastructure and logistics have begun to pay off. The company keeps capturing a larger slice of American and even international purchases. It keeps attracting more users to its Prime fast-shipping subscription program, and, albeit slowly, it is beginning to scratch out higher profits from shoppers.
Now that Amazon has hit this point, itâs difficult to see how any other retailer could catch up anytime soon. I recently asked a couple of Silicon Valley venture capitalists who have previously made huge investments in e-commerce whether they were keen to spend any more in the sector. They werenât, citing Amazon.
This week I also asked several stock analysts if they could see any potential competitive threat to Amazonâs online sales dominance. Some literally laughed at the question.
âThe truth is theyâre building a really insurmountable infrastructure that I donât see how others can really deal with,â said Ben Schachter, who studies Amazon for Macquarie Securities.
It may be no exaggeration to say that at least in North America and Europe, e-commerce as an expansive category of Internet exploration is on the wane. Mr. Bezos has already won the game.
There are many who will lament that Amazon has reached these heights, and not just its retail competitors. As with Walmart before it, Amazonâs rise engenders fears of economic and cultural totalitarianism â which are reasonable concerns, even if often overblown. Many critics are worried, too, about how the company treats its workers (Amazon has argued that theyâre treated well) and how it affects local and national economic activity (a matter of constant dispute), among many other issues.
And while weâre in the to-be-sure part of this column, letâs note that Amazon also faces a wider set of competitive threats internationally. Although it has reported increasingly brisk sales in India, the company has had a difficult time breaking into the lucrative Chinese market, where Alibaba dominates the shopping scene. Indeed, Alibabaâs sales and profits dwarf Amazonâs. On Singles Day, held in China on Nov. 11 to celebrate the proudly unmarried (as best as I can tell), Alibaba rang in more than $ 14 billion in sales, which is more than Americans will spend both offline and online over the entire post-Thanksgiving weekend.
Even domestically, competitors arenât sitting idle. Over the last year, investors have poured hundreds of millions of dollars into Jet.com, which aims to become a discount competitor to Amazon. The firmâs odds of success, though, have always looked long, and seem to keep getting longer.
Walmart, which on Tuesday published earnings that came in slightly above analystsâ expectations, is also spending billions to slow Amazonâs roll. But Walmart said that in its latest quarter, e-commerce sales had grown only 10 percent from a year ago. Amazonâs retail sales rose 20 percent during the same period.
Why is Amazon so far ahead? It is difficult to resist marveling at the way Mr. Bezos has built his indomitable shopping machine, and the very real advantages in price and convenience that he has brought to Americaâs national pastime of buying stuff. What has been key to this rise, and missing from many of his competitorsâ efforts, is patience. In a very old-fashioned manner, one that is far out of step with a corporate world in which milestones are measured every three months, Amazon has been willing to build its empire methodically and at great cost over almost two decades, despite skepticism from many sectors of the business world.
Now those investments are beginning to bear fruit. Itâs happening in fulfillment, which is the business term for filling and shipping orders. Amazon has built more than 100 warehouses from which to package and ship goods, and it hasnât really slowed its pace in establishing more. Because the warehouses speed up Amazonâs shipping times, encouraging more shopping, the costs of these centers is becoming an ever-smaller fraction of Amazonâs operations.
Amazonâs investments in Prime, the $ 99-a-year service that offers free two-day shipping, are also paying off. Last year Mr. Bezos told me that people were increasingly signing up for Prime for the companyâs media offerings â the free TV shows, music and movies that come with the subscription, and which Amazon has been spending vast sums to produce.
Mr. Schachter, of Macquarie Securities, estimates that there will be at least 40 million Prime subscribers by the end of this year, and perhaps as many as 60 million, up from an estimated 30 million at the beginning of 2015. He argued that Amazonâs investments in giveaways will help make Prime more attractive to people in lower-income groups. As a result, he predicted that by 2020, 50 percent of American households will have joined Prime, âand thatâs very conservative,â he said.
Growth in Prime subscriptions matters because Prime alters the psychology of shopping. Once youâve prepaid for shipping, you tend to start more of your shopping excursions at Amazon. According to some estimates, people spend three or four times as much with Amazon after they sign up to Prime.
Because Amazon is still expanding madly, its expenses remain enormous and its retail profits tiny. In its last quarter, its operating margin on the North American retail business was 3.5 percent, while Amazon Web Servicesâs margin was 25 percent.
But this âPrime effectâ is key to Amazonâs long-term profitability. Analysts at Morgan Stanley reported recently that âretail gross profit dollars per customerâ â a fancy way of measuring how much Amazon makes from each shopper â has accelerated in each of the last four quarters, in part because of Prime. Amazon keeps winning âa larger share of customersâ wallets,â the firm said, eventually âleading to a period of sustained, rising profitability.â
Of course, many other retailers could build services like Prime; in fact, many are. But it could take them years to catch up.
âThe thing about retail is, the consumer has near-perfect information,â said Paul Vogel, an analyst at Barclays. âSo whatâs the differentiator at this point? Itâs selection. Itâs service. Itâs convenience. Itâs how easy it is to use their interface. And Amazonâs got all this stuff already. How do you compete with that? I donât know, man. Itâs really hard.â