EP172 - Amazon Shareholder Letter and Q1 Results

EP172 - Amazon Shareholder Letter and Q1 Results

Amazon Annual Shareholder Letter

Jeff Bezos released the Amazon 2018 Annual Shareholder Letter, which this year was focused the the phenomenal success and growth of the Amazon Marketplace.  In the process, Amazon disclosed the breakdown of it's 1P and 3P revenue from 1999 - 2018, as well as giving us the "physical gross merchandise volume (physical GMV)" for the first time.  In 2018 1p = $117B, and 3P = $160B.  For a total GMV of $277B (which means US GMV is approx $161B).   Prior to this disclosure we've all had to guess as the the actual size of Amazon's retail business.  This makes Amazon the second largest retailer in the US, behind Walmarts $318B (excluding Sam's Club), and ahead of Krogers $116B.

The letter also talks about the importance of companies being allowed to experiment (wondering as Jeff calls it), even if many of those experiments ultimately fail.  No customer ever asked for AWS, but a few success like AWS can fun many failures.  Even failures can be valuable, such as the Fire phone, which ultimately led to the Amazon Alexa.  Jeff argues, that as the scale of a company grows, so much the scope of these failures.

The letter takes a victory lap for some of the improvements in employee pay and benefits that Amazon has put in place and a challenge to other retailers.  A challenge that other retailers like Walmart did not particular appreciate.

As always, the letter closes with a reminder that the 1997 shareholder letter still accurately reflects the guiding principals of the company.

It's very likely that this years letter, is in response to an increasing call from thought leaders and politicians to regulate and even break up large tech companies like Amazon.

Q1 Results

Revenue came in at $59.7B, 19% y/y growth ex-F) which was in-line with Wall Street consensus.  Overall operating margin was 7.4% compared to a 5.2% consensus, so that was a clear beat.  There is some concern about unit sales decelerating (a risk as Amazon saturates the market, and Prime membership plateau).

Surprisingly, ad sales growth also plateaued but that was explained as mostly an accounting change.

The big news from the Q1 earnings was that Amazon would be investing over $800M to move from free 2-day shipping for Prime members, to free 1-day shipping for Prime members.  With most retailers already struggling to match Amazon's 2-day delivery promise, this is a meaningful moving of the goalposts by Amazon. 

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Episode 172 of the Jason & Scot show was recorded on Monday, April 29th, 2019.

http://jasonandscot.com

Join your hosts Jason "Retailgeek" Goldberg, Chief Commerce Strategy Officer at Publicis, and Scot Wingo, CEO of GetSpiffy and Founder and Executive Chairman of Channel Advisor as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.

Transcript

Jason:
[0:24] Welcome to the Jason and Scott show this is episode 172 being recorded on Monday April 29th 2019 I'm your host Jason retailgeek Goldberg and as usual I'm here with your co-host Scot Wingo.

Scot:
[0:38] Jason and welcome back Jason Scott show listeners so Jason did you survive the Epic geek week that we just went through with the featuring.
Avengers and Game of Thrones really big episode / movies come out.

Jason:
[0:56] I did it was soup this is the first time in a I did not get to see Avengers yet so I have tickets for next week so so spoiler-free please and we won't do any Game of Thrones spoilers either
but I will say is the first time in a long time I was like desperately waiting for the weekend to be over.

[1:15] So that we can watch Game of Thrones so I got her the whole weekend I was just waiting for Sunday night and in that seems like counterintuitive.

Scot:
[1:21] Yeah yeah me too it's pretty epic the amount of geekdom was was
was off the charts I ended up seeing an in-game twice with a complicated kid Arrangement so it was so I had like seven hours of of intense content.

Jason:
[1:38] You're the only dude I know that gets to see the movie twice and win father of the year for doing it.

Scot:
[1:44] Yeah we'll see if my wife agrees but yes I am not coming husband.

Jason:
[1:50] I decided when everything come out.

Scot:
[1:53] Mutually exclusive.

Jason:
[1:54] Apparently so I will say on the a joke about desperately waiting for the weekend to be over with a young kid at home my brother who's in the same situation and I am taking the saying that like.
Sunday night is the new Friday night because I like entertaining your kid for to haul at the holidays is so much more exhausting than going to work.

Scot:
[2:16] Yes it absolutely is.

Jason:
[2:19] You could have warned me about that earlier.

Scot:
[2:21] Sorry you didn't ask him.

Jason:
[2:23] So in between all that supersetting get dumb and parental responsibilities I feel like it's pretty dense Amazon week as well.
Amazon news new your margin is there opportunity.

Scot:
[2:47] It is so Amazon had there since we we we we were at Austin and lay down some shows that we've been putting out there so the lot of Amazon music come out so first mr. Bezos Jeff who's one of our top listeners
he releases annual shareholder letter which is one of my favorite days of the year and then they also had their first quarter results that came out last Thursday
so with all the Amazon news that is going to be our Focus For Today Show
so let's jump into the shareholder letter this being an Amazon geek I read these like.
Many many times I keep them all and I refer back to the 97 letter L
this is a really interesting shareholder letter first of all because a lot of time so like last year he talked about it always being day one.
I'm and you'll come
cultural stuff I would say about Amazon and this one was really so very internal thinking, sharing a little bit of how they think about things of Amazon with which I find intriguing the 2018 letter the one that was.

[4:00] Just came out recently it was really different because it was really external so the first thing was there is a really big surprise you and I have talked a ton about mini people
underestimate the size of Amazon because their revenue is a derivative of the GMB that goes the platform
so first-party sales 100% Revenue equals gmv
third party sales they only recognize their take rate of that GMP to Amazon's a lot bigger than you would think they are on the retail side
and this is been a puzzle that everyone's been trying to figure out literally for 20 years and just right there in his letter Jeff Bezos revealed
the the DMV for 2018 from third parties so let me pull that up here just kind of go through here
so we'll talk about why he did this but here's what he said third-party sales are grown from 3%.
The total of 58% to put it bluntly third-party sellers are kicking our first party but badly
and then he said just got a little long so I was up to it and it's High party because her first party. From 1.6 billion
1999 2A 117 billion this past year the compound annual growth rate for a first-party business in the same time. Is 25%
but at the same time they're pretty cells are grown from .1 billion to 160 billion.

[5:25] Compound annual growth rate of 52% so twice the rate so he's essentially saying 3ps going twice the rate at 1 P we talked about that on the show that's definitely a thing.
Write an external Benchmark eBay's GM be in St. Drew a compound rate of 20% from 2.8 billion to 95 billion
so
I want some pack there but he was he's essentially saying in 2018 first party was 117 third-party 160 you had those up you get 277 billion new surrounding you got about three hundred billion in GMP
so and then you'll see
yes I didn't do the revenues during that period were 232 billion so much have to take out AWS and advertising and then you're left with retail gross it back up to 277 Amazon's a lot bigger than people think so that was really interesting
and you're the real question is why why would Amazon do this do you have any speculation on them.

Jason:
[6:29] And why they would they shared the the the gym being focused on the third-party sellers for the first time.

[6:36] Yes I do right now I think there's been a lot of news recently talking about folks that are interested in regulating Amazon and that you know you have all these.
Candidates for political office I frankly on both sides of the political Spectrum in Amazon has been a easy Target and you have people like a professor Galloway that talks a lot about splitting up all the big
Fan Company in Amazon gets included in that and it's a complicated issue.
And I feel like there there's a number of vectors where they like the the sort of simple.
Criticism of Amazon probably isn't accurate or fair but one of the the best offenses Amazon has that I think they're really trying to lean into is.

[7:29] We we are not some big company that has these huge revenues where a facilitator of all these small businesses that have these these revenues and you know if you were.
To try to split Amazon up based on antitrust allows you to have to establish that there are monopolies in one of their big defenses against being a monopoly is hey we don't have 277
billion dollars in sales our partners have.
This hundred and sixty billion dollars in sales those are even our sales so I think
emphasizing the their Marketplace roll.

[8:08] Is is one of their better defenses and I think you know there's a full-throated version of that in this the shareholder letter but I think there's some earlier efforts as well where they,
like they really started doing some advertising campaigns promoting the small businesses that sell on Amazon and in hitting those numbers and so to me.
That there was a huge nugget in that letter that it was the first time that he really shared enough data let us back into an accurate gmv and.
Amazon famous for not sharing information like that I think Jeff has a good quote we're in the information
Gathering business not the information sharing business so she had to have a good reason to share it and and in my mind the obvious good reason is it's it's one of the the pillars of of his defense against the
The Break-Up break us up argument.

Scot:
[9:00] Yeah I'm playing up here he even specifically says you know where we're a very small percentage of overall retail even when you can add one Pea in 3p so so definitely you know kind of.
Trying to get in front of the spani trust talk that that's out there.

Jason:
[9:17] Yeah they're making the anti-monopoly argument and I'm frankly based on the way the laws are written right now like I did think it actually is a good argument
the the the argument that comes up a lot.
Protecting Amazon the there's this related argument and and I think some of the the presidential candidates have gotten really vocal and this one is the whole like hay
they're using the marketplace data
as an unfair advantage to design their own products so they they look at what what those 3-piece sellers are selling and then they knock it off and sell it themselves and it's not fair for you to be
one of the teams in the baseball game and the Umpire to use a bad metaphor that Elizabeth Warren tried death
I tried to use at one point and so that's an argument that I also frankly think is wrong but that argument ironically
like probably get strengthened by buy this argument that the marketplace is the biggest part of our business.

Scot:
[10:23] Yeah he doesn't really defend against that other one he kind of takes a little bit of a swing out is just reminding how many employees they have and which is
portents and then they have raised The Gauntlet and I think this is actually just came out around the time.
I think it was Bernie Sanders was talking about how they don't pay a living wage that they upped it to $15 an hour for all their full-time books.

Jason:
[10:47] Yeah. So that way there's a few funny references right any any so that you mention that he he compare their there
third party DMV that eBay which eBay did not appreciate and and had some pretty prompt responses to online and then Walmart decided
the comments about hourly wage were targeted directly at Walmart despite the fact that Walmart was not named.
In the in the shareholder letter and I think maybe you guys should pay your taxes.
Which also is kind of a.
Amazon doesn't pay a lot of taxes and I think there's a legitimate criticism to make their from a from a social justice perspective but.
They do pay all the taxes they required to pay under the US tax code so it's it's maybe a little unfair to criticize them for.
Following the rules but it does are interested or interesting sort of public fuse I'm not sure.
That in past decades you saw this kind of like real-time tit-for-tat between
in a bitter Rivals I got I don't think the car manufacturers took those kinds of over shots at each other that we're now seeing eBay Walmart and.
And I Amazon shoot in that I think we're going to have more examples before the show's over.

Scot:
[12:14] Yeah yeah the the Twitter battles between these guys is pretty fascinating
and then some other interesting thing was kind of everyone was able to now say okay here's a real datapoint let's go sharpen our pencils
now one of the things in the letter is it.
Because it's a letter and not really Financial document this is not what's called Gap measure meaning that it's subject to General accounting principles you know everyone Defiance GM be a little different so for example.

[12:47] EBay.

[12:49] They've gone back and forth I can't remember where they are right now of you have this concept of unpaid items so they're there are some items on eBay that go unpaid and then know should they count in GMT or not they went through a phase where it was in wasn't sometimes shipping is in
what are the sayings did Amazon did say was this was paid physical items so this would not be things like apps
any of the Kindle e content in the ebooks any of that kind of stuff music digital music digital movies any of those kinds of things were not included in here
so that being said one of the analysts that we put a lot on the show John Blackledge she's over at Kalen he had 2018 at 314 billion so
off by about 20% Which I feel like could be I'm pretty sure this number I called includes media and digital stuff so and I know he hasn't text me yet it have a chance to put for the show so pretty close
my model was a good bit higher
so the percentage wise you know was really capturing the 25 in the 50% growth rates as well so I'm going to go find my model never actually have a real datapoint
and then the real variable you say two points is.
What the average selling prices for 1 p.m. three piece suits this really gives us a pretty good way of backing into that now it should be helpful going for.

Jason:
[14:18] Yeah I know I was like a day and a half of my life when that letter came out cuz I quickly started opening spreadsheets and building forecasting models and and trying to like.
Back into the physical DMV in North America and compare that with like Walmart's physical DMV in North America for example and there's all kinds of interesting ways to slice it and dice it now that we have.
Slightly less speculative data.

Scot:
[14:47] Yo what you think about the rest of the letter.

Jason:
[14:51] So I liked it you know he hit some
important points that he is he's talked about in the past as well the the main theme for the the back half of the letter after the gym V stuff.
Was.
The the notion of the importance of curiosity and what he called the power of wandering and this is a section of the letter where he talked about the.

[15:21] The company needing permission to.
Sort of stumble into new products and solutions and not necessarily take a straight line from each each product Innovation to the next and so.
You know he kind of talked a lot about how when you know you have a successful product in your iterating it that you know you want.
Can you achieve a certain scale and you can you can really focus on efficiencies and and try to take the shortest path from each version to the next version as you can.
But when you want to invent something new most often you can't do that by.
Knowing in advance what you're going to invent and that you can't necessarily ask your customers what they want and and you don't assume that you're going to get some.
Some you know game-changing new innovation out of a sort of feedback from your customers and so that the huge example for him of that was AWS and that like.

[16:23] You don't know customer ever came to Amazon and said hey we really need to rent server capacity from you you guys seem pretty good at doing it for your retail store you should sell it to the rest of us.
That that was a a a sort of risky bet that Amazon had to take that like if we offered this to people that they would accept it and.
And I could be a big business and it's become a huge business obviously and then you know in the letter and Jeff gives examples of.
Of dozens of soda products on top of AWS that got invented in much that same way that like.
No one was necessarily asking for machine learning models from Amazon but they built them and put them on top of AWS.
No one was asking for all these like specific database solutions that Amazon invented but you know many of them have been super successful.
And you know you kind of made the point that.

[17:19] You have to give people permission to sort of explore and fail and then he's easier to transition into talking about how important it is.
To have failures and he talked about the Fire Phone for example and that that was a you know a billion dollar fail for Amazon.
But you know his argument was that that failure enable the success.
With the the Amazon is I quickly hit mute with the Amazon Alexa and that those products only existed because.
A bunch of Engineers had permission to fail on the on the phone that was sort of the precursor to this product and he pointed out.
As a company gets bigger that their failures have to be bigger as well and so you know he's going to.
He talks about you know you should expect companies of Amazon size to have some pretty pretty big honkin of failures and that that's a sign of of Health then so.
I think that that's an interesting message you know like I'll be blunt like I walk into a lot of distressed.
Clients and they they talk about like only being able to make a limited number of a bats and I can't afford for any of those vents not to work.

[18:38] And I Michael those aren't Betts if you know if you have to know in advance that eat each one's going to pay off like there's they're like by definition you can't take any risk and they're not bets and and you know Jeff is talked before about.
Like if you have to know the outcome in advance is not an experiment in until I like this weather seems like a kind of articulation of that Philosophy from Jeff which which.
I do think makes a lot of sense.

Scot:
[19:04] Yeah I was good to you it's just easy to make billion dollar bets when you know why she doesn't care about you make me up your GPS and you have a cute voice.

Jason:
[19:16] Yeah I mean I do think that there's an argument the date they have more leeway and until I do think a lot of companies to wear that are a little sort of jealous of that but.
You know the kind of argument would be the day earn some of that we way with their investors.

Scot:
[19:34] Yeah they're they're pretty upfront about it with Wall Street will talk about it and q1 but you know if the know they basically say to Wall Street we're really focusing on growth and we think this is a big opportunity for that ride.

Jason:
[19:48] And if you
it's for those that aren't super friendly are at the end of every single annual shareholder meeting Jeff references the original shareholder meeting letter he wrote in 1997 and includes a copy of it which is what you were talking about at the beginning of this segment
and it's in that shed all their letter that he sort of like.
Makes the the argument and announces to shareholder that hey what were long-term thinkers and where we're not going to necessarily focus on on short-term profits and if you invest in that you should be up for that.

Scot:
[20:25] Yep yep and he's been amazingly consistent.

Jason:
[20:29] Yeah yeah and so again like the when you write that in 1997 you might not have a lot of credibility but but today and in 2018 that the fact that he still gets to point to that letter and say hey we've been through that for
now more than 20 years like there's there's some good credibility there.
And as you mentioned he kind of closed out with this conversation talking about wages and I do think you know Amazon has made significant progress in.
In raising their wages I'm as have a lot of other retailer so I would say like sort of.

[21:02] Target Walmart Amazon have all announced major initiatives about raising wages and into Arch Dent have.
Follow through on those initiatives they all want to get as much Public Credit as they can for it and they all want to use as a foil for the attacks they get from the the Bernie Sanders of the world,
like there's also a very good practical capitalist reason that they're doing that that like their.
They're all desperately trying to grow and they need quality employees to grow and is a competing more customer experience then they're relying on these employees to deliver the customer experience.
And I think they're all just finding they have to pay more to.
When the recruiting battles and get the kind of employees that they need to keep feeding their businesses and so I.
I'm not so sure that these guys are all doing it out of the goodness of their heart I think this is a place where.
Where capitalism is kind of working and driving driving wages up a little bit which is certainly a good thing.

[22:01] So that was my take on the shareholder letter I did reference earlier like that you know.
The other attack is this whole notion of the the market put is unfair to be an Umpire and a player,
and that that was the baseball metaphor that Elizabeth Warren me like she's she's pretty smart woman I'm not sure she's an expert in baseball cuz I didn't love that metaphor because the umpires actually work for the owners.
And I think I can change the rules whenever they want like I'm not sure that wasn't exactly the the metaphor she was going for.

[22:37] I have heard this a lot like there lots of people that hark on the fact that like oh my gosh Amazon's totally leaning in a private label and they're launching all these products and their they're using the data from the marketplace.
To build these these products and we can't allow that if you're going to be the marketplace you can't also be a seller.
And we're hearing that argument more and more and.

[23:01] Yeah you can make that argument like that I mean there's an intellectual argument there that that a smart person could could certainly by into but what what miss me a little bit is people talk like Amazon's the first one to do it and it's a new idea.
And I would argue like that's a play that retailers have been running for 200 years and at the moment all of Walmart's competitors are much better that play than they are so I don't frankly with only a few exceptions.
Virtue of the Amazon.
Private label products are very successful and is as business does hit I think I think I may have hit this in the in the shareholder letter also or maybe it was in the.
Another document this week but like less than 1% of their sales are private label and you go look at a.
Walmart or Target or a Best Buy in your in the like 20 and 30% of sales are our products that.
That are owned by that retailer and so I like I do think we want to be careful about just saying hey retailer shouldn't be allowed to sell their own products in addition to other people's products because.
That that would like fundamentally break most retailers.

Scot:
[24:11] Yeah yes communication to see how these things play out and you know what we'll see.

Jason:
[24:18] So I know there's a super big transition that I was supposed to remember and I think it's to the the q1 sales results which came out last Thursday so Scott what what were your sort of take away highlights from from the q1 result.

Scot:
[24:36] Yes it does the really big news that kind of swamped some of the Nuggets that we will cover here is it Amazon announce they're moving Prime to one day shipping
and they're going to become gradually doing this so
they're going to start with certain areas in the US and and then continue to ramp it up that's really kind of what they announced it didn't announce it in.
They also did announce that they're going to do to they're going to be interesting over $809 in this initiative so certainly not chump change by by any,
means on Wall Street is girding so Amazon is gone through this. Through to one of 19.
And harvesting a bunch of Investments and now they're really signaling both with this race Pacific number and then there for guidance
I'm a really good margins in q1 talk about their sibling you know don't get used to that investment cycle as we really invest in one day Prime,
so does speculation when you kind of read you know you and I get along this Wall Street reports Wall Street, read the tea leaves there is
no Prime now is in 50 to 75 US market so maybe in those metros by Prime day
at which will be dry just as shortly Benadryl I don't know what it'll be this year but I'm at
but then by holiday 19 will see a much bigger kind of coverage pays for the delivery.

[26:03] Reaction was really interesting on social media you and I had a lot of folks chatting to us about it while streets are really excited so I said said they were very
spaghetti with excitement and most of Wall Street I'm on the back so this announcement plus the results will go over a socially raised Amazon, 2002
2250 price Target
the wall Street's kind of analysis has this is going to weigh more than pay for itself because know what we seen is as Amazon turns the crank on getting stuff to you faster and faster your demand goes up so you just got someplace just it's not clear how much that's incremental but more of your everyday shopping kind of then
the time is over into the prime bucket as I can just get it next day then that's
in fact the shares of Wal-Mart and Target were worked something after they announced that
but then at the same time so that was the bush reaction to Bears reaction is there's a sea of people on on
Twitter that were saying that's kind of ridiculous because they're not living up to the two-day promise for me so it was interesting to see that there was more negativity that I've seen in a long time from anecdotal Ian I'm sure Amazon has all the student is exactly what's going on but.

[27:22] Army isn't rushing there was a pretty big outpouring a folk saying
what day what what happens if I don't get my stuff in two days so that was that was fun to watch most perplexing reaction was Walmart's Twitter where they said one day shipping without a subscription
interesting so that was funny
what time is the Wall Street guys that the headlines in the reports are kind of fun this was the winner from you is Scott Devitt of
I said Amazon is releasing the next day Prime that starts we work the Star Wars reference in there which is
always awesome Jason what did you think about Saint ounce what is this kind of the nail in the coffin for the Ollie's omni-channel guys that are kind of catching up the amazon or or do you think they're going to kind of be able to hang in there.

Jason:
[28:11] Yeah you're always going to win the quitting contest with Scott if you include a Star Wars reference
I don't think this is the nail in the coffin I do think it's a big smart move from Amazon though and I do think it's a gut-punch to most other retailers so the.
You know no retailer has close to the investment in fulfillment that Amazon has and you know Amazon has all this.
These other aspects of their fulfillment network but if you just look at these big fulfillment centers they have like more than seventy-five of them in the US now and and dozens of other things that support them like sortation centers in and transportation hubs and all these other
but they have 75 of these big warehouses Walmart has been next most which is they have like 20 many of which are much smaller
and then you know after that most retailers are lucky they have like two or three and so no retailers made close to the the.

[29:17] Investment in fulfillment infrastructure that Amazon has made into most retailers are you know.

[29:25] Taking some sort of strategic approach to how they answer what Amazon was already doing like.
Oh man we don't have custody ability to deliver in 2 days at Amazon has what should we do should we invest billions of dollars to try to get closer to them by opening more fulfillment centers
should we use our stores more in leveraged or fulfillment like you know because Amazon doesn't have stores and we do and you know they're all these sort of.
Typical omni-channel plays that you would make
and those are all things to sort of close the gap than Amazon has between everyone else and so when Amazon it if you just came up with some strategy to.
Partly closed the Gap and you're making a a big painful Investments to partly close that Gap and then Amazon goes oh by the way we've got another gear and we're going to open up this Gap more
that's that's really demoralizing to to a lot of these other retailers and so I do think this is a big smart move I think it's it was a clever way to leverage that advantage in in fulfillment centers that they have over everyone else
and you know I think there's going to have to be a lot of soul-searching amongst all these other retailers about the how how to respond a little more detail in the Walmart response which I agree was totally wacky.
Like basically Walmart public relations made a tweet that said.

[30:51] Not sure that's revolutionary what would be revolutionary is one day shipping without a membership fee.
Stay tuned in the the implication was that Walmart's going to announce something in the future that they're not prepared to announce today
along the lines of free free one-day shipping in the
the reality is they just don't have enough of filament centers to do one day shipping to to the whole Us in so you don't frankly like either they're going to make an announcement to dig another hundred holes and build
you know you know 10 billion more square feet of a filament space or
it's going to be something like we're going to do one day shipping from our stores,
which is interesting and that could be a good customer experience in a bunch of retards are using that approach Walmart's one of the last ones.

[31:39] That really isn't shipping from their stores but I would remind people that those stores have like a hundred thousand skews in them and Amazon selling 800 million products so
you know really not Apples to Apples if that's the approach that any retailer takes two matching Amazon so you know
roll all that up and I think the Fulfillment centers are a huge competitive Advantage for Amazon and they keep investing more in it which is a total gut punch for retailers and in frankly they talked about you know this being an 800 billion dollar investment for Amazon
that's actually not that big of an investment right
it's all right you like you know I think going back to the the wandering and the size of your failures has to scale part of the letter like I actually don't think a hundred million dollars in fulfillment for Amazon at this point is even a huge bat and so you know that's
that's going to be problematic for retailers to match I think they're they're doubling down on their damages which is smarter.

Scot:
[32:37] Yeah my um so I have two thoughts on this just got out of pylons what you're saying and you give a really good talk you have this kind of rare but occasionally to give a good talk in the winter.

Jason:
[32:51] You know that I'm recording this right.

Scot:
[32:54] What are the topics you talk about is that their work done out of Potomac capability among the big tree so UPS FedEx USPS right
I maxed out to as a reminder to listeners in October of last year Amazon
started this program that they've tried to go out this couple is first day they started this flexnetwork
I like uber for products that it works okay but it's not really at the NC that.
Volume that they're looking for and it's it's hard to control the quality of uv2 of that program of doing more salt delivery is they
they split up this program called delivery service partner program DSP
this is very much like FedEx Ground where they actually went to logistics companies and said look if you'll deliver packages for us we will give you some pants and in front of the state with her 20,000 Mercedes Sprinter is really nice delivery Vans let you know.
Orders more capacity than likely yes. If you think about it
I think we could take a six months of data under the hood and my bed is they now know exactly.

[34:13] What the cost is and how to take over enough of The Last Mile in certain markets to do the one day and don't think they could do it when they had they had FedEx.
I'm really ups and USPS a little bit of FedEx as The Last Mile I just want to date the cost was cost-prohibitive but now I think they have the economics for they say you know if we just spent $800 more we got you know
maybe that equates to you another 20,000 Spinners and then whatever it is to deliver their I think they now see that there had this last little push and they can get to that.
Buy one reading of the tea leaves is
you're right the filament centers are key to it but I don't think it was until they did The Last Mile that they realized this was Insight they could do it and then I think once you do next day then same day everywhere
Art's to become a pretty good reality so then you're kind of there's not that much more capacity I think you have
add for same-day so so I would say to retailers you're going to probably have a competitor that's able to do its own last mile delivery at about half price you pay a third party
and they're going to be moving to same day delivery so it could be interesting to watch this and see what happened.

Jason:
[35:32] Yeah for sure in like I don't even think you have to guess that like. I live in Chicago which I sometimes described as living in Amazon's future because there's a lot of this this one film incapability they're talking about rolling out Nationwide is already here so
the majority of packages I ordered get delivered in one day
and they're very often is a same-day offer in this is totally distinct from Amazon Prime now so Amazon Prime now is this thing with smaller warehouses that have 60,000 accused and and can deliver in a couple hours
what I'm talking about is delivering from the the full Amazon assortment and when it says like order right now when when you get this product
if it's before noon very often it says I'll get the product by 9 p.m. today and almost always the like the
the promise is
that I can get it tomorrow and so you know frankly I think what they're with their talking about here is is building out the Chicago style fulfillment Network.
For the rest of the country in it like you know I think it does fundamentally change your shopping behavior when you win the
the lag between desire and fulfillment is is that much closer.

Scot:
[36:47] Yes and one day Prime was the big kind of Earth shattering news out of the first quarter results what other financial highlights did you see Jason.

Jason:
[36:55] Well they made some money so so revenue for the quarter was just a hair under 60 billion like 59.7 billion
which is 19% growth from from this quarter last year
which is basically in line with the the Wall Street estimates but what got people excited was the Mead more profit on that Revenue than then folks expected so I think.
The consensus goal for operating margin was like 5.2%.
And they actually announced that they made 7.4% so that's a very meaningful beat.
And you know it's super encouraging that that Amazon is continuing the ratchet up these sort of.
Record profits on their their sales and you know side note that makes it easier to make these billion dollar investments in new fulfillment capabilities.

[37:51] And yeah a little more detail on that North America is is about 60% of Amazon's revenue and that's the profitable market for Amazon so that.
Operating margins in North America were 6.4% and international was a loss International so far in their in their history is always been a loss.
But the the loss is getting smaller and smaller so the International Ice was like 6%.
Which which sort of demonstrates that they're getting close to break-even and eventually getting profitability on that that International Revenue in addition to this North American Revenue.
So that seem like a big deal in an encouraging sign and I think Amazon attributed a lot of that that incremental profit to.
Fulfillment efficiencies so essentially.
Getting a return on all this fulfillment investment that you were just talking about and all those fulfillment programs in the airplanes that are Leasing and things that they're essentially.
As they scaled they're able to to squeeze some some incremental profit out of the model which is unisuper encouraging to.
To Wall Street at the very least and then of course you know.

[39:07] Amazon web services is another big big chunk in revenue for that for the quarter was like 7.7 billion.
Which is still 42% year-over-year growth which is exciting cuz you you worry that eventually you're going to email when you
that gets a big that it's harder to keep growing at that pace I'm so I do think the pace of growth is slightly decelerating for Amazon web services but it's still very fast growth and,
just a quick reminder like an unlike the retail side of the business that 7.7 billion is considerably more profitable so that's a nice revenue or profit driver for long for Amazon as well.
Those are kind of some of the the financial highlights what what else would you take away from the the quarterly earnings.

Scot:
[39:53] Yeah there was a third-party side 53% of the units for third party that was a new high Wall Street was expecting the kind of you that has a missed their revenue that Amazon does report from third-party
services that was a little light another positive was subscription Services which grew 49%
and the CFO in his is kind of color commentary and answering some questions
I know at the 4th quarter report listeners remember we talked about Amazon said they had more Prime users added in the 4th quarter than ever before
so one street Wall Street analyst kind of said hey how are those new ads kind of converting is there is. There and they
it said that you know they saw a really good activations across all the different rhyme
capabilities suits what they mean there is no way they do it is in a Bezos says that you'd be
I want to make prime so good you'd be responsible not not sign up for it so so you've got. Obviously the fast free now going to one day normally two days you've got.

[41:05] You got all the Kindle stuff you got music you've got the video star.
I called the Alexa and puts in their busy even more in their exclusive products and all these things so one of the things that they kind of said body language was on the call was there fishing really good kind of.
Is increasing I kind of read it is increasing and this line item called subscription Services where that would show up that grew 49%
what kind of cars do you everything in the first quarter that was kind of the fastest-growing peace which I think it's well if if Prime is prime sign up for when your fastest growing things that that.

[41:43] What's the acceleration on the road as those people start ordering and taking advantage of their subscription
advertising one this was this is interesting so we talked a lot about this on the show it really slow down prematurely it's been growing kind of north of 50% I believe in this load to 34% year-over-year the
there was some talk
the system of all she has reported that there was an accounting change their that some of the third-party types of ads have now moved over into more this merchant services kind of line item and aren't showing up in advertising so I think they're kind of you know.
Are some apples and oranges there and then the CFO did say you know if you
adds grew faster than other so the other line with 34% so he was kind of trying to signal I think if accounting changes out there is still growing pretty rapidly
John Blackledge I referenced earlier you got to put sad visit 13 billion this year and she's at about 35 by.
What kind of the new multibillion-dollar line that Amazon is growing up a lot on the call about how.

[42:55] And I'll take this over to you cuz this is your bailiwick they're adding a lot more capabilities here for agency types of folks to have apis and ability to.
Run multiple accounts and I think they they realize that something that has large agencies need to include Amazon and a lot of ads and it sat out there.
The biggest concern from Wall Street is they have this metric called paid units.
That has slowed those 14% growth in Q4 at slowed to 10%.
Speed unit growth only go 10% yet will Revenue gross means the.

[43:39] The average order value is kind of doubled the only way to make that work in the retail world so there are some bears out there saying this feels like maybe Amazon starting to bump up against.
Challenges of scale in saturation there's a lot of reports that show that there at like 85% less of the.
High-end cameras out there are on Prime and those kinds of things so that's give me a metric I want to watch this really close when they did their forward-looking projections it does feel like a little bit of acceleration but it's not clear
is that coming from a TBI sads or the retail business are our what soaks I was kind of like the only little
kind of cloud on the horizon I would say is the speed unit growth really decelerate it pretty hard it's the lowest it's ever been
Child Say the bottom line on the first quarter is a really solid showing by Amazon the big surprise was the one day Prime that definitely kind of got everyone's attention and like I said before most of the Wall Street folks were pretty pleased and we saw a lot of
yeah raising of price targets to your kind of that north of a trillion-dollar territory up into the the $2,250 kind of ranch.

Jason:
[44:58] That it's going to be interesting to watch that the advertising thing a lot of the new device are right after the announcement like people people miss that
certified accounting change and there was a little bit of a panic in the advertising world because there's been all this talk about oh my gosh Amazon's the fastest growing advertising platform and and you know number of the newest episode of forecasted at 2
do certain eventually be able to compete with a Google's and Facebook's of the world and so.

[45:30] At this point to already have decelerate in growth would have been a concern but obviously if that's.
I'm sure they explained Away by just went buckets Amazon puts the the revenue in then that's that's not as big a concern so it'll be interesting to see.
Like is that does that explain 100% of it or have they had a deceleration.
Well I am sort of bullish on on Amazon's prospects as an advertising platform,
I think you you hit one of the pain points that that's going to keep them from scaling is there there.
They're advertising tools and capabilities are are much more nascent than
say Google or Facebook in and you mentioned agencies don't like that and that's certainly true but like increasingly the the Google and Facebook tools are good enough that clients like to run their own campaigns on and that's
that's way less true on Amazon today so Amazon has a lot of.
Catch up to do on tools and you know you could see that like I'm sure they're they're investing a lot in the tools right now like we see a lot of new apis and capabilities coming out all the time
but but that could be a constraining factor on their advertising and another thing that I still speculate.
Is Eliza constraining factor in the short run is the budget that these advertising dollars are coming out of so.

[46:54] You know I still think the majority of advertising it happens on Amazon is advertising for a particular product that a brand is trying to sell on Amazon and Those ads usually come out of what's called a trade budget
and a lot of the dollars that gets spent on Google and Facebook come out of
a marketing awareness budget and I'm not sure Amazon his establish themselves as as a viable platform for those
those kind of top of the funnel advertising dollars in the same way that that Facebook has yet I think they're ever going to really scale they're going to have to demonstrate that they're good at that too and so I think.
Time is going to tell there but that's probably a good place to leave it's got unless you have any any closing remarks cuz we we've used up the are budgeted time for for the show.

Scot:
[47:49] I think that's all the exciting news on the Amazon side will it's just kind of keep it there and we'll be back with more guests and more news and future episodes next for joints.

Jason:
[47:59] Yep and if you didn't try this episode we sure would appreciate that five star review on iTunes as always if you have any comments or questions or we got anything wrong feel free to
the reach out to us on Twitter or leave us a note on her Facebook page we loved to have a dialogue with our listeners and until next time happy commercing.