Disney continues to see weakness in Media Network’s segment

The biggest problem Disney has had to face in recent years has been the decline in subscribers to its flagship network, ESPN. After peaking at around 100 million at the end of fiscal 2010, the figure dropped to 92 million by 2015. The declines showed up in Disney’s most recent quarterly earnings report as revenue in Disney’s Media Network segment in Q1 2017 fell by 2% year over year while operating income decreased by 4%. These poor numbers are attributed to lower advertising revenue in the Cable Networks sub segment where ESPN resides. This makes sense as companies will not pay as much to advertise on a network that has fewer subscribers.

diseq1172

The company has been able to perform fairly well in spite of this challenge due to strong performance in other segments. The Star Wars franchise and other box office hits have helped the Studio Entertainment segment carry Disney. However, the weakness of ESPN over the past half-decade or so represents a much bigger problem that all the major cable networks are having to deal with: the mass conversion from traditional cable TV to streaming services. This trend commonly referred to as “cord cutting” has seen many Americans drop their legacy cable provider in favor of new devices such as Roku or Apple TV and content providers such as Netflix, Hulu and Amazon Prime. Consumers are no longer willing to pay for an entire package of channels; they want to be able to choose exactly what services and networks they wish to view. Millennials are at the forefront of this trend but a sizeable number of Americans 35 and older are also choosing to drop their cable packages. We have reached a point where 25% of Americans do not subscribe to cable TV anymore.

Cord Cutting Statistics

On top of this troubling trend for cable TV networks, Disney has also seen increasingly higher production costs due to a new contract with the NBA and rate increases owed to the NFL. So what strategy should Disney as looks to salvage its flagship network? One thing is certain: there will always be an extremely high demand for sports broadcasting and ESPN is clearly positioned as the dominant outlet for all sports media and coverage. One positive headwind for ESPN has been the growth of light cable packages which has counteracted the prevalence of cord cutting. Disney has also been exploring new platforms for ESPN and is aiming to make the network more readily available on streaming options. Only time will tell whether ESPN and all of the other large cable networks will be able to find new monetization methods as streaming becomes the dominant method of TV consumption.

Sources:

GM Looking to Sell Opel and Vauxhall in Europe

General Motors continues to lose money in Europe.  Despite attempts to reduce costs, the company recorded losses of $813 million in 2015 and $257 million in 2016 before taxes. Even with these losses the French automaker, Peugeot, may be looking to purchase the GM’s European fleet that contains both Vauxhall and Opel.  The announcement of such measures on Tuesday have caused GM’s stock prices to soar, with the potential to unload this segment of its business with such large losses.

GM predicted that the company would break even in 2016.  As such, the first two quarters of 2016 revealed the potential for the European region to yield a profit for GM.  After the Brexit turmoil, the company believes a weak pound and decline in vehicle demand influenced $257 million in losses.  Still, 2016 remains one of the company’s better years in Europe, and the company aims to break even by 2018 now.  With such enormous losses, why then does Peugeot want to buy Opel and Vauxhall?

A major factor inhibiting the profitability of GM’s European division remains its inability to appropriately utilize factory capacity.  Last year, only 63% of its factory capacity was used, lower than industry averages.  This remains a problem across Europe, as the governments makes it difficult to close factories and lay off workers, yet the operating capacity of GM remains 8% below the industry average.  As a global giant in the auto industry, the low production capacity in Europe evidently reveals a large problem; however, Peugeot may seem to think they have the ability to harness some of this capacity.  As such, the acquisition would stand to make Peugeot the second largest player in the European car market, behind Volkswagen.

In 2016, GM’s European subsidiary showed potential for profit.  As such, Opel recorded two straight months of strong sales to start the year in the German market, an increase of over 25% during that period.  These sales were largely driven by the Opel Astra, the European “Car of the Year” in 2016.  Currently, it is difficult to tell whether GM is finally abandoning its European segment after years of losses, approaching almost $20 billion since 1999, or whether the company is selling high after the displayed potential for profits and sales in 2016.  However, it remains to be seen whether the sales in Germany alone will continue to rise across all of Europe.  If they do, the acquisition of Opel and Vauxhall may prove lucrative for Peugeot.

Sources:

http://www.businessinsider.com/gm-reportedly-in-talks-to-sell-european-business-2017-2

http://www.cnbc.com/2017/02/15/general-motors-could-exit-europe-with-1-billion-opel-sale-to-peugeot-analyst.html

https://www.fool.com/investing/2016/08/09/how-general-motors-turned-a-loss-into-a-profit-in.aspx

http://www.freep.com/story/money/cars/general-motors/2017/02/14/gm-opel-psa-group-peugeot/97886608/

https://www.gm.com/mol/m-2016-opel-03-02-sales-increase-february-28-percent.html

http://www.marketwatch.com/story/gm-faces-bumpy-road-to-profit-in-europe-2017-02-05

U.S.-Sino Relations Under Trump

Four weeks into his presidency, Donald Trump has made sweeping statements regarding the U.S.’s current economic standing with China, and that tensions arising from economic conflicts has left China prosperous, of course to the detriment of the American people. Trump’s rhetoric suggests China is an economic enemy of the U.S., operating under different regulations, working standards, and currency meant to take advantage of the two nations’ globalized partnership. The China that Trump suggests currently exists, though, has not existed for some time. The supposed ‘sweat shops’ that continue to surface as news stories slamming Apple or Nike, are isolated and are in no way representations of the current manufacturing industry in China. The race to the bottom in the manufacturing industry has actually begun to shift away from China. Factory worker wages are the highest they have ever been, costs continue to rise in Chinese manufacturing, and there are a number of firms that are looking elsewhere, even the US, for their facilities.

As for Sino-U.S. relations, they seem to be strong and getting stronger, regardless of the skepticism surrounding Trump’s foreign policy. A familiar debate has sparked in recent years over this relationship: does the U.S. need China more, or vice versa? Now that China has become an even more industrialized, globalized state since this topic was first debated in the 1980s, questions are being raised about the ability for the two nations to maintain a symbiotic relationship. What economists, politicians and scholars have found is that the U.S. and China have far more economic similarities than they do differences, and must focus on these similarities in order to evolve and expand as modernized states. This gap between economic goals will only continue to shrink as China takes a larger role in the global economy. One example is GDP growth, which in China has grown from one eighth the size of the U.S. to nearly two thirds.

U.S. reliance on China illustrates the expectation that U.S.-Sino economic relations may remain relatively unchanged. U.S. exports to China far outweigh Chinese imports to the U.S., and Chinese investment in U.S. firms has grown 300% since 2015. Now that Trump is in office, his threats to this relationship have dwindled, for he has recognized that conflicts arising over a certain issue will do more harm than good in a partnership that must mature in order to meet both nation’s interests.

The Prof: This graph is very odd, in part because it ignores that for China the base in 2000 was very low.

This is not to say China is still not an economic threat to many areas of the U.S. economy, and a number of important steps must be made in order to assure the U.S.’s role is not diminished in this relationship. China’s focus has shifted away from low-tech and clothing manufacturing to be shipped to the U.S. Instead, Chinese firms are focusing on developing technology that they can label as Chinese products, directly competing with U.S. firms. One example of this shift is China’s intentions to be a global force in semiconductor manufacturing, with two of the largest firms operating heavily in China already (Samsung, TSMC). Further restrictions on foreign investment and trade have made it difficult for U.S. investment in China as well, threatening firms that must take advantage of Chinese GDP and income growth in order to remain profitable in those regions.

Thus, the question remains: how does the U.S. respond to Chinese growth and investment regulations without threatening their symbiotic relationship? Trump’s public stance is to back away from the relationship, imposing trade tariffs and export restrictions that may do the opposite of what he intends, sparking a trade war that will negatively effect both nations. A more tactical approach may be necessary. Jacob Parker of the U.S.-China Business Council suggests regulations that don’t specifically target China, but put pressure on Chinese trade. A more direct approach would be to reciprocate Bejing’s current trade and investment restrictions, but could result in backlash and potentially further restrictions. Whether by direct contention with Chinese business or not, Washington will need to carefully carry out trade policies with China over the next 4 years in order to assure both nations’ success through their long-standing symbiotic relationship made up of mostly similar economic goals.

 

Sources:

Bloomburg Article

Reuters Article

Shanghai Daily Article

 

Where Have All The Blackberries Gone?

It looks like it’s the end of an era. Nearly ten years after the release of the first iPhone, Blackberry’s market share has dropped to 0.0%. Well, it’s actually 0.0481% for the 4th quarter of 2016, but that can be rounded to a startling zero percent. Blackberry, once a notable player within the cellphone industry, has all but vanished from the market.

What has happened to this company? One can remember a time where, around the mid 2000s, almost every working professional had a Blackberry. In fact, the companies products were so well renowned, that people affectionately referred to them as “Crackberries.” People constantly on the go cherished them for their full QUERTY keyboard and and email functionality.

So where did Blackberry’s market share go? It would appear that iOS and Android operating systems, through the rise in popularity of Apple iPhones and Samsung Galaxies, have formed what appears to be a duopoly; the two hold 99.6% of the cellphone market share. Most people looking to buy a cellphone today choose not to purchase a Blackberry; as such, the company’s consumer base looks to be a rapidly aging group. This could prove a larger marketing issue than it has in the past, as the company’s value continues to plummet. The fall of Blackberry has been long and drawn-out, even if it hasn’t been noticed by the general populace. Blackberry stock hit its record high of about $140 in 2008, but since then, its price has fallen to $7.35 (February 16th). Although Blackberry does produce handsets that run on other operating systems, such as Android, these products only accounted for around 400,000 product sales in the second quarter of 2016.

One can ask what the future holds for Blackberry. The company has handed off future production of their name-brand cellphones to the Chinese company TLC Communication.  Instead, Blackberry is moving away from the cellphone industry. Currently, the firm is looking into producing software and also self-driving vehicle research. For those curious about the developments within the cellphone industry, it will be captivating to see how the company turns out. It is possible that diversifying Blackberry’s portfolio of products could lead them out of a gulley, but it is just as likely that it destroy them completely. Perhaps, it would be better for a firm, like Microsoft or Apple, to buy them while trying to vertically integrate. The employees of Blackberry could almost certainly prove beneficial to any company that acquires them. As Apple continues to increase profitability by limiting their operating system to their own in-house products, the challenge of keeping up will prove to be too much for most companies, like it has been for Blackberry. Apple seems to have the luxury smartphone market cornered, while Android manufactures are able to sell units at all different price points. It is entirely possible that we will see a pure duopoly, or even a monopoly, inside the cellphone market in the not-too-distant future.

Sources:

http://www.businessinsider.com/blackberry-smartphone-marketshare-zero-percent-gartner-q4-2016-2017-2

http://doctordalai.blogspot.com/2011/07/rim-shot-lessons-from-blackberry-hill.html

https://www.macrumors.com/2017/02/15/blackberry-hits-zero-market-share/

https://snapshot.fidelity.com/fidresearch/snapshot/landing.jhtml#/research?symbol=BBRY

http://www.techtimes.com/articles/197805/20170216/blackberry-s-smartphone-market-share-dips-to-0-percent-android-and-ios-lead.htm

Boycotts Surrounding the Trump Administration

During Trump’s administration there have been a number of boycotts (or at the very least, called for boycotts) on a wide variety of industries, both for supporting Trump and for clashing with him. The boycott of Uber from a weeks ago garnered national attention and eventually warranted response from the company’s CEO, but the most recent boycott surrounding Trump and his family is of Nordstrom after the company’s decision to end its partnership with Ivanka Trump. Nordstrom stopped selling Ivanka’s clothing line, citing poor sales as the driving factor. But that decision may also have been largely influenced by the threat of anti-Trump boycotts following the “Grab Your Wallet” campaign that called for consumers to boycott a list of almost 70 perceivably pro-Trump companies. Despite the company’s official stance that removing Ivanka’s products should not be interpreted as “taking a political position,” Trump supporters have by and large condemned the company for giving in to anti-Trump boycotts and have responded with a similar call to action. Since making the decision, Nordstrom has become a target for a whole new series of boycotts from the opposite side of the political spectrum.  Still, the actual impact on Nordstrom’s stock from the pro-Trump boycott has been minimal.

Nordstrom stock prices have actually increased, overall, since the company dropped Ivanka Trump’s brand on February 3, 2017.

The limited effectiveness of these boycotts could be for a number of reasons. First, the boycotts associated with Trump, his supporters, and his critics have become so numerous that little to no attention is paid to them individually anymore. Overall, the number of stories about boycotts in U.S. newspapers has increased about 30% from only a year ago. Each specific boycott only has a few days of media attention before the public is redirected toward a new cause. Most companies suffer minor and temporary reputational damage as a result of any given boycotting effort. Furthermore, boycotts in general have proven to be an ineffective method of exacting change from companies. Even amongst consumers who agree with the ideology behind a boycott, most would not frequent the company in the first place and the rest are usually too loyal to the product or service to inconvenience themselves by forsaking it.

In today’s highly polarized political atmosphere, it may be difficult for companies to completely avoid taking any kind of political stand. Nordstrom was in a unique situation with Ivanka Trump in which the public perceived even inaction as a decisive political stance. Perhaps as tensions rise around Trump’s administration, it will become more and more difficult for companies to avoid these increasingly common, politically motivated boycotts, especially if even silence and inaction is interpreted as opposition.  However, trends have shown that the repercussions of even highly public feuds and boycotts in this political and economic climate are not necessarily detrimental. While the situation between Nordstrom and the Trumps continues to unfold, so far Nordstrom stock has had a slightly positively impact from the media attention.

Sources:

https://www.bloomberg.com/news/articles/2017-02-02/nordstrom-said-to-wind-down-relationship-with-ivanka-trump-brand

http://fortune.com/2017/02/09/donald-trump-ivanka-trump-nordstrom-twitter-boycotts/

http://www.businessinsider.com/trump-boycott-companies-will-it-work-2017-1

Snapchat Reveals Profits

This past Thursday, Snap Inc published its initial public offering filing. Snapchat’s parent company filed the paperwork this past November and is seeking a valuation of $20 billion to $25 billion, despite a Bloomberg report several months ago that valued Snap at $40 billion. Morgan Stanley and Goldman Sachs will head the deal, which could make CEO Evan Spiegel wealthier than many Fortune 500 CEOs. Spiegel and several of his friends from Stanford created Snapchat in 2011 as a private photo-sharing application, but the functionality of the application continues to expand over time. In the three years from 2011 to 2014, the app saw an increase in daily active users from one million to 100 million. While the daily user count continues to expand, the rate of growth has slowed down significantly in recent months. This number increased by only 7 million during the last three months, less than it had in most quarters.

Despite its growing user base, Snap mentioned in its filing that it may never become profitable. This risk factor caused many business journalists to criticize the social media platform in the past few days due to speculation over its potential viability against longer-established companies like Facebook, Instagram, and Twitter. The company brought in $404.5 million in revenue in 2016, while losses increased from $372.9 million in 2015 to $514.6 million in 2016. This increase in losses correlates with the growing daily user base that creates extra costs associated with hosting all the pictures, videos and messages running through the app’s servers. Snap currently makes its money from selling advertising space that companies can buy to promote movies and products on the filters and lenses available for users to implement into their pictures and videos. Short advertisement clips also play after consumers view certain pictures or videos, and the company’s filing shows potential for the growth in mobile advertising around the world, especially as internet infrastructure improves in developing countries.

The company is looking to expand its revenue sources with the introduction of Spectacles, sunglasses with a camera that allows users to save images and videos as “Memories” on the Snapchat app. Introduction of this product beyond the mobile app helps Spiegel reposition Snap Inc as a camera manufacturer and not just a social media platform. The camera glasses were sold in limited quantities during the last few months of 2016, creating new hype for the future of the product and company innovations in the future. Despite this excitement, expansion into new markets will result in more losses and feed the doubters that question the future profitability of the company.

Sources:

http://www.businessinsider.com/snapchat-parent-company-snap-inc-files-for-ipo-2016-11

http://fortune.com/2017/02/04/snapchat-abridged-history/

http://www.telegraph.co.uk/technology/2017/02/03/snap-ipo-can-snapchat-lose-515-million-worth-25-billion/

Why Uber Could be Headed for Failure

The rideshare company Uber took losses of 1.2 billion dollars in just the first half of 2016. This loss may come as a surprise to many people. Uber was founded in 2009 and has since become a hugely popular service, now available in two hundred and nine cities across the United States and in eighty one countries. The company was reported to be worth 62.5 billion dollars in 2016, making it worth more than General Motors Co. and Ford as well as eighty percent of the S&P 500. Yet still many are saying that Uber is destined to fail, that its losses sustained in 2016 are only the beginning. How could that be?

To start, some view Uber as being in a high expense/high capital business. In order to have enough drivers it must hire people who do not have cars. According to Erik Gordon, a professor at the University of Michigan’s Ross School of Business, this means that Uber has to finance the purchase of cars for these drivers and it ends up racking up high expenses in the process. Uber doesn’t simply buy cars and ship them out, however. New drivers in need of a car can make use of various partnerships Uber has to rent, lease, or buy a car of their own. Uber recently partnered with GM’s new ride sharing service, Maven, which will allow Uber drivers to rent and use cars flexibly on a weekly basis.

A larger concern that seems to be shared more widely is that Uber is operating in a market without any barriers to entry. Uber’s product is an app, one which already has been successfully duplicated. It has already seen the downside here in the emergence of its largest competitor, Lyft. In this market consumers are looking for a ride that is cheap, fast, and lacking the unpleasant aspects sometimes found using a taxi service. That means there are few things that can set firms apart in the ride sharing business. Uber can try to be faster and provide a more pleasant experience, but these factors are largely dependent on the drivers they hire, all of whom work to the beat of their own drums (one of the reasons people are drawn to drive for Uber). That just leaves the price factor. Uber can lower their fares and try to attract more customers away from their ride sharing competitors and taxis, and they have done so multiple times now. This creates a bit of a vicious circle, however. Uber’s competitors can only respond by dropping their rates to match or beat Uber’s. In this back and forth, rates would eventually drop to merely equal costs (mostly made up of fuel costs).

According to Dr. Joe Sulmona, a transportation strategist and economist based in Vancouver, this “destructive competition” could spell huge trouble for firms like Uber. Destructive competition drives prices so low, at some point it comes apart because people can’t make a living at it, he says. If this happens, Uber will lose drivers and those that remain will have very little incentive to operate with any safety or reliability. Once it becomes clear to consumers that Uber is not to be trusted, that will spell the end.

 

Sources:

https://www.marketplace.org/2016/08/30/economy/why-uber-will-fail-according-one-economics-professor

http://www.geekwire.com/2015/6-reasons-ubernomics-fatal-customers-mass-transit/

https://www.bloomberg.com/news/articles/2016-08-17/an-expert-in-valuation-says-uber-may-have-already-peaked

http://www.reuters.com/article/us-uber-gm-maven-idUSKBN12W4ZZ

 

Tesla and its Host of Issues

Elon Musk, considered a real-life Tony Stark by some, promised years ago to revolutionize the auto industry. It began with the Roadster, a premium luxury car experience which was followed by the Model X, Model S, and now the anticipated Model 3. Today however, Tesla seems to be running into a host of issues. The largest issue currently is that the Model 3 release date continues to be pushed back, with some estimates predicting that people who put a deposit down for the car in 2016 will not be able to receive their Model 3 until 2021. Out of the past 31 financial quarters, Tesla has only managed to post two positive quarters (it posted positive in the third quarter of 2016). As you can see from the graph, nearly every time Tesla attempts to sell cars it loses money.

What is interesting though is that Tesla has a positive profit margin on the cars they sell. So where does the disparity lie? The disparity comes in Tesla’s massive R&D budget which drains any profits Tesla may actually earn.

Furthermore, Tesla recently merged with SolarCity and Space X to form a trifecta of money losing companies. One additional reason SolarCity and now Tesla finds itself in dire straits is that states such as Nevada are rolling back their net metering programs which allow solar panel households to sell back their unused power to utility companies. Without these types of programs, solar panels make little to no financial sense. As Prof. Smitka aptly pointed out, combining three money losing companies into one is not exactly smart business.

So what is Tesla’s alternative business strategy? Well for one by asking consumers to put a deposit down on vehicles before they have even begun production allows Tesla to acquire valuable financial capital.  400,000 consumers already made $1,000 deposits on the Model 3 giving Tesla an extra $400,000,000 in financial assets. Furthermore, Tesla plans on operating out of its own dealerships, something other auto industries have attempted, but failed to do due to high operating costs associated with dealerships. Tesla hopes these dealerships will provide an added layer of unmatched service (we’ll see if that actually helps). Finally, with Tesla hoping to be one of the first fully battery powered cars to hit the market, Tesla has to operate and open more of their SuperCharge stations to make mass production and sales of Tesla vehicles even possible (imagine if Ford had to open and operate their own gas stations). One problem however, is that cars like the Nissan Leaf and Chevy Bolt are likely to hit already on the market, long before the Model 3 will launch, leaving Tesla with only brand recognition left as its saving grace. Tesla may have to up its current $0 marketing budget to compete in such a competitive market or may find itself coming up short of its financial goals yet again.

Sources:

  • http://www.cnbc.com/2016/10/26/tesla-reports-third-quarter-earnings.html
  • http://thetechnalyzer.com/tesla-business-model/
  • http://dailycaller.com/2016/11/10/billionaire-elon-musks-solar-company-has-basically-turned-into-a-bonfire-of-money/
  • http://www.businessinsider.com/a-legendary-car-exec-thinks-tesla-is-facing-the-trifecta-of-doom-2015-10

The Median Voter Theorem

The median voter theorem as developed by Anthony Downs in his 1957 book, “An Economic Theory of Democracy,” is an attempt to explain why politicians on both ends of the spectrum tend to gravitate towards the philosophical center.  Downs, as well as economist Duncan Black, who proposed the theory in 1948, argue that politicians take political positions are far as possible near the center in order to appeal to as many potential voters as possible.  Under certain constraints/assumptions, Black says, the median voter “wins,” and the outcome ends up as a Nash equilibrium.  These assumptions are as follows:

  1. Voter preferences are single-peaked:  All voters have a single point along a policy position preference curve at which they would receive the highest utility.  The farther a candidate’s policy positions are from this point, the more dissatisfied the voter will be.  
  2. Voter preferences are one-dimensional: Similar in composition to the Hotelling model, the median voter theorem is only able to find an equilibrium when voter preferences are being measured in one-dimension.
  3. There are 2 candidates or parties competing for voters: Each voter must choose between two different policy positions.  Voters will vote for whichever candidate is closer to their highest preference point from the first assumption. 

The polarizing nature of this most recent presidential election however has many experts doubting how empirically applicable the median voter theorem truly is.  The 2016 election was awash with fringe candidates, politicians such as Trump, Bernie, and Jill Stein represented voters with preferences much farther away from the median than had been seen in a long while.  Many argue that this is a result of party stances drifting farther to the right/left, however the positions of Bernie/Trump were substantially outside those even of their own parties.  Why?  Thomas Romer and Howard Rosenthal point out that cartels of “agenda-setters” are able to exploit the differences between median voter’s policy preferences and the actual status quo in order to articulate policies that come as close as possible to their (the agenda setters’) preferences as possible.  In US presidential politics, agenda setters are party activists and special interest groups, to whom candidates need to win favor in order to receive campaign funding.  For the Republican side Daniel Drezner of the Washington Post hypothesizes that fierce competition among GOP candidates for party favor caused many of them to shift “ever rightward” on foreign policy and many other issues.  He goes on to say that once one party begins to shift to one side, the other party is able to shift more and more to their side while still appearing to be relatively moderate.  This would explain much of the early success of Bernie Sanders and some of the more liberal stances taken by Clinton in the later stages of the election.

All-in-all, the median voter theorem does a satisfactory job at explaining why candidates choose the positions that they do, and how voters choose who to vote for.  However, the theorem will soon stand its strongest test as the Trump presidency rumbles on and partisan politics drift farther and farther from the median.

Sources:

“The End of the Median Voter in Presidential Politics” – Washington Post

“The Median Voter Theorem and its Applications” – Joshua Palette

“Why Politics is Stuck in the Middle” – NYTimes

 

How Amazon Keeps Expanding Despite Its Small Profits

In its early years, Amazon began as an online bookstore, but over its past two decades, the company has rapidly expanded into a becoming a household name. Amazon has now broken into many different markets by selling music, movies, electronics, and even household goods on its website. The company is known for having “Earth’s Biggest Selection” of products available through its collection of websites that utilize a cost leadership strategy to stay ahead in the market.

 

According to a report from July 2015, Amazon only made $92 million for the previous quarter’s profit. When comparing this margin to other tech giants like Google, which netted $3.93 billion that quarter, or even its inferior competitor eBay, which made $682 million in the same quarter, Amazon simply does not measure up. How can the company be expanding so rapidly with a net income so low?

The secret to Amazon’s success can be dedicated to its unmatched business strategy. Throughout its existence, Amazon has been practicing a strategy called “purposeful investment” where although earnings are significant and large, the company puts most of its revenues back into the business to keep expanding. Although the company has only recently begun posting consistent profits (see graph 2), it has still been able to expand because of their continued large investments in research and development (see graph 3). These large investments help the company make the most educated and innovative business decisions and allow for major expansion.

As a result of their investment in research, the company has been able to provide several benefits that set them apart from competitors. Some of the specific measures taken include: steep discounts for is regular members through Amazon Prime (The $99-per-year Prime unlimited shipping membership has proven a big driver of online sales), ensuring timely and even express delivery and at times, waiving off shipping charges, and conveniently selling a variety of products in one place to fulfill all of their consumer’s needs. The company works to maintain maximum utility and efficiency as well as strives to make the customer experience as seamless and as smooth as possible.

 

Some analysts do not believe that Amazon can continue its heavy purposeful investment and maintain sufficient profits to keep investing, but even as the company begins to generate more consistent quarterly profits, the company’s CEO Jeff Bezos isn’t backing down from the investment strategy. Constant investment is crucial for a business like Amazon because if its innovation were to fall behind, the company could be overtaken by competitors in its many different fields. Therefore, in order for the company to continue its successful tract, it must keep up the heavy investment.

 

Luckily for Amazon, it can afford to continue investing large amounts of money into research and development because the markets it is targeting still have plenty of room to grow. The company has begun creating a larger geographic footprint by entering the overseas markets of Mexico and India. The company has also already seen major growth in Amazon Prime membership in Europe and Japan. Not only will Amazon expand its scope, but the dominance will also continue well into the future for Amazon as its taps into new product and service categories. By working to implement same day delivery, Amazon hopes to be able to revolutionize the grocery business, a category that has yet to successfully translate to the internet. With continued large investment into research and development, it seems as though the sky is the limit for Amazon.

 

Sources

http://business.financialpost.com/investing/how-amazon-is-spending-its-way-toward-total-global-domination (graph 3)

https://news.thestreet.com/independent/story/13661539/3/here-s-where-amazon-is-investing-next.html

http://www.digitalbusinessmodelguru.com/2013/07/analysis-of-amazon-business-model.htmlhttp://ben-evans.com/benedictevans/2013/8/8/amazons-profits

(graph 1)

http://www.theverge.com/2016/7/28/12313526/amazon-q2-2016-earnings-report-aws-cloud-profit (graph 2)