#its definitely true that as like an overall trend fantasy is just not as concerned with prose anymore

[cruelsister-moved2]

12 and 3 for the book asks!

12:Any books that disappointed you? Yeah 😭 like this book daughter of the moon goddess was marketed as like a mythological retelling and then it was just like the most generic magic school YA fantasy love triangle it was soooo bad thats like 8h of my live ill NEVER get back..... also wasnt prepared for earthsea being really misogynistic. scream. also honestly the prose of basically every new release I've read has been disappointing to me sorry to be a hater

3: What were your top five books of the year? ngl most of my top books this year were nonfiction, but i really liked she who became the sun by shelley parker-chan like its not a perfect book but it was enjoyable and exciting the way it depicts gender. and human acts by han kang was really good. everything else i liked was like short story collections and nonfiction ngl. wait i mean i enjoyed reading (the first 3 books of) earthsea but the misogyny literally left such a bad taste in my mouth 😭 i know she addressed it later etc etc but it just blindsided me bc i didn’t expect it also in the first book when ged’s little creature thing died i literally almost DNFed

[jeremyau]

Amazon’s Earnings, Amazon Logistics Services?, Netflix’s Earnings

Good morning,

One thing I didn’t get into in yesterday’s interview with The Athletic CEO Alex Mather was an actual evaluation of the site’s prospects; I simply said the company was “one of the more fascinating stories in media”, and I definitely think that!

For example, I generally believe that subscription-based publications should not take venture capital investment: the best subscription-based publications will win by having a superior cost structure and superior coverage of a relatively narrow niche, and those aren’t typically VC-scale businesses. Surprisingly, though — at least it’s a surprise to me! — I think The Athletic is right to go all-in with venture capital funding. The Athletic isn’t really similar to, say, Stratechery; it is clearly a bundle play, and bundles are like networks: you either have one or you don’t. That is exactly the sort of opportunity where venture funding is critical, because you can’t bootstrap into a bundle anymore than you can a network.

By the same token, that raises the risks for The Athletic considerably: not only does it have all of the pressure that comes with venture capital, it has the bloated cost structure (relative to revenue) that comes from spending to create a viable business model (as opposed to building it slowly). Plus, while networks reduce their customer acquisition costs over time (because the network becomes more valuable and thus more attractive to marginal users the more users there are), The Athletic will run in the opposite direction: not only will the hardest core fans sign-up first, they will also be the fans most likely to be interested in the other non-local sports that make the bundle attractive; acquiring customers cheaply will be a challenge that will only increase over time.

And, of course, there is execution risk; subscriptions are ultimately about quality, not quantity, and those two factors often work in opposite directions. In the case of The Athletic, the more writers they hire the harder it will be to ensure they are of a consistently high quality standard; worse, quality is often judged by a publication’s worst pieces, not its best.

All that said, if ever this model were to work it would work in sports. Sports lends itself to bundles, and there is always something interesting to write about. And, I’d add, while I still favor Faceless Publishers, I was struck by Mather’s argument that many writers wanted to be affiliated with The Athletic; I could see where my own personal desire for independence could lead me to underestimate the attractiveness of being attached to a brand instead of building my own. I’m biased in a second way: I started Stratechery as a side project, but that was only possible because my day job didn’t involve writing publicly; by definition established writers can’t build up a personal site on the side, and for them jumping to a startup like The Athletic is perhaps a bigger leap of faith than I give them credit for.

On to the update:

Amazon’s Earnings

From the Wall Street Journal:

Amazon.com Inc. said quarterly profit fell 77% even as sales jumped, a sign of the high cost of its increasing dominance of retail. The Seattle-based retailer eked out its smallest quarterly profit in nearly two years. The company reported $197 million in profit on $38 billion in sales in the second quarter as it spent on new warehouses and delivery capacity for its retail business and data centers for its cloud services business. The company also poured funds into hiring engineers to work on its artificial intelligence Alexa service as well as warehouse workers…

Amazon’s 25% sales growth comes at the expense of traditional retailers, which are struggling with declining foot traffic and the shift of consumer spending online. At a time when Amazon is investing heavily and expanding, other retailers are saddled with high debt loads and falling sales, forcing them to close stores and cut jobs—and extending Amazon’s advantage.

One of the big takeaways from this quarter goes back to a piece I wrote in 2015 entitled The AWS IPO. As I explained in that piece:

Amazon is not a monolithic operation, but rather a collection of businesses sharing resources, including a channel (Amazon.com), logistics, and a common technological foundation. These businesses range from bookshops to video game stores to home furniture to clothes to shoes to consumer electronics to auto accessories…the list is quite extensive at this point! True, consumers experience all of these different businesses as a unified Amazon.com, but inside the company some of these businesses are mature and (theoretically) throwing off cash, while others are reliant on investment as they work to get off the ground.

The concern for Amazon is that the business that had been throwing off cash for 20 years — Media, i.e. books, CDs, DVDs, and video games — was a dying one; the general e-commerce business was growing revenue dramatically, but was much less profitable (probably significantly unprofitable). That is why the revelation that AWS was extremely profitable was so important:

The profitability of AWS is a big deal in-and-of itself, particularly given the sentiment that cloud computing will ultimately be a commodity won by the companies with the deepest pockets. It turns out that all the reasons to believe in AWS were spot on: Amazon is clearly reaping the benefits of scale from being the largest player, and their determination to have both the most complete and cheapest offering echoes their prior strategies in e-commerce…

Perhaps the biggest implication of AWS, though, is its impact on Amazon.com…the sky is the limit for AWS, and if the service is profitable at its current scale, what expectations should we have for five years from now, or ten? More importantly, that profitability can over time replace the role of ‘Media’ in the Amazon engine: cash to build new e-commerce businesses, or to explore what is next (a la AWS), or both of the above. Or, in the fantasy of Amazon’s investors, to actually provide a return to shareholders.

Over the next several earnings periods it was clear that AWS was throwing off more cash than CEO Jeff Bezos and team knew what to do with; the company started to turn a consistent profit and some investors started to expect a new normal.

Consider expectations dashed.

First, AWS is, more than ever, the key to making Amazon go. While growth continues to slow — 42% this quarter, compared to 42.67% last quarter, and 58.22% a year ago — the division continues to throw off huge amounts of cash; AWS had $916 million in operating income last quarter, as compared to Amazon’s overall profit of only $197 million.

UPDATE: Well, this is a painful update to write — and also an easy one. In short, I totally messed up this section.

The missing money in “Investing Activities”, as a couple of readers gently pointed out, is the purchase of marketable securities. For some reason I had it stuck in my head that that was a financing activity and I just totally overlooked it. I honestly have no excuse: I built a big part of this update on something that was totally wrong, and I’m very sorry about that.

That point aside, the broader takeaway remains that Amazon is pouring money back into the business. International margins in particular have gone even more negative — from -1.4% to -6.3%, and North American margins have slipped from 4.0% to 1.9%; it is, as noted in the update, funded by AWS.

Moreover, I do believe Amazon Logistics Service is a real thing; it would, however, show up under Purchases of property and equipment (it likely already is there, just called “Fulfillment”) or in capital leases, which I have covered previously.

Anyhow, this was a big screw-up, and I’m sorry.

Back to tomorrow, where I plan to do better!

Second, Amazon is spending on something big. Take a look at the company’s cash flows over the last five years:

Note the investment line: ‘Investing Activities’ had negative cash flow of over $5 billion, by far the most in the last five years. Moreover, a look at cash flows on a trailing twelve-month basis shows this is a trend that has been picking up since early 2015 — which, as I just noted, is when Amazon started breaking out AWS in the first place:

So what is this money being used for? According to Amazon’s 10-Q:

Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, internal-use software and website development costs, cash outlays for acquisitions, investments in other companies and intellectual property rights, and purchases, sales, and maturities of marketable securities.

Amazon actually breaks out most of these individually, and comparing this quarter’s numbers to Q2 2015, when the outflow in investing activities started to accelerate reveals…something (as an aside, the numbers are rounded to reflect the numbers reported in the ‘Liquidity and Capital Resources’ commentary from which the numbers are taken, even though more exact numbers for total Investing Activities are available):

Q2 2015 Q2 2017 Change Total Investing Activities 1400 5100 264% Cash Capital Expenditures 1200 2500 108% Internal-use software and website development 150 90 -40% Acquisitions 8 633 7813% Missing 42 1877 4369%

The acquisitions part is easy: last quarter Amazon paid $580 million in cash for Souq.com, which reflects most of the difference there. ‘Cash Capital Expenditures’, meanwhile, “primarily reflect additional capacity to support [Amazon’s] fulfillment operations and additional investments in support of continued business growth due to investments in technology infrastructure (the majority of which is to support AWS)”, and a doubling in two years seems reasonable and reflective of Amazon’s revenue increase over the same time period.

That, though, leaves $1.8 billion in this quarter alone: what is Amazon investing in that is not AWS, not fulfillment centers, and not an acquisition?

Amazon Logistics Services?

My best guess is the company’s burgeoning logistics business. We already know the company has leased airplanes, bought thousands of truck trailers, is registered as an ocean freight forwarder, and is building a $1.5 billion logistics hub. Moreover, all of that activity started in, you guessed it, mid-2015.

The end game here — call it Amazon Logistics Services — has been clear for a long time, and if fits right in with the Amazon playbook. From a 2016 Daily Update:

It seems likely that Amazon will build out this network from the inside out, by first connecting its fulfillment centers with each other and with suppliers, leaving the more logistically challenging and expensive last mile delivery to whomever wants to fight for it. That doesn’t sound great for UPS’ already low e-commerce margins.

One more thing: a persistent myth about AWS was that Amazon was selling excess server capacity that resulted from the need to ramp up for the holidays; this never made sense, because what would happen when the holidays came around in the future? Would Amazon kick everyone off? Interestingly, it seems like a similar myth is developing around this logistics effort. Namely, most reports suggest Amazon wants to bring on extra capacity to avoid the 2013 Christmas disaster when many packages were not delivered in time.

This, though, also makes no sense: are Amazon’s planes going to twiddle their thumbs the rest of the year? I’d think about their efforts from the opposite perspective: the company is building a baseline logistics capacity and will use UPS et al to handle peak demand. Until, of course, the company gets such scale [by offering the service to 3rd parties a la AWS and fulfillment] that their static volume drowns out dynamic peaks and valleys, and then the existing logistics providers will really be in trouble.

Presuming this is true, I suspect that, once again, Amazon’s investors will be quite alright with forgoing profits in the short-term.

Netflix’s Earnings

From Bloomberg:

Netflix Inc. shares soared after the streaming-video provider scored a record second quarter, surpassing forecasts for subscriber growth and boosting its international audience past the domestic total for the first time. Investors continue to forgive minuscule profit for growth in subscribers, which soared to almost 104 million in the period. The company’s stock price jumped as much as 9.7 percent to $177 Tuesday in New York, its biggest increase since October. Netflix shares have risen 78 percent in the past year.

I’ve explained previously why investors care more about Netflix subscriber numbers than profits: like any good SaaS customer, Netflix customers will pay back the cost to acquire them (which in the case of Netflix is the investment in evergreen content) over time. What is particularly noteworthy about the Netflix strategy, though, is that those customer acquisition costs are funded by debt.

This gets at why I’ve long considered Amazon Netflix’s most problematic competitor (and Apple a potential acquirer): not only is Amazon offering a far more comprehensive bundle (Prime) for less money than Netflix, the former has a massive capital advantage. The only cost to using AWS profits to fund, say, original video are opportunity costs. That means no default risk and, thanks to Amazon’s track record, permission from the market to set whatever hurdle rate management deems prudent. Netflix, meanwhile, has to take a riskier route and pay for said risk with actual cash (in the form of interest), and then endure the roller coaster that is to what extent their quarterly subscriber numbers exceed or fall short of the company’s expectations (and by extent, ability to pay back said debt).

It is to the company’s credit that it has withstood Amazon’s onslaught to date, and a reminder that Netflix is very much a company built with Internet assumptions; Amazon’s competitors that were built for a world before the Internet are in decidedly worse shape, and it’s only going to get worse.

The Daily Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.

Thanks for being a supporter, and have a great day!

[jeremyau]

Amazon’s Earnings, Amazon Logistics Services?, Netflix’s Earnings

Good morning,

One thing I didn’t get into in yesterday’s interview with The Athletic CEO Alex Mather was an actual evaluation of the site’s prospects; I simply said the company was “one of the more fascinating stories in media”, and I definitely think that!

For example, I generally believe that subscription-based publications should not take venture capital investment: the best subscription-based publications will win by having a superior cost structure and superior coverage of a relatively narrow niche, and those aren’t typically VC-scale businesses. Surprisingly, though — at least it’s a surprise to me! — I think The Athletic is right to go all-in with venture capital funding. The Athletic isn’t really similar to, say, Stratechery; it is clearly a bundle play, and bundles are like networks: you either have one or you don’t. That is exactly the sort of opportunity where venture funding is critical, because you can’t bootstrap into a bundle anymore than you can a network.

By the same token, that raises the risks for The Athletic considerably: not only does it have all of the pressure that comes with venture capital, it has the bloated cost structure (relative to revenue) that comes from spending to create a viable business model (as opposed to building it slowly). Plus, while networks reduce their customer acquisition costs over time (because the network becomes more valuable and thus more attractive to marginal users the more users there are), The Athletic will run in the opposite direction: not only will the hardest core fans sign-up first, they will also be the fans most likely to be interested in the other non-local sports that make the bundle attractive; acquiring customers cheaply will be a challenge that will only increase over time.

And, of course, there is execution risk; subscriptions are ultimately about quality, not quantity, and those two factors often work in opposite directions. In the case of The Athletic, the more writers they hire they harder it will be to ensure they are of a consistently high quality standard; worse, quality is often judged by a publication’s worst pieces, not its best.

All that said, if ever this model were to work it would work in sports. Sports lends itself to bundles, and there is always something interesting to write about. And, I’d add, while I still favor Faceless Publishers, I was struck by Mather’s argument that many writers wanted to be affiliated with The Athletic; I could see where my own personal desire for independence could lead me to underestimate the attractiveness of being attached to a brand instead of building my own. I’m biased in a second way: I started Stratechery as a side project, but that was only possible because my day job didn’t involve writing publicly; by definition established writers can’t build up a personal site on the side, and for them jumping to a startup like The Athletic is perhaps a bigger leap of faith than I give them credit for.

On to the update:

Amazon’s Earnings

From the Wall Street Journal:

Amazon.com Inc. said quarterly profit fell 77% even as sales jumped, a sign of the high cost of its increasing dominance of retail. The Seattle-based retailer eked out its smallest quarterly profit in nearly two years. The company reported $197 million in profit on $38 billion in sales in the second quarter as it spent on new warehouses and delivery capacity for its retail business and data centers for its cloud services business. The company also poured funds into hiring engineers to work on its artificial intelligence Alexa service as well as warehouse workers…

Amazon’s 25% sales growth comes at the expense of traditional retailers, which are struggling with declining foot traffic and the shift of consumer spending online. At a time when Amazon is investing heavily and expanding, other retailers are saddled with high debt loads and falling sales, forcing them to close stores and cut jobs—and extending Amazon’s advantage.

One of the big takeaways from this quarter goes back to a piece I wrote in 2015 entitled The AWS IPO. As I explained in that piece:

Amazon is not a monolithic operation, but rather a collection of businesses sharing resources, including a channel (Amazon.com), logistics, and a common technological foundation. These businesses range from bookshops to video game stores to home furniture to clothes to shoes to consumer electronics to auto accessories…the list is quite extensive at this point! True, consumers experience all of these different businesses as a unified Amazon.com, but inside the company some of these businesses are mature and (theoretically) throwing off cash, while others are reliant on investment as they work to get off the ground.

The concern for Amazon is that the business that had been throwing off cash for 20 years — Media, i.e. books, CDs, DVDs, and video games — was a dying one; the general e-commerce business was growing revenue dramatically, but was much less profitable (probably significantly unprofitable). That is why the revelation that AWS was extremely profitable was so important:

The profitability of AWS is a big deal in-and-of itself, particularly given the sentiment that cloud computing will ultimately be a commodity won by the companies with the deepest pockets. It turns out that all the reasons to believe in AWS were spot on: Amazon is clearly reaping the benefits of scale from being the largest player, and their determination to have both the most complete and cheapest offering echoes their prior strategies in e-commerce…

Perhaps the biggest implication of AWS, though, is its impact on Amazon.com…the sky is the limit for AWS, and if the service is profitable at its current scale, what expectations should we have for five years from now, or ten? More importantly, that profitability can over time replace the role of ‘Media’ in the Amazon engine: cash to build new e-commerce businesses, or to explore what is next (a la AWS), or both of the above. Or, in the fantasy of Amazon’s investors, to actually provide a return to shareholders.

Over the next several earnings periods it was clear that AWS was throwing off more cash than CEO Jeff Bezos and team knew what to do with; the company started to turn a consistent profit and some investors started to expect a new normal.

Consider expectations dashed.

First, AWS is, more than ever, the key to making Amazon go. While growth continues to slow — 42% this quarter, compared to 42.67% last quarter, and 58.22% a year ago — the division continues to throw off huge amounts of cash; AWS had $916 million in operating income last quarter, as compared to Amazon’s overall profit of only $197 million.

UPDATE: Well, this is a painful update to write — and also an easy one. In short, I totally messed up this section.

The missing money in “Investing Activities”, as a couple of readers gently pointed out, is the purchase of marketable securities. For some reason I had it stuck in my head that that was a financing activity and I just totally overlooked it. I honestly have no excuse: I built a big part of this update on something that was totally wrong, and I’m very sorry about that.

That point aside, the broader takeaway remains that Amazon is pouring money back into the business. International margins in particular have gone even more negative — from -1.4% to -6.3%, and North American margins have slipped from 4.0% to 1.9%; it is, as noted in the update, funded by AWS.

Moreover, I do believe Amazon Logistics Service is a real thing; it would, however, show up under Purchases of property and equipment (it likely already is there, just called “Fulfillment”) or in capital leases, which I have covered previously.

Anyhow, this was a big screw-up, and I’m sorry.

Back to tomorrow, where I plan to do better!

Second, Amazon is spending on something big. Take a look at the company’s cash flows over the last five years:

Note the investment line: ‘Investing Activities’ had negative cash flow of over $5 billion, by far the most in the last five years. Moreover, a look at cash flows on a trailing twelve-month basis shows this is a trend that has been picking up since early 2015 — which, as I just noted, is when Amazon started breaking out AWS in the first place:

So what is this money being used for? According to Amazon’s 10-Q:

Cash provided by (used in) investing activities corresponds with cash capital expenditures, including leasehold improvements, internal-use software and website development costs, cash outlays for acquisitions, investments in other companies and intellectual property rights, and purchases, sales, and maturities of marketable securities.

Amazon actually breaks out most of these individually, and comparing this quarter’s numbers to Q2 2015, when the outflow in investing activities started to accelerate reveals…something (as an aside, the numbers are rounded to reflect the numbers reported in the ‘Liquidity and Capital Resources’ commentary from which the numbers are taken, even though more exact numbers for total Investing Activities are available):

Q2 2015 Q2 2017 Change Total Investing Activities 1400 5100 264% Cash Capital Expenditures 1200 2500 108% Internal-use software and website development 150 90 -40% Acquisitions 8 633 7813% Missing 42 1877 4369%

The acquisitions part is easy: last quarter Amazon paid $580 million in cash for Souq.com, which reflects most of the difference there. ‘Cash Capital Expenditures’, meanwhile, “primarily reflect additional capacity to support [Amazon’s] fulfillment operations and additional investments in support of continued business growth due to investments in technology infrastructure (the majority of which is to support AWS)”, and a doubling in two years seems reasonable and reflective of Amazon’s revenue increase over the same time period.

That, though, leaves $1.8 billion in this quarter alone: what is Amazon investing in that is not AWS, not fulfillment centers, and not an acquisition?

Amazon Logistics Services?

My best guess is the company’s burgeoning logistics business. We already know the company has leased airplanes, bought thousands of truck trailers, is registered as an ocean freight forwarder, and is building a $1.5 billion logistics hub. Moreover, all of that activity started in, you guessed it, mid-2015.

The end game here — call it Amazon Logistics Services — has been clear for a long time, and if fits right in with the Amazon playbook. From a 2016 Daily Update:

It seems likely that Amazon will build out this network from the inside out, by first connecting its fulfillment centers with each other and with suppliers, leaving the more logistically challenging and expensive last mile delivery to whomever wants to fight for it. That doesn’t sound great for UPS’ already low e-commerce margins.

One more thing: a persistent myth about AWS was that Amazon was selling excess server capacity that resulted from the need to ramp up for the holidays; this never made sense, because what would happen when the holidays came around in the future? Would Amazon kick everyone off? Interestingly, it seems like a similar myth is developing around this logistics effort. Namely, most reports suggest Amazon wants to bring on extra capacity to avoid the 2013 Christmas disaster when many packages were not delivered in time.

This, though, also makes no sense: are Amazon’s planes going to twiddle their thumbs the rest of the year? I’d think about their efforts from the opposite perspective: the company is building a baseline logistics capacity and will use UPS et al to handle peak demand. Until, of course, the company gets such scale [by offering the service to 3rd parties a la AWS and fulfillment] that their static volume drowns out dynamic peaks and valleys, and then the existing logistics providers will really be in trouble.

Presuming this is true, I suspect that, once again, Amazon’s investors will be quite alright with forgoing profits in the short-term.

Netflix’s Earnings

From Bloomberg:

Netflix Inc. shares soared after the streaming-video provider scored a record second quarter, surpassing forecasts for subscriber growth and boosting its international audience past the domestic total for the first time. Investors continue to forgive minuscule profit for growth in subscribers, which soared to almost 104 million in the period. The company’s stock price jumped as much as 9.7 percent to $177 Tuesday in New York, its biggest increase since October. Netflix shares have risen 78 percent in the past year.

I’ve explained previously why investors care more about Netflix subscriber numbers than profits: like any good SaaS customer, Netflix customers will pay back the cost to acquire them (which in the case of Netflix is the investment in evergreen content) over time. What is particularly noteworthy about the Netflix strategy, though, is that those customer acquisition costs are funded by debt.

This gets at why I’ve long considered Amazon Netflix’s most problematic competitor (and Apple a potential acquirer): not only is Amazon offering a far more comprehensive bundle (Prime) for less money than Netflix, the former has a massive capital advantage. The only cost to using AWS profits to fund, say, original video are opportunity costs. That means no default risk and, thanks to Amazon’s track record, permission from the market to set whatever hurdle rate management deems prudent. Netflix, meanwhile, has to take a riskier route and pay for said risk with actual cash (in the form of interest), and then endure the roller coaster that is to what extent their quarterly subscriber numbers exceed or fall short of the company’s expectations (and by extent, ability to pay back said debt).

It is to the company’s credit that it has withstood Amazon’s onslaught to date, and a reminder that Netflix is very much a company built with Internet assumptions; Amazon’s competitors that were built for a world before the Internet are in decidedly worse shape, and it’s only going to get worse.

The Daily Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.

Thanks for being a supporter, and have a great day!