The Secret of Amazon’s Success

The Secret(ˈsēkrit) of Amazon’s(-zən,ˈaməˌzän) Success

It isn’t just size. Unlike many big American companies, Amazon is not squandering(ˈskwändər) its profits on stock(stäk) buybacks.

By William(ˈwilyəm) Lazonick

What is it that makes Amazon different from other large companies?

Certainly(ˈsərtnlē), the sheer(SHi(ə)r) range of the products it sells and its market power are unmatched in corporate(ˈkôrp(ə)rət) America. The recent frenzy(ˈfrenzē) over its HQ2 pick(pik) is another expression(ikˈspreSHən) of its outsize influence(ˈinflo͝oəns) on the economy(iˈkänəmē).

But there is another difference that is much less appreciated(əˈprēSHēˌāt) yet has been more significant(sigˈnifikənt) in shaping(SHāp) its path: Amazon’s resource-allocation(ˌaləˈkāSHən) strategy(ˈstratəjē) — in particular, how it chooses(CHo͞oz) to use the profits that it earns. It is one of very few large American corporations(ˌkôrpəˈrāSHən) that is choosing to retain its profits and reinvest(ˌrē-inˈvest) them rather than cutting payrolls and distributing corporate(ˈkôrp(ə)rət) cash to shareholders as dividends(ˈdiviˌdend) and buybacks.

Most Americans know Amazon through the consumer end of its business, with tens of thousands of low-wage(wāj) workers handling orders at distribution sites around the country. It would be a mistake, however, to see Amazon’s growth as driven primarily(prīˈme(ə)rəlē) by low-wage employment(əmˈploimənt). While most of Amazon’s revenues(ˈrevəˌn(y)o͞o) come from the sale of low-priced(prīs) products, most of its profits come from its cloud computing operation, Amazon Web Services.

This high-tech division(diˈviZHən), which has made Amazon the world leader(ˈlēdər) in cloud computing, accounted for less than 10 percent of Amazon’s revenues(ˈrevəˌn(y)o͞o) in 2017 but generated $4.3 billion in operating income. By comparison(kəmˈparəsən), North American web sales, which accounted for 60 percent of revenue(ˈrevəˌn(y)o͞o), generated only $2.8 billion in profit.

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https://www.nytimes.com/2018/11/19/opinion/amazon-bezos-hq2.html