Amazon and Value Creation: A Bezos Farewell

Amazon and Value Creation: A Bezos Farewell

Timothy Taylor 27/04/2021 8
Amazon and Value Creation: A Bezos Farewell

Jeff Bezos is stepping down from daily management tasks as chief executive officer of Amazon, the company he founded in 1994, although he will continue to be involved in the company as executive chairman of the board.

Earlier this month, Bezos wrote his last annual letter to company shareholders. A main focus of the letter is on how Amazon creates "value." 

Of course, for economists one measure of value is the total value of Amazon's stock, which now stands at about $1.6 trillion (and Bezos owns about one-eighth of that). But his letter focuses on the most recent year. He writes: 

Last year, we hired 500,000 employees and now directly employ 1.3 million people around the world. We have more than 200 million Prime members worldwide. More than 1.9 million small and medium-sized businesses sell in our store, and they make up close to 60% of our retail sales. Customers have connected more than 100 million smart home devices to Alexa. Amazon Web Services serves millions of customers and ended 2020 with a $50 billion annualized run rate.

During 2020, Amazon had net income of $21.3 billion. Bezos adds: 

In 2020, employees earned $80 billion, plus another $11 billion to include benefits and various payroll taxes, for a total of $91 billion.

How about third-party sellers? We have an internal team (the Selling Partner Services team) that works to answer that question. They estimate that, in 2020, third-party seller profits from selling on Amazon were between $25 billion and $39 billion, and to be conservative here I’ll go with $25 billion. ...

Customers complete 28% of purchases on Amazon in three minutes or less, and half of all purchases are finished in less than 15 minutes. Compare that to the typical shopping trip to a physical store – driving, parking, searching store aisles, waiting in the checkout line, finding your car, and driving home. Research suggests the typical physical store trip takes about an hour. If you assume that a typical Amazon purchase takes 15 minutes and that it saves you a couple of trips to a physical store a week, that’s more than 75 hours a year saved. That’s important. We’re all busy in the early 21st century. So that we can get a dollar figure, let’s value the time savings at $10 per hour, which is conservative. Seventy-five hours multiplied by $10 an hour and subtracting the cost of Prime gives you value creation for each Prime member of about $630. We have 200 million Prime members, for a total in 2020 of $126 billion of value creation. ...

AWS [Amazon Web Services] is challenging to estimate because each customer’s workload is so different, but we’ll do it anyway, acknowledging up front that the error bars are high. Direct cost improvements from operating in the cloud versus on premises vary, but a reasonable estimate is 30%. Across AWS’s entire 2020 revenue of $45 billion, that 30% would imply customer value creation of $19 billion (what would have cost them $64 billion on their own cost $45 billion from AWS). The difficult part of this estimation exercise is that the direct cost reduction is the smallest portion of the customer benefit of moving to the cloud. The bigger benefit is the increased speed of software development – something that can significantly improve the customer’s competitiveness and top line. We have no reasonable way of estimating that portion of customer value except to say that it’s almost certainly larger than the direct cost savings. To be conservative here (and remembering we’re really only trying to get ballpark estimates), I’ll say it’s the same and call AWS customer value creation $38 billion in 2020.

I'm sure one can tinker with these estimates in a variety of ways, and combining wages paid to employees with time saved by consumers will represent conceptually different categories of "value." One could also expand this list in various ways: for example, there is value to consumers (especially consumers who may not live close to lots of other retail options) in the extreme variety of products readily available via Amazon. 

But my goal here is not to fine-tune the estimates, but to make a general point here worth noticing. The value of Amazon's profits in a given year is much, much less than the value created by the company in other ways: wages, facilitating sales by third-part firms, time savings for consumers, and so on. 

These gains didn't just happen.  Building an interactive website that works at large scale is a monumental task. As one counterexample among many, think about the issues that arose when trying to build websites for buying health insurance in the aftermath of the Patient Protection and Affordable Care Act of 2010, or think about the computer network problems of the Internal Revenue Service. Yes, it's plausible that if Bezos had never started Amazon, some other company would have emerged from the dot-com scrum of the late 1990s. However, Bezos led the company that actually did it. Whether you are a fan or detractor of Amazon, the sheer size and scope of what has been built commands attention. 

Of course, when at top executive at a big company is writing to shareholders, the emphasis tends to be on the good news. I never want to deify any company. There are lots of tough real-world questions about Amazon: How well does the firm treat its workers? How is the firm using data collected from customers and searches? Has the firm taken advantage of its platform not just to act as a tough competitor, but also to block competition from others? How is Amazon, both domestically and abroad, interacting with the US corporate tax code? What have been the tradeoffs of Amazon's success for bricks-and-mortar retailers? 

But asking reasonable questions is different from being a doomsayer. Especially during the pandemic, Amazon has made my life easier. As one example, I'm a person who has a visceral need for new reading material. The ability during the pandemic to "go to" the local public library online, 24/7, and download books to my Kindle e-reader has saved me money and helped keep me sane. 

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  • Tom Cunningham

    Jeff Bezos is the one that made Amazon successful. They will find it difficult to replace him.

  • Kyle Ellison

    Like him or not, Bezos is a legend !!

  • George Wilson

    I respect Bezos for what he has accomplished in the business world.

  • Dave Smith

    Amazon won't be the same company.

  • Paul Mummery

    Bezos is smart.. He knew that he can't offer something new so he decided to take a back seat and let someone else bring value to his company.

  • Stephen Wong

    Amazon helped me buy groceries during this pandemic... Bezos is a genius.

  • Robbie O'Connor

    Excellent article

  • Andrew Graham

    Bezos will be missed.

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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