Secret of success: What makes Amazon different from other large firms?

Unlike many big American companies, Amazon is not squandering its profits on stock buybacks

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

Certainly, the sheer range of the products it sells and its market power are unmatched in corporate America. The recent frenzy over its HQ2 pick is another expression of its outsize influence on the economy.

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



 

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

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

The web services division has transformed Amazon into an enormously profitable company. Amazon incurred an annual loss of $241 million as recently as 2014, but in the first nine months of 2018, it had net income of $7 billion — more than double its $3 billion in profits for all of 2017.

But unlike so many big, successful American public companies, Amazon does not use those profits to make distributions to shareholders. (Jeff Bezos, the founder and chief executive, is the largest.) The company has not paid a dividend since going public in 1997, nor has it done any buybacks of its shares since 2012.

That makes it an outlier among big American companies. From 2013 to 2017, companies that were in the S.&.P. 500 index during that period gave away 98 percent of their profits to shareholders, with 56 percent as buybacks.

Instead of squandering its profits on buybacks, Amazon has been reinvesting them in its business and its employees. That strategy is reflected in spending on research and development, where Amazon is far and away the world leader.

The investment shows up in its work force. From 2014 to 2016, Amazon increased its United States employment of high-paid “professionals,” mainly software engineers, to 30,433 from 18,266. And it will be adding many more of those among the 50,000 people it will eventually employ at its new outposts in New York City and in Northern Virginia.

With all those retained profits, Amazon can easily afford to increase the wages of its low-paid workers, too. Starting this month, the company is paying its more than 350,000 employees in the United States a minimum of $15 per hour, although there was criticism that some hourly employees would actually make less under the new payment scheme.

That shouldn’t obscure the fact that it is while paying low wages to a rising majority of its workers that Amazon has become a behemoth — growing from 17,000 worldwide employees in 2007 to 566,000 in 2017. With median pay of its United States full-time employees at $34,123 in 2017, almost half of those workers are in the low-paid ranks, meaning a job that pays less than two-thirds of the median wage for men. And the $31,200-per-year yielded by Amazon’s new minimum wage will remain low-paid work by American standards.

Senator Bernie Sanders praised Amazon after the $15-an-hour announcement, saying he hoped that other companies would follow its lead. But Amazon sets a much more important example in the way it chooses to use its profits to reinvest in its business and its employees rather than on buybacks. It is because Amazon has engaged in this “retain and reinvest” growth strategy that the company now has the profits to share its prosperity with its employees and to add 50,000 employees in any city.

The company should continue this strategy, making it a top priority to bring the pay of its low-paid employees closer to a middle-class standard of living.

And, following Amazon’s example, other American companies should drive their growth by retaining profits to invest in innovation. They should then use the gains to raise the pay of all their employees, instead of spending billions on buybacks that make the rich even richer.

Of course, there are many valid criticisms of Amazon, including how it treats small firms that sell products on its website, the demanding pace of work for its employees, and the fact that it has not yet gone very far in raising wages for low-paid employees.

But by being different, and choosing to reinvest profits in the current “financialized” business environment, Amazon, and other large American companies, can make a difference for the tens of millions of low-paid workers who have thus far been left behind.

William Lazonick, emeritus professor of economics at the University of Massachusetts, Lowell, is president of the Academic-Industry Research Network.
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