Google and Amazon have caught a glimpse of their big-spending futures. The search giant reported mediocre fourth-quarter results due in part to high outlays. The online shopping firm did better than expected but also shelled out hefty sums. Neither can count any longer on economies of scale to boost margins sky-high. They need to make pricey investments just to stay in the game.
Amazon founder Jeff Bezos has consistently maintained that the company focuses on the long-term. There has always been another warehouse to build, data centre to open, product to develop and country to enter. Lately, though, investors have been clamouring for restraint. They may have thought it had arrived when the company reported earnings on Thursday that were higher than expected.
Despite a whopping $29.3 billion in revenue, however, profits were only $214 million during the most important quarter for a retailer, the one that includes the holiday season. That's 10 per cent less than for the fourth quarter of 2013. What's more, Amazon's return on capital fell 4 percentage points to nine per cent as the company continued to invest heavily in its business.
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Big technology firms like Google and Amazon have successfully sold the idea that, once their networks were built, more users could be added at minimal cost, and revenue from those customers would fall straight to the bottom line. That may be true in theory, but the tech giants also know they are under constant pressure from rivals. And the infrastructure needed to serve additional users has a way of being more expensive than anticipated.
Given their extraordinary histories, the companies can't be faulted for dreaming of lofty margins. The new reality is turning out to be a little more complicated.
