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Time for something new.
PRIME TIME

Amazon’s ability to turn a profit is no longer a cool trick

By Alison Griswold

Just two years ago, the sole story of Amazon’s second quarter would have been the nearly $900 million in profit that it generated. CEO Jeff Bezos had trained Wall Street to take earnings in stride, promising that the occasional net loss should be viewed not as catastrophic, but rather a deliberate investment in the company’s future. Profitable quarters, when they happened, were rare events to be celebrated.

And yet when Amazon reported results on July 28—revenue up 31% to $30.4 billion, net income up 835% to a record $857 million—investors weren’t ecstatic. In fact, they seemed confused.

The market’s ambivalent response to what by any measure were impressive second-quarter earnings is a sign that expectations for Amazon have shifted. The Amazon of today is a corporate behemoth. Its cloud computing division alone brings in $10 billion a year, and its signature Prime membership program is a household name. That the company can turn a profit is no longer seen as a pleasant surprise or neat trick.

As it always does, Amazon punctuated its latest results with flashy tidbits that don’t give you any insight into performance. Amazon’s wireless Alexa speaker now has “over 1,900 third party skills.” Its on-demand “Dash” ordering button added 50 new brands, including Campbell’s Soup and Play-Doh. AmazonFresh, the company’s grocery delivery service, debuted in London. And Amazon Studios, its video production arm, earned 16 Emmy nominations.

But investors don’t care about these things. What they care about is Amazon Web Services and Amazon Prime, and on the latter the company refused to engage. During Thursday’s earnings call, CFO Brian Olsavsky repeatedly dodged inquiries on Prime’s metrics. Instead, he praised Amazon’s second-annual Prime Day (“a great day for customers globally”) and nodded vaguely to the program’s strength (“we are seeing great acceptance of Prime, and usage of Prime benefits”).

Understanding Prime has become increasingly vital to understanding Amazon writ large. Bezos made clear earlier this year that Prime is a priority, writing in his letter to shareholders, “We want Prime to be such a good value, you’d be irresponsible not to be a member.”

Amazon has furnished the $99-a-year subscription with perks like streaming music and video, photo storage, and access to Amazon’s Kindle lending library. Free two-day delivery remains the classic Prime staple, but in many markets subscribers can now also get free same-day or even two-hour delivery on eligible items.

“Amazon talks about [Prime] as a principal driver of success, with just about every financial release talking about new benefits, new programs, or how much better Prime has done,” says Michael Levin, co-founder of Consumer Intelligence Research Partners, an investment research firm. ”Yet, Amazon doesn’t elaborate in a way that investors can use, and specifically that investors can incorporate into forecasting models.”

In the absence of good data from the company, third-party firms such as Levin’s have compiled their own estimates. Earlier this month, for example, CIRP reported that Prime had reached 63 million subscribers in the US, equal to half of all US Amazon customers. A recent estimate from Cowen & Co. is more conservative, at 45 million. Prime members are also thought to spend more than twice as much per year as other Amazon shoppers, and to renew at incredibly high rates.

No one doubts that Prime is a powerful product for Amazon. But as things stand, investors and analysts have little insight into how powerful that program is, an omission that has them increasingly on edge as Prime potentially approaches saturation in the US market. Amazon is seeking new markets for Prime, announcing this week that the subscription program is coming to India.

“What I can tell you there is there’s still a lot of room in Prime,” Olsavsky said, when asked about this by an analyst during Thursday’s earnings call. “There’s a lot of different flavors of Prime, and we are aggressively looking for a perfect Prime for everybody.”

Two years ago, that answer may have thrilled its audience. Today, it seems likely to only prompt more questions.