Hey Big Spender: Amazon profits drop 26% after flurry of expenditure

November 11, 2019

2 min read

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What's going on here?

Amazon’s quarterly profits are down from $2.9 billion to $2.1 billion. Analysts attribute this drop to the company’s investment in cloud storage programmes and its free-one day delivery offerings. It comes at a time when the company faces increasing scrutiny from United States regulators.

What does this mean?

A drop in profits of $800 million would be cause for concern had Amazon not posted a 24% rise in revenues (total income before expenses are deducted) to $70 billion for the quarter. The flurry of investment represents a move towards longer-term investments which serves to bolster Amazon’s earning capabilities. 

A more pressing concern for Amazon is the increasing attention directed towards it by regulators all around the world. In the USA, Amazon and its competitors, are being investigated by Congress on issues concerning digital markets and the technology industry. Equally, things are heating up for Amazon in the UK. The Competition and Markets Authority (CMA) has launched investigations into the effect of Amazon’s proposed acquisition of Deliveroo on consumers. For now, the CMA has requested that the companies keep their operations separate.

What's the big picture effect?

Amazon, the world’s 13th largest company by revenue, is always eager to expand. This comes at a time, in the UK in particular, when mergers are open to more scrutiny. In the past, the CMA have been more relaxed, as illustrated by the £4 billion merger between Tesco and Booker in 2018. However, the blocked Sainsbury’s-Asda merger highlighted a shift in CMA’s approach. 

Amazon has previously been the recipient of light-touch regulation from the CMA, which did not investigate its 2016 establishment of Amazon Fresh nor its 2017 acquisition of Whole Foods. It seems now that a tougher regulatory stance is being applied to disruptive technology companies. For instance, in 2019 the CMA ordered Tobii AB to unwind its 2018 acquisition of Smartbox Assistive Technology Ltd and sell the business on the grounds of a substantial lessening of competition in the hardware and software marketplaces. Sporadic intervention such as this by the CMA demonstrates an awareness of the increasing dominance of technology companies, and the potential anti-trust (a.k.a. competition) issues arising. 

Law firms with strong anti-trust and M&A practices within the technology sector ought to expect higher volumes of advisory work as technology clients grow increasingly hesitant about future merger and acquisition plans. Additionally, restructuring & insolvency and private equity practice areas may see an upturn in workload. Technology start-ups that are unable to turn a profit and are unable to merge or be acquired due to regulatory impositions might open themselves to private capital to stay afloat.

Report written by Sherard Siahaan

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