Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

AI Summary. Amazon estimates it generated $301bn in value in a single year, of which shareholders received 7% ($21.3bn) as net income, employees $91bn in compensation and benefits, third-party sellers about $25bn, and consumers $126bn, mainly through time savings. Its cloud unit added an estimated $38bn in customer value via roughly 30% lower costs than on-premises alternatives.

Jeff Bezos Amazon
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Amazon generated a $301bn consumer surplus in 2020, with only 7% or $21.3bn going to shareholders. Employees received $91bn in compensation & benefits, while third-party sellers earned $25bn. @JeffBezos

How much of the value a large retailer creates goes to shareholders?

Core argument: Amazon's 2020 shareholder letter estimates the company generated $301bn in value, with 7%, or $21.3bn, accruing to shareholders as net income, while employees received $91bn in compensation and benefits.

In 2020, Amazon generated a consumer surplus of $301bn, with only 7% of this value, or $21.3bn, accruing to shareholders as net income. Employees received $91bn in compensation and benefits, while third-party sellers earned an estimated $25bn. Amazon's consumer customers benefited from $126bn in value creation, primarily through time savings, with 200m Prime members saving 75 hours annually valued at $10 per hour. AWS [Amazon Web Services] contributed an additional $38bn in customer value by offering a 30% cost reduction compared to on-premises solutions. This distribution of value highlights Amazon's significant impact on various stakeholders beyond its shareholders, emphasizing the broader economic implications of its business model.

Takeaways by Macro Roundup® AI

  1. Amazon's 2020 shareholder letter estimates the company generated $301bn in value, with 7%, or $21.3bn, accruing to shareholders as net income, while employees received $91bn in compensation and benefits.
  2. Amazon estimates consumer customers captured $126bn in value in 2020, largely from time savings, with 200m Prime members saving 75 hours annually valued at $10 per hour.
  3. AWS delivered an estimated $38bn in customer value in 2020 by offering a 30% cost reduction versus on-premises solutions, while third-party sellers earned an estimated $25bn.

Jeff Bezos, "2020 Letter to Shareholders," Amazon, April 15, 2021, https://www.aboutamazon.com/news/company-news/2020-letter-to-shareholders

Bezos's last shareholder letter as CEO highlights Amazon's consumer surplus

2020 Letter to Shareholders: Extended Excerpt Image 1


Their calculation, “…Remember that stock prices are not about the past. They are a prediction of future cash flows discounted back to the present. The stock market anticipates. I’m going to switch gears for a moment and talk about the past. How much value did we create for shareowners in 2020? This is a relatively easy question to answer because accounting systems are set up to answer it. Our net income in 2020 was $21.3 billion.If, instead of being a publicly traded company with thousands of owners, Amazon were a sole proprietorship with a single owner, that’s how much the owner would have earned in 2020. How about employees? This is also a reasonably easy value creation question to answer because we can look at compensation expense. What is an expense for a company is income for employees. 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. For customers, we have to break it down into consumer customers and AWS customers. We’ll do consumers first. We offer low prices, vast selection, and fast delivery, but imagine we ignore all of that for the purpose of this estimate and value only one thing: we save customers time. 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 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. Adding AWS and consumer together gives us total customer value creation in 2020 of $164 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.For customers, we have to break it down into consumer customers and AWS customers.We’ll do consumers first. We offer low prices, vast selection, and fast delivery, but imagine we ignore all of that for the purpose of this estimate and value only one thing: we save customers time.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 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. Adding AWS and consumer together gives us total customer value creation in 2020 of $164 billion….”

Ed Comment:I’ve always said/agreed that it (i.e., how much producers produce for customers to put a dollar in their own pocket) is probably 20:1, but rounded it down to 5:1 so the liberals (who completely ignore critical truths like this, like they pretend poverty is 40mm by not counting half the income we give them) won’t disagree (and then cut it to 3:1 to remove recapture by the rich). This says 14:1 piling conservative assumptions onto conservative assumptions. Given the growth of Amazon, presumably they provide a higher multiple than the marginal producer. It’s true some of this would be created by traditional sellers, but so would the profits, albeit probably lower, increasing the multiple.

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