2020 Letter to Shareholders
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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
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
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.