EP115 - Amazon Q4 2017 Earnings Hot Take
This episode is a hot take of the Amazon Q4 2017 earnings
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Episode 115 of the Jason & Scot show was recorded on Thursday, February 1st 2018.
Join your hosts Jason "Retailgeek" Goldberg, SVP Commerce & Content at Razorfish, and Scot Wingo, Founder and Executive Chairman of Channel Advisor as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.
New beta feature - Google Automated Transcription of the show:
Jason: [0:25] Welcome to the Jason and Scott show this is episode 115 being recorded on Thursday February 1st 2018 I'm your host Jason retailgeek Goldberg and as usual are you with your co-host Scott Wingo.
Scot: [0:40] Hey Jason and welcome back Jason Scott Sugar Sisters. Well Jason her here we are on the first day of February 2018 is zipping by and today was interesting because it's kind of like the Super Bowl of two companies. Well yesterday we had eBay in Facebook announced and then today we have the Three A's Amazon alphabet / Google, and Apple so a lot of news coming out of those results and the all these companies are announcing how their fourth quarter of 2017 went which is. Exciting in the world of retail cuz that's the, the biggest quarter so tonight we're going to really focus in on Amazon on this episode and I were to have a hot take on some of the dialysis of their fourth quarter 2017 results and then at the end we have some time we are going to hit a couple other highlights of some of the other quarterly announcements. So long tail lizards know this but it's always important to refresh Aaron's memory when you look at these different results it's important kind of think about the Baseline out there and as an industry were growing looks like. The holiday Ecommerce came in at 16 dating percent retail came in at like 4% Jason is that kind of what it's been.
Jason: [1:54] Yep yep maybe even a little higher like for 4.5%.
Scot: [1:57] Go to those are those are kind of the benchmarks and you know I think the the the way I view the world is, if you're going faster than those are gaining sure if you're growing slower you're losing sure if you're not growing you're. You're pretty much toast to the role of e-commerce in retail so let's start outside with some big picture things so Jason I thought for you first we talked a lot about. Conversational Commerce and all. Echo ecosystem and this is this is probably the most strong bases code I've ever seen in any of Amazon's quarterly press releases for the last 20 years, read it in its entirety so Bezos said quote our 2017 projections for Alexa were very optimistic and we far exceeded them, we don't see positive surprises of this magnitude very often expect us to double down so that was pretty interesting and kind of like a, you know if you have to read that while you look at that picture of Jeff Bezos where he was like you seen the me where he was like super geeky on one side now he's all ripped, so you have to you have to imagine the rips of Jeff Bezos list of some kind of saying that one they sold tens of millions of Echoes In the.
[3:12] Precious is the issue is not over 50 bullets I would say a good quarter of them were around Echo.
[3:21] Anything you want to add around Echo.
Jason: [3:23] Yeah it wasn't just funny because I remember it wasn't very long ago maybe even 2 years ago. Echo was just trying to get some traction and I think you mentioned to a reporter that you thought that it potentially could be the next billion-dollar business from Amazon and that was a, shocking surprising prediction that the people were asking you to back up and you know.
[3:48] Tens of millions of of a echo devices get you pretty close to there.
Scot: [3:54] Yeah yeah yeah yeah if we assume so I guess the lowest you spend is like 40. Four. And then you're the most you can spend is like 150 so I imagine the average is a hundred bucks.
Jason: [4:10] That would even sending it a hundred bucks each either so that's that.
[4:17] Exactly so as per usual you you were right and then you know I think it's one of the scariest as I keep seeing about this is. What you did now the top two selling products on Amazon. Like are that that Echo. And the fire stick.
Scot: [4:33] Yeah and since we're on the topic over on the Google side they were asked when they're going to start monetizing it and they're CR sudar. Which I think is how you say he said that they're really just focused on the user experience and nailing that and monetization is very far away so that was interesting that you know that date. Why do people read that quote is in committing their little bit behind and they can't really worry about monetizing until they catch up with where Alexa / Echo are.
[5:03] Cool so continue with the big picture Amazon's total revenue in another footnote is if he heard me say some numbers that may be a little bit out of line with what you read and special leases or are seen in the news. I always take the voice two sets of Amazon numbers there's the ones that are just the wrong numbers and then there's the ones that taken to the consideration, the effects of foreign currencies in Wall Street sign that's XFX set of the excluding the foreign exchange changes so if a British pound oscillates 20 or 30%. That will just your earnings so if you strip that out it kind of is more apples to apples so I was going with the Apples to Apples numbers so that being said Amazon's revenue accelerated in the fourth quarter 36%.
[5:48] And that's up from a 34% growth rate in Q3 and they came in with a 60.5 billion dollar Revenue number which is not too shabby and you know every. Every quarter public companies tend to give guidance in this was very much at the top of Amazon's guidance Wall Street was expecting. Let's see.
[6:11] Yes so this was also above wall Street's expectations are expecting 59.8 and so does exceeded by it looks like .7 which doesn't feel like a big deal but that's like $709 so. That's that's pretty pretty nice beat the key drivers of the quarter were amazon-web-services Wishes the cloud computing and then they have this, tricky category called other Revenue, and moose while shooting let's agree the biggest Chunk in there is ADS so that business we talked about a lot on the show which would include the AWS and AMS and AMG businesses, That Grew that also accelerated growth and it grew 60% versus 58% the last quarter. Amazon had a very high probability and prove pretty dramatically in the quarter Marjorie gross margin sticked up last quarter they were 35.2 and they took up the 36.4 so that's what you would call a hundred basis points kind of move which is. Pretty substantial at these levels on the conference call to see if I owe attributed it to the North America business and Retail doing really well at scale eight of us contributed to that as did he actually caught the ad business is starting to kind of. News the needle on Gross margins here which which I think is pretty interesting because it's actually pretty small I think it's.
[7:32] 6 billion annualized so that would be like. Maybe 2 billion at this point in the fourth quarter so it must be just pure margin feel to move the gross margins of the larger 60 billion dollar business. Not any meaningful way enough for the CFO to call it out so a lot of folks are reading the tea leaves there and saying that it that ad business is really starting to.
[7:54] Can I show up in ways it hasn't before.
[7:58] And hopefully they'll be a day when it gets to be big enough that they have to carve it out like today w x and they crawl curious is really see what's going on inside of their.
[8:06] Let's see about that.
[8:10] They also made kind of another one of these kind of things you have to parse where they said more new members joined Prime in 2017 than ever before which I think you know when your growing.
[8:19] The rate you're going you would assume that's the case. But then most estimates out there Amazon does not disclose the number of prime memberships out there most folks kind of put it in about 60 million us households out of. 250 us households so it really good penetration there some surveys as you go up into the upper upper income levels you get north of 50% penetration and they did say 5 billion items shipped with prime over the year.
[8:47] That puts Amazon and I just put that in perspective not even half of Walmart when you look at it this way, so that's interesting but you know Walmart I don't think they've announced yet but they did typically have been growing kind of you know their eCommerce is growing pretty strongly now overall they've been growing low single-digits I I would be surprised if they don't, youngest Walmart comes in above maybe 5% growth All In.
[9:17] Doesn't it was a nice surprise is this is the first quarter we're prophets of come in over a billion no you and I talked a lot to people that the number one thing. That you hear when you talk to Executives about Amazon is, oh well she's giving a pastor unprofitable there a money-losing kind of business the only thing inside of their that makes money is the cloud computing etcetera etcetera know those things are true so if you took cloud computing out the whole interview at Amazon still makes money I even if it took ads out I'm sure now it is true that you carve out the retail business that show you a p&l for North America, and international North America is quite profitable and then International is still losing money but that's because they're building enough they're investing like you know, two billion dollars in India there still investing in China they just watch Australia you know there's something going on down in Latin America Brazil so so, it's just because that investing pretty heavily there so.
[10:15] Not only did prophets come topically dollars for the first time in a quarter that came in at 1.9 billion this is really big surprise for Wall Street cuz I think they're expecting more like 500 million now it was so that is one time so Amazon did say that about 800 million of that 1.9 billion, I was from the new tax plan that rolled out so they're decrease in the corporate tax rate in United States helped out Amazon pretty immensely.
[10:40] But you know what's interesting is you not talked about this but but it really doesn't care about profits which sounds weird and the reason they don't is when you're public company it it's almost impossible to.
[10:52] Grow profits in a way that makes sense because of the way accounting treatment happens, yeah your Revenue gets spread out your cost gets spread out and all these things happen so Amazon believes a better measure of how the business is doing is free cash flow and that was 3.3 billion so a lot of cash getting generated Amazon even though they continue to invest in a torrid pace and fulfillment centers in those kinds of things. So that's the big picture Jason you want to look at the retail side.
Jason: [11:22] Yeah and I just one sort of thing that I always chuckle about like there's a number of people that feel like, to some extent Amazon manages their Investments to make sure that they don't have a significant profit, inside like under that Siri you can imagine that they were like mildly annoyed at the the tax savings that kind of came in with this big lump profit at the end of the year.
Scot: [11:46] Yeah they didn't say that on the cob but it's possible.
Jason: [11:52] Inter on the the retail side of the business and we will break this down when you get into the marketplace but from a pure Revenue side North American revenues we're at 37.3 billion for the quarter which is up 42% year-over-year growth so again, you know you can tear that to the the kind of. Ecommerce industry growth at 16% and you know they're they're continuing to eat up a market share at a, a pretty scary place so I can I really only know of one retailer with meaningful volume that's, potentially going faster than then that's that's Walmart and obviously they're growing a much smaller number and cheer Point International grew slower at 22%, and you know that's that someone interesting like obviously they're still in in the early investment stage in a bunch of these markets but the but they're, they're sharing a lot of those markets is much smaller so you know it it's actually easier to grow much faster and so that, to me that that highlights the fact that they still have their work cut out for them to to win and be a meaningful player in some of those big big International markets particularly India that there, they are in a knife fight in.
Scot: [13:04] Yep absolutely and then I will be in the marketplace which is where I spend a lot of my time so the way I think about it is if there is a, the pie chart of Amazon or our kind of a diagram, you have AWS and other if you pull those out your left with the retail business and the retail business has two pieces what we call one p which is the traditional wholesale model in 3p which is the marketplace model Amazon is always historically been pretty.
[13:31] Kind of Silent about giving details about the marketplace the one the two things I do talk about our unit growth so overall in the entire retail entity unit growth was 23%. Pretty interesting and it makes you kind of say all right if the retail business if you kind of look at the the midpoint of that 42 and 32 the retail this is probably true kind of mid-30s unit growth, you 23% how did they grow mid-thirties, and that's just selling that's an increase in average order value essentially so you know the value per unit that goes through is gone up so everyone gets a lot of nice multipliers in their model up because the scale they're at so how these to talk about. The number of users that requiring that slow down pretty dramatically and but then Revenue itself accelerated that's another indication that the revenue per active user was really. Growing because of prime the other metric they disclosed is they talked about a unit mix between 1 p + 3 P that is now 51%, that's not a high water mark I think she wanted you to as a 51% and Q3 a dip to 50% because of all the echo, Prime Day Day stuff and it came back here to 51% for the holiday quarter so long was long time ago she was the show know that this is, Marketplace peace is really important because you know to really understand the impact of Amazon there's their associate iceberg, and we really only see the tip of the iceberg and that that big kind of mass underneath the water at Amazon is the marketplace so here's how it works on the canal walk you through the mail so if we round numbers they did $60 in Revenue.
[15:10] 5 billion of that was eight of us so you take that out and now you have essentially 55 billion in retail there's like a billion or two of ads in there but let's keep, math simple at 55 billion now.
[15:23] Well it says 51% of units were three p that doesn't mean that you take that 55 in / 1/2 because the way Amazon a recognizes revenue for each this, pieces of business is different in the 1p world Revenue equals sales so I saw hundred-dollar widget. My road is $100 easy reptile rooms used to doing it but in the 3p World they County Road SE, when a third-party let's say we have I don't know Jason's audio shop and you know he has all this awesome audio equipment he sells $100 mixer on there a Amazon collect $10 as the commission so now what happens is you have the revenue is actually the $10, and the transaction value of the item sold as what we called gmv or gross merchandise value in the world of Market places so you have this kind of. Weird thing that happens where the actual transaction the volume is not Revenue anymore it's a small percentage that Amazon takes his commission or we used were taking it so.
[16:23] If you take that 55 billion for the quarter, and when I do my analysis on this about 47 billion of that is first party so that leaves caught, but that 8 billion for third-party is really just the commission rate and. I argued if you want apples to apples this to other retailers you have to gross that back up. Because when someone bought the audio device from Jason store on Amazon vs Best Buy, Best Buy lost $100 even though Amazon only made $10 if that makes sense to the transactional value is the Zero Sum game out in the world of retail, so if we take that 8 billion that's the revenue for third-party, and we assume just going to keep it easy to take rate of 10% you have to effectively * 10 and you get 80 billion so first party was 47 billion and then third party is about 80 billion, so you're by my math when you had this up the total gmv for the quarter would include 1 p + 3 p is 129 billion.
[17:32] This is all a very long way of saying essentially Amazon's Choice as big as people think it is and when you look at that context you know if that's what they're doing it accordingly rate. 20 billion multiply that by four you get 480 billion then an Amazon Apples to Apples is as big if not bigger than Walmart at this point we actually look at the transactional implications. So did the other natural question is so if I'm saying 47 billion first party. 80 billion third party this kind of like 1/3 2/3 out of the total why is that unit number 51%, and do you know the number gets very skewed the the bulk of one p units and Amazon her books and digital items they even include like if you bought a 99-cent app on your, you know you're your fire your Kindle kind of device that counts in there so. It seems have a much lower aov compared to 3p so so. But that's the unit mix is 51% but the GMB mcscuse higher towards third party so usually kind of like how to get the ends up being like 62% this year versus 38 on the other side so.
[18:46] Now. Other there's other ways to calculate this an Amazon is is gives when they release their quarterly The Q's which is there SEC document state day damn it. The annual one.
[18:57] They'll be some numbers in there that give us another view of that and when you look at while she puts out there in the ballpark might my way of doing it tends to come out a little bit high so I'm kind of in the other 129. And I've seen some of the analyst kind of looking more at like the 1:20 so we'll see you don't no matter how you slice it though. Pretty huge Amazon's bigger than people think it is and this whole entity is growing at in a 38 36% year-over-year and they're really just kind of.
[19:30] Destroying Shear I'm sure we'll start to see articles coming out where you know I seen Art summer day where they got half of the e-commerce growth but I think it's probably actually be bigger than that and I think they they definitely took up a lot of the overall retail growth when you looking at the scale these numbers. Another last thing is, you're one of my favorite things every year is the Bezos annual letter that doesn't come out until they do their final SEC documents in this works little Insider baseball on your public company you put out this quarterly reports and you do a very quick audit on that, with Auditors to put them out but then when you do your annual and you have to go back and kind of do a forensic audit of the entire year so that'll go on and then usually in the first week of April is when Amazon publishes, their annual numbers to the SEC which will include an annual report and that will have the business letter so we have to wait in Fortune until April to read that.
Jason: [20:25] Yep and that definitely will be worth waiting for I mean great great breakdown I know there's a lot of detail there for folks that are newer, that gmv point Scott makes a super important I just like to think of that as that's how much money consumers gave Amazon in exchange for goods or how much of a consumer's wallet Amazon got and so that's why, when you're comparing any other retailer that the really important thing is what share of the consumer spending did Walmart get versus Amazon versus Target or anyone else and so if you're up, a retailer that doesn't have a Marketplace like Target and you say you you sold 50 billion dollars for the quarter. That's how much of the consumers dollars you got 50 billion bucks and then in Amazon case they said they they got.
[21:13] 43 billion in Revenue but that actually equals 82 billion of consumer spending and so obviously.
[21:21] There they are out there killing it now Walmart also has a Marketplace it's a much smaller percent of their total revenue but so Walmart is another retailer where did you want to look at him really closely you also would try to back into a. GMB number versus Revenue.
[21:39] So moving forward Amazon doesn't think they're slowing down either so they they set their their q1 guidance in that. 47.8 billion to 50.8 billion so that would be somewhere between a 34 and 42% year-over-year growth so.
[22:03] You know it so middle that's 38% which again growing much faster than the overall industry. Second biggest player in the industries Walmart they are growing even faster than than Amazon in e-commerce at the moment and so when you. You talk about the 16% average there on a heck of a lot of retailers that are growing at 16% and most other e-commerce sites are actually. Doing much worse than that because the two guys at the very top of the echo system are are growing so fast.
[22:34] You know it's it's crazy to see the biggest players in the industry growing this this fast.
[22:43] So you know the interesting to see what sort of numbers the Wall Street analyst put out in terms of their projections for the 2018 and 2019 models but I don't think they they do the these disclose to their names cause that writes got.
Scot: [22:58] Yeah I saw one guy updated this model and he said 20 18 lb 234 billion and 2019 lb 284 billion so. Still still really big numbers one of the things that was you know making some of the Wall Street guys a little skittish is. The revenue guidance like you said is pretty solid at kind of like a 38% growth point at the midpoint, evidence of used Amazon coming at the height side there was kind of thinking it'll be 40% so we'll see but then their bottom line guidance was pretty light so it's kind of like 300 million to a billion which kind of either is conservatism or Amazon saying. Hey we're going to, we had a great fourth quarter we're going to go to another investment cycle so the Wall Street folks that that Paul Amazon the kind of live in fear of these kind of Amazon ghost these Harvest. Swear they'll Harvest a bunch of investment state made this this year is very much a harvest year so you're really good bottom line. Probably under spent on capex from an entry no overachieved on the bottom line as well and then, Aaron lives in fear that they're going to wake up one day and say alright we're going to best. Three-blade dollars in original content or you know a you know our whole load fulfillment system with trucks and everything or, so that's just kind of things ratchet up there the worry. Turn off the wall of worry gets higher and this is the one kind of negative that I saw everyone call out was you know what.
[24:28] What could they be spending that much money on that's like an incremental billion and a half of spend and they're going to Wawa color on that and, they're kind of elusive on the phone call about giving any details what's going on there so it's going to be a wait and see you through the first quarter one thing I always watches the announcements around number of fulfillment centers so that's what we'll keep an eye on that, add to my knowledge I didn't see them announce any in January which is kind of unusual they may have been in a quiet. So maybe we'll see a little bit of a raft of those coming out now they've announced earnings.
Jason: [25:01] And there's a whole you know there's there's a big crop of openings that they try to get done before holiday obviously so it it makes little sense it would slow down.
Scot: [25:11] Yeah they they I'm sure they need a month just kind of breathe.
Jason: [25:16] Yeah so one other piece of interesting Amazon news that's come across my desk this month is not directly related to the earnings but I still think is exciting is it appears a lot of. 1p sellers on Amazon are getting new options for what content they get to put on their product detail pages. I'm so historically there's basic content that you provide to Amazon and Amazon you know puts on that PDP for free and then there are like richer media options that would let you do things like. You know have some product comparison charts are some some animated tutorials explaining your product or videos or things like that. And those are often called a A+ content and they're super important to. The the engagement and conversion rate on those on those pages but they're you know they generally have been a premium thing that Amazon has as charged for. And this quarter we're seeing Amazon start. To give away a bunch of what were the traditional a plus content options so making them free to any seller and they're adding even more exotic. Options that you can pay for it so it's essentially a lot of sellers are getting the option to customize their pdp's to a far greater extent than they. Ever been able to before and you have given an Amazon has become such an important distribution point for so many products.
[26:47] That that's really important to a lot of sellers so it's interesting to me that they they continue to evolve that pretty rapidly.
Scot: [26:54] Could you know there's always this kind of it's hard to keep track of these things are available to 1 p and summer 3p and summer both do you know. Is this is an on both sides or is it just for brands or is it is it also third-party sellers.
Jason: [27:10] Yep so I have primarily seen this exclusively on the one p I can't definitively say that it's not available on the 3p but like one of the things you have to think about it's it's hard for Amazon to sell. Actual like extra product attribute opportunities on the 3p side because all the seller share. The same PDP into essentially. You know one one seller would be paying for that extra content and then all the the other people piggybacking on that listing would be riding along for free.
[27:43] So like for the most part I see that these opportunities at the PDP level are exclusively to one piece hours but but Amazon isn't quite frankly they're not very good at life. Publishing open price West and saying hey here's all the programs we have in here's how much they cost and they're the same for everybody you know what it feels like for the most part of the offer everything and negotiate everything on a. Need your account by account basis and so like not not every Star tends to get the same options for the same deal.
Scot: [28:22] Cool so that's kind of some good Roundup of Amazon's quarter any other interesting Amazon news before we kind of widen the lens look at other companies.
Jason: [28:33] I think I think that's an interesting conflicting rumors out there about Amazon's effort to monetize ads on the Alexa echo system.
Scot: [28:46] Gulfport what are you here.
Jason: [28:48] So they're there had been some rumors at the beginning of the year that a few big sellers had been offered a.
[28:57] Promotional opportunity. 2 baht to be the recommended product via voice Commerce when someone's ordering a product for the first time so so is that sounds more complicated than it is so you say Alexa to order batteries and you bought a bunch of batteries before, Amazon going to use your purchase history to try to predict what batteries are talking about, but if you've never buy batteries before Amazon is going to come back and say I have a Amazon elements 8 pack of double a batteries is that what you want in you, can say yes or no in so there was there was some rumor that like Brands were given the opportunity to be that that Amazon Choice product and then last week Amazon sort of came out publicly and said no no no, you know we we've looked at at adding adds to the the Amazon Echo System and we just don't think that makes sense and we think it's disruptive to the user experience when so they, they sort of explicitly said that they're not doing that so so, the stuff you heard about Google like that could be that we don't see ads from any one invoice which I don't think any of us are going to feel very bad about.
Scot: [30:13] Yeah one thing that was interesting that there was a lot of talk about is so a lot of the the business and world leaders were at Davos and I need to use that platform to announce that this kind of interesting contortion of, Amazon Berkshire Hathaway and JPMorgan Chase are going to pull their efforts and work on Healthcare and is very nebulous they're going to start a company, it's not clear who's going to owner run this company and it's kind of going to be dog food in whatever this is they build for their own employees sounds like what they're doing, but you know this causes ripples throughout the world because that we talked on the show there's been Talk of the Amazon opening kind of a pharmacy online and then you start to say. Amazon nursing pieces that kind of think about your Amazon. Using the cloud services to kind of have health services so, yo a nice portal for employees the ability to manage all the healthcare programs and then Berkshire Hathaway has a big division that does insurance so they could kind of provide that. Then you would also need some kind of a you know a financial service piece around that too so that's give me something to really watch but that's good.
[31:27] This kind of thing could disrupt the entire insurance industry or you know all the HR systems out there so or it could be a big nothing Burger so I have to kind of see where it goes it's kind of a, free nebulous right now but it was all the Talking Heads could talk about for for quite a while.
Jason: [31:44] Yeah yeah and your point like it it you know if it's them trying to aggravate their buying power across those three Enterprises that's, probably not a very meaningful so you know did the three of them together don't employ as many people as Walmart so they're probably not, going to let you know make dramatic changes to healthcare system but if Warren Buffett and Jeff Bezos and Jamie dimon are trying to collaborate and figure out a, a new product or a new a new way to solve the healthcare problem for employees that you know. Is there a free smart guys that have a broken paradigms before so that potentially could be interesting and exciting.
[32:20] Another piece of non Amazon news that has has everyone buzzing is. Early in the year I think the first week of this year the Supreme Court announced that they were going to hear a case which is I believe South Carolina versus Overstock.
[32:41] Dot-com and so this is a case about sales tax.
[32:46] At the moment there's a the Supreme Court has ruled on one sales tack case which is. North Carolina versus quill and in that ruling essentially they said that in order to be required to collect sales tax. You have to have a physical presence or a Nexus in in each state in so if you have no presence in that state you're not obligated to collect text a lot of lawyers were really surprised by that that ruling. Because there are a lot of other occasions where your required to comply with the States laws even though you're not physically in that state.
[33:24] But be that as it may that's been a lot of land and e-commerce texting for a long time is. If you have a if you have a physical presence in a state you have to collect tax if you don't have a physical presence in that state you don't.
[33:37] So again most of the omni-channel retailers with brick-and-mortar stores in every state. There they've always had to collect tax Amazon has has slowly negotiated into paying taxes in in essentially every state as they've opened more. More of fulfillment centers in distribution centers and so today Amazon Flex tax in every state that has a state tax oh. A couple states don't don't have sales tax like a Portland Oregon and in the maybe Nevada or Florida. But sit there collecting tax everywhere said they're not really affected but if the Supreme Court rules in favor of South Carolina South Dakota in this. This new case the which they could you know here in a I want to say March of this year that suddenly obligates all other online sellers to start collecting tax.
[34:30] And there a couple interesting things that happened then. Number one like you potentially have to calculate a different tax to collect for every municipality which potentially could be more than a thousand different tax districts in the US. So that becomes a huge burden for small companies that are selling online to have to figure out all these taxes. It's probably a huge Boom for the commercial tax companies that will sell services to all these guys so you can you can you know that's an extra fee for all those like you know small Shopify sellers.
[35:03] And in my mind the biggest entity out there not collecting sales tax. Is actually Amazon 3-piece sellers Sowell Amazon collect tax on other one piece sales they leave it up to the individual 3-piece sellers what whether they have an obligation to collect sales tax or not and overwhelming majority.
[35:22] Don't except for in the state they're doing business in and so if the Supreme Court ruling goes against Overstock it could have a very pronounced effect on three-piece selling on Amazon.
Scot: [35:35] Yeah and it's pretty complicated to because there's a bunch of scenarios right there's there's a scenario where I'm I'm a seller on Amazon, and I have Nexus in North Carolina which is where my warehouses and I'm shipping all of the country so that's one so what most sellers do there is they say they collect the sales tax for North Carolina and Amazon has settings for this so say it up 7% in North Carolina I will collect that but the other states I don't have a Nexus etcetera, maybe you're more sophisticated Celerity out to our houses so that gives you 2 points in Nexus but and. Amazon doesn't really open on this Amazon says you're responsible for figuring out your own texting. So so Amazon's listen to saying we're not going to your lawyers here we're not going to accept any liability for you collecting you're not collecting that you tell us what you want to do and then they actually give you some, they rolled out some nicer apis that give you kind of that you know this this tax software used to be hundreds of thousands of dollars and now Amazon's rolled out whatever they use sellers can have access to it for you still pay for it but not really at the scale it's it's pretty reasonable, but then it gets complicated right because I'm using FBA. And you don't there's a PA is pretty much in Most states I think like 40 States and you, it's not very easy to get from Amazon where your product is once it gets kind of into that cloud of warehouses it gets distributed out and you also don't. You don't have a lot of control over today selling Amazon hey please don't put my product in Illinois cuz I really don't want to pay state sales tax there that's not really how the.
[37:11] The phone network works so. What most sellers do is they just kind of say well you know I'll I'm small business how can I take the risk on that so this this could be you know. Can I kind of clothes McPherson these guys that you know they may I end up having them a relatively complex set of States they need to figure out and, not a lot of great infrastructure for figuring out where their products are the release valve on that would be so perfect Prime and there was a release a press release Amazon's investing more and more around giving sellers that are kind of larger scale the bility to have their products Prime enabled meeting their Prime eligible and are primed as they like to say and, and then using their own warehouses to get them to the consumers and two days that could be, you know it's interesting Amazon's doing a lot more around there obviously I think it's primarily cuz they want more Prime eligible product but you could see it as a, a way of kind of if sellers were freaked out about this and wanted to have more control over Nexus that that's the answer essentially.
Jason: [38:10] Yeah yeah I can imagine there that Amazon is it is potentially rooting for South Dakota in this case because, a lot of the 3p sellers feel like one of the reasons they can be competitive in one of the reasons they can they can sell their goods even when Amazon is also selling their saying Goods is because of that tax advantage right and so potentially if they don't have that tax advantage to two good things happen for Amazon. The one that Amazon 1p product wins the buy box more often.
[38:41] And number too it's hurting and suddenly forces everyone in the Amazon Echo System 2. Comply completely with with the law and it eliminates all this gray area of who's collecting what tax on FBA. And so that you can imagine in some ways Amazon would say hey in the long run that's cleaner now in the short run that could mean three PCL slow down on Amazon which is you know one of them are profitable elements so. So who knows one thing I would point out. Is the Supreme Court rules in favor of South Dakota so now everyone's obligated to collect tax everywhere it's very likely. The Congress doesn't just sit Pat right so there was a lot of of work on legislation about at what kind of sales tax internet sales company should be collecting. A number of years ago and there was this thing called The Marketplace Fairness Act in. The the main notion in Marketplace Fairness Act is hey every online so I should be collecting tax but which should be a simplified tax so we don't have all this. This complicated math and so instead of having a thousand different tax rates maybe we agree that all online sellers pay one simplified tax rate. And so you can imagine of the Supreme Court rules in South Dakota's favor that might be the impetus. To Congress to pass some sort of like that and.
[40:13] Conversely if Overstock wins there's like 8 more cases from other states that that are also in the queue and potentially could get to the Supreme Court later so it's not like. Even if if the Supreme Court rules in favor of Overstock that this is over so it's the interesting thing to follow.
[40:31] Moving on to a couple ass little news news Clips UPS also had their earnings call. Yesterday or today and one interesting thing that came up they had a good quarter as well.
[40:48] But the. They there they beat their estimates in their stock still took a little hit largely because they announced that they're capex spending for next year was going to be much higher. Then it had been in any previous year and the explanation for that was that they're being forced to invest a lot more in sorting centers and airplanes. To make all the the residential deliveries that they're doing for Amazon more profitable and so you know that the sort of pithy had a headline is that UPS has an Amazon problem. They're having that invest a lot to to deliver what they're already delivering to Amazon and of course. Amazon's needs are only going to grow you know potentially 38% more.
Scot: [41:34] Yeah and the other two could be a bit of a trap here where, they're having a grow their infrastructure to support Amazon and Amazon is growing in structure outside of UPS so it's some point you know if your UPS you have to kind of start to wonder how far ahead of your skis can you get on that before it gets kind of risky.
Jason: [41:51] Exactly if this was a video podcast we'd be playing Admiral Ackbar saying it's a trap right now.
[41:59] Reference I threw in there just for Scott in the last earnings that jumped out at me from this week eBay had their earnings called yesterday, and I I think they the like met or slightly better beat their earnings but the, the big drama was in there called they announced that they're. Mandatory partnership with PayPal whom is a reminder that used to own and and spun off as a separate company when they spend them off, the spin-off included in agreement that eBay we keep using PayPal for a certain period of time so that. Of time is now expiring and eBay has announced that they plan to shift payment providers from PayPal to a big European payment processor called Aiden, and so that, they probably has some implications on eBay but it has potential huge implications on PayPal because I think eBay is something like 18% of PayPal's Revenue.
Scot: [43:04] Yeah they the CFO of. PayPal is on CNBC any shows 18% but it was like their slowest growing peace there's little shade there's something going on between those two companies are definitely got to get zika nomics driving it but it seems like there's some more kind of, they are not really getting along very well right now.
Jason: [43:22] Yeah and it's like I would like to cenarios I you can totally imagine that this is an actual break up, and if so that is interesting that says something about how competitive in the marketplace PayPal is if eBay really feels like there's a meaningful savings to be had by shifting to this, to another payment processor that, you know potentially said something negative about PayPal's competitiveness but you could also Imagine the eBay and PayPal are negotiating their first, fees agreement since they're they're sort of mandatory partnership expired and all of this could. Potentially be somewhat posturing is there sort of negotiating with each other so you could think of it a little bit like the showtime having a break up with Time Warner or while they you know.
[44:08] Weather negotiating how much the cable company should pay for free HBO or Showtime or something.
[44:15] And with that we have Perfectly Used up the allotted 45 minutes we had for today as we're trying to get the shows a little bit shorter for our listeners so we greatly appreciate. Your participation in the show today and if you have any questions or thoughts as always we love to hear from you on our Facebook page or on Twitter we we have a couple of good good questions that came through this this weekend fact on Facebook. So I think I have some answers there in fact. And of course if you enjoy the show we would very greatly appreciate you taking just a second jumping over to iTunes and giving us that 5-star review, we don't we don't charge anything we don't run any ads on the show so that way you can you can pay us for all the time we put in that show as right as a nice review on iTunes.
Scot: [45:06] Yep thanks Wilson there buddy.
Jason: [45:08] Until next time happy you comercing.