Amazon's Inevitable Enshitification...

0:00 Amazon's business offering is changing because it needs to change. The tech conglomerate has so many fingers in so many pies, it has found itself exposed to basically every risk and opportunity in the market today. softening demand for maxed out customers, push back from exploited thirdparty retailers, returns fraud, investors who want to actually start seeing some profits on all the AI hype, a growing dependence on advertising revenue, a degrading customer experience, competition from Chinese retailers who are selling a lot of the same crap anyway, and the fact that they are literally running out of human beings who haven't already worked for them before and quit. It's easy and honestly sometimes a little bit fun to point out the flaws and challenges in a business that has screwed over so many people. But the Amazon case study is more important than that. It perfectly encapsulates the strengths and

0:45 weaknesses of the modern business strategy as it tries to be so many different things to so many different people. You might think that all of these problems are just another recession indicator or yet another case of juicing short-term gains at the expense of long-term reputation. But the inconvenient truth is that a lot of these challenges were inevitable from the very beginning. Online retail is the most competitive business in the world. Amazon dominated early e-commerce by offering an incredible service below cost to build a one-stop marketplace. But now that it has, it cannot maintain it without making a long list of very unpopular sacrifices. >> No, it's blowing it out of the fence. What good is a vacuum that spreads the dirt? >> Sellers losing hundreds to thousands overnight. Amazon shutting down accounts for absolutely no reason.

1:30 >> It does not matter what you're going to make on the product. This is going to be a bad result almost every time. >> It's Amazon Prime Day. And in case you don't know, the entire website is just a lie. >> Is cheaper, aggressively promotional, programmed to sell you useless stuff. >> It doesn't matter to me whether we're a pure internet play. What matters to me is do we provide the best customer service. >> Despite all of the problems in the world, the American spirit to consume is still going strong. This year, Amazon extended its Prime Day sales to 4 days and once again announced record results. The expectation was that the company in combination with the other retailers that were forced to put on sales in response would generate two Black Fridays worth of sales over this time just without the trampling. And I mean really what's the point of that? But behind the scenes there was cause for concern. Their official announcement focused more on how AI was helping

2:17 people shop and how much people saved. But nowhere did it list how much they had actually spent. Third-party guesstimates have said that despite running for twice as many days as last year and offering longer overall savings on big ticket items, sales growth was only up by 4.9% with other reports suggesting results significantly worse. Reading between the lines of the company's press release, they were focused almost exclusively on the service benefits that come with a Prime membership like Amazon Music, fuel discounts, a GrubHub subscription, and Prime Video rather than the retail side of their business because that business kind of sucks. Amazon has invested tens of billions of dollars to build out the most efficient hyperoptimized distribution network in the world. It has massive economies of scale, pabytes of customer data, a captive market of

3:02 subscription customers, and even then the actual retail operations of its business are barely profitable. Express delivering individual packages to customers doors is just really expensive when compared to a competitor like Walmart where customers have to take themselves to the products, not the other way around. The point is the company just doesn't have that much wiggle room when it wants to compete on price with a fundamentally cheaper system. So it has had to slowly make sacrifices which are admittedly looking excellent on financial statements but have caused four serious problems in a business that markets itself on customer obsession. The first problem is a growing reliance on advertising bloat. Amazon is now one of the largest advertising businesses in the world. According to company financials, they have made almost $60 billion last year from advertising alone. a revenue segment that outpaced every other part

3:48 of the business. Amazon now brings in more money from advertising than it does through its Prime subscription service by a significant margin. The most publicized place where these ads started popping up was on Prime Video. The company was one of the first to roll out ads on top of an already paid streaming service. For the three of you who have actually watched Rings of Power, I am sure this was very annoying. Now, it would be hypocritical of me to say that advertising is just always bad. I wouldn't be able to pay my team or myself if it wasn't for advertising. And I very much believe that as long as it is reputable, I would rather take an advertiser's money than my audiences. However, when people were already paying for a service, there was understandably a bit more push back. But stream advertising wasn't where the real money or the real problems were. Anyway, if

4:34 you had tried to search for a specific product on Amazon recently, I don't need to tell you that sponsored listings have become far more invasive. This advertising space is some of the most valuable anywhere in the world because people who are literally searching for a specific product in an online marketplace are about the most high-intent customers imaginable. Brands are now spending several billion dollars per month to get their products to show up first. If the company can't sell ad spots in a particular category, they will just give them away to their own white label brands. There also isn't a lot of pressure from the company to make sure these advertisers are promoting products that are well, you know, good. An investigation by the FTC found that Bezos himself, while he was still in charge, pushed executives to accept junk ads because they were so profitable that in a report he was quoted saying, "The

5:19 revenue generated by advertisements eclipse the revenue lost by degrading consumer shopping experience." Now, to be fair, he was right. Over the last year, Amazon's combined retail operations have grown their margins to be wider than even Walmart, who you will remember has lower operating overhead. They might talk a lot about high-tech automation in their warehouses or AI shopping assistants, but the real driver of these profit margins has been advertising within the online store itself. This has fundamentally changed the nature of the business. The company is still customer obsessed, but you are not their customer. Their customers are advertisers. You and the millions of other people that shop online through them every month are the product they sell to those customers. And that's just the first problem. So, it's time to learn how money works to find out why

6:05 Amazon's great in shitification was inevitable. This week's video is brought to you by Brilliant. Brilliant is a learning app that helps you become a better thinker and problem solver. Through thousands of interactive lessons across math, science, data, and computer science. What makes a difference is how you learn. Instead of watching someone explain a concept, you're solving problems, playing with ideas, and building intuition step by step. It's a proven method that's way more effective and honestly a lot more fun. I've been going through their updated logic and programming with functions course and they really pull you in. You start small puzzle style challenges, basic code snippets, and before you know it, you're designing systems and reasoning through complex problems. It's the kind of learning that actually sticks. And the best part is how easy it is to stay consistent. Whether I've got 5 minutes

6:50 on my phone or a full hour on my laptop, it always feels productive. So, if you've been wanting to sharpen your problem solving skills or just finally understand stuff you wish school had taught better, Brilliant's a great place to start. You can try everything Brilliant has to offer for free for a full 30 days at brilliant.org/howy works. And if you decide to stick with it, you'll get 20% off an annual premium subscription. Okay, so you are probably already aware that for most of Amazon's history, the lossmaking storefront was subsidized by early investors and then the company's massively profitable Amazon Web Services. Amazon was one of the first to realize that it could effectively rent out the spare space on their server infrastructure and let other businesses get access to globalized hosting without having to build out their own data centers. In the most recent letter to shareholders, they made special mention

7:36 of recent contracts they have signed with organizations like PayPal, Norwegian Cruise Lines, Reddit, Japan Airlines, Northrup Grumman, and the US Army. These contracts will pay out billions of dollars with strong margins because once the upfront investment in the server hosting is made, the actual ongoing expenses are comparatively minimal. This part of the business makes more profit every year than the company has ever made from retail. Which begs the question, why don't they just give up on retail, which is causing them so many problems, and focus exclusively on AWS? Well, that has a lot to do with the second major problem Amazon is facing, the uncertain value of all that money they are throwing into AI. In the last annual letter to shareholders, the company CEO spoke about next generation's wise in their business. And the top three W's that he was addressing from shareholders was, "Why is AI so

8:23 important? Why invest so much into AI this quickly? Why do chips and AI need to be this expensive? And why have personal assistance not taken off yet?" He gave the standard corporate approved answers and it's a public release. So I am not going to waste your time reading them here. But the questions themselves highlighted some pretty clear pressure from shareholders to actually see some results on all the promises of AI. According to Bloomberg, top tech companies spent $200 billion last year on capital expenditures related to AI. The biggest investor out of all of them was Amazon, which alone sunk more than $70 billion into AI infrastructure. To use the technical corporate terminology, that is a ton of money. But it's actually worse than it sounds. This is just capital expenditure, which typically means money spent on tangible

9:08 assets like office space, warehouses, trucks, and in this case, racks on racks on racks of GPUs. That means it does not include the salaries for all the developers, the R&D budget to develop their own chips, the terowatt hours of energy they are pumping into this, or the missed opportunity of what could have been done with this money instead. Capital expenditures also typically build up capital in the business. If a company spends a billion dollars on a new office, they haven't lost a billion dollars. They've just transferred it from cash into real estate on the balance sheet. But the Nvidia chips that make up a majority of Amazon spending have a very short shelf life. In 10 years time, a commercial real estate investment will still be worth money. If the business is lucky, it might have even appreciated in value. But to those of you who are still running a rig with a 1060 in it, you will know that in 10 years, these current state-of-the-art

9:54 GPUs aren't going to be worth diddly. Setting money on fire at this scale has literally never been done in the history of business. And there are a lot of shareholders that are suggesting that maybe it would just be better to do stock buybacks with that money instead. However, if this all pays off, Amazon's retail division would stand to benefit more than any other business in the world. Automated shopping, warehousing, and last mile delivery would transform their current high-revenue, low margin business into an even higher revenue, high margin business. But with every year that goes by, there are tens of billions of dollars that need to be made up with these cost savings. And that much money pays for a lot of wage cages and well, let's call them tactical jugs. But that's actually the third problem, which also explains why Amazon is going allin on AI and automation. They are

10:41 running out of people to work for them. Amazon is the second largest private employer in America after Walmart, and most of that headcount is warehouse or delivery staff. The conditions in these rules are very bad. Warehouse and delivery work is physically demanding. The pay is low and the deadlines are strict and turnover is massive. According to leaked documents published by Gadget, the company had a turnover rate of 150%. Which in plain English means it was effectively replacing its entire workforce every 9 months. With more than a million employees in total, this means that it would only take about a decade before literally every able-bodied working age person in America who wasn't already employed at a better job would have worked for Amazon. Even aside from the harsh working conditions, the company does not encourage employee tenure, statistically

11:27 preferring to hire new college graduates over offering internal promotions to warehouse staff. Only around 4% of warehouse managers, let alone floor staff, were promoted into a corporate role. According to the same report, the company could pay its employees more or relax the punishing deadlines, but that would either cost them the margins they had fought so hard for or slow down the fast deliveries that they have built their brand on. The hope that they have been relying on for almost two decades at this point is mass automation of the retail operations that will eliminate the need for masses of floor staff in the first place. In the meantime, even though retail doesn't actually make them that much money, it's a hand that they get to hold on to for free, which could pay off massively if their dream of comprehensive endto-end automation comes true. There are also some benefits of having lots of revenue, even if it doesn't necessarily translate into lots

12:12 of profit. Amazon makes billions of dollars in sales every day, but it doesn't need to pay for the items it's selling for up to 3 months after it has already sold them. This means that the company gets to hold on to a whole lot of cash in the meantime, which is something called negative working capital. In the case of Amazon, though, this is billions of dollars, which helps with a lot of day-to-day operations. But it is an additional strain on the fourth big problem they are contending with. Third party sellers hate using Amazon. A lot of the products the company sells, they do not own. They are just distributed on behalf of third parties through the fulfilled by Amazon or FBA service. A lot of businesses selling products online feel forced to list their items on Amazon because that's often the first stop for people that want a convenient online shopping experience. But they would really rather not for three reasons. The first reason

12:59 is that if they are selling generic items, their products are all mixed together with other products with the same skill, even if they are from different suppliers. This has made counterfeit products extremely common because once they are in the distribution system, there is no way to tell which third party was responsible for the defective items, but whoever happened to take the order will be blamed for it. The same problem happens with returns. Amazon has a growing problem with people taking advantage of its generous returns policy. Some people take this to an extreme by systematically cycling through Amazon accounts to try and get expensive items for free. Now, I'm sorry, but I am not going to teach you how to do this, but it generally involves buying a product and then getting that money back without actually returning it or not returning it in a good enough condition and to go and buy it at a discount later. I know I

13:44 sound like a broken record, but a lot of people in America and around the world right now are maxed out on debt and bottomed out on savings. If people can make a few hundred bucks pulling a fast one with some online orders, some are going to do it. When the perceived victim is Amazon and they don't even need to hand back the products in person, people don't feel as guilty about returns fraud as they would from an independent business. Even when most of the time it actually is the third party retailer behind the scenes. Since items are handd delivered to your door, it's often not even worth it for the company to get someone to come and pick an item up again because then they are paying for shipping twice on an item they probably won't be able to sell again. Every year, the company destroys billions of dollars worth of return merchandise, which the third party retailers end up paying for. According to data from Red Stack Fulfillment, this is lower than most e-commerce sales,

14:30 which average a return rate of 16.9% compared to Amazon's 5 to 15%, which it said was thanks to Amazon's investments in customer ratings. However, when businesses handle their own returns directly, they have more control over what happens to the product, which can avoid new customers getting defective repackaged returns. This return rate is also almost double the rate of traditional brick-and-mortar retailers because getting away with questionable returns is a lot harder in person. For businesses that sell through Amazon, this is a growing strain on their business. And for normal people that just want to return defective items, they now have to jump through more hoops than ever to get it done. Between customers, shareholders, employees, third party retailers, and economic realities, Amazon cannot satisfy everybody at the same time. For now, the strategy is to make everybody just a

15:16 little bit angry while they wait for AI to hopefully pay off. But even if that does, it presents a new problem. If AI takes all of our jobs, who is Amazon going to sell to? Go and watch this video next to find out. And don't forget to like and subscribe to keep on learning how money works.