Once a year for the past two decades, Jeff Bezos, the founder and chief executive of Amazon, has sent the same missive to investors: his annual shareholder letter from 1997, which outlined his grand designs for a company that was, at the time, little more than an online bookseller.
Nowadays, it feels like a bit of a brag. In 1997, Amazon reported sales of $148 million, served 1.5 million customers and had 614 employees. Last year, the company reported sales of $178 billion, served 300 million customers and had 560,000 employees.
Amazon is the world’s largest ecommerce company and Mr Bezos is the world’s richest man. In his latest shareholder letter, published on Wednesday night, he disclosed for the first time the number of people who subscribe to Amazon’s Prime membership service: 100 million globally, more than was thought. Investors reacted positively, sending Amazon shares closed up by 1.9 per cent at $1,556.91 yesterday, valuing the world’s second largest public company at $757 billion.
One hundred million Prime members is an important milestone for Amazon. Its ecommerce business remains by far its largest and is the source of the cash that it uses to invest in cloud computing systems, delivery drones and everything in between. As such, Amazon needs to keep people shopping and Prime is a means to that end. Members of the Prime scheme receive fast, reliable and free delivery of Amazon goods. The cost of a subscription varies but it is $99 a year in the US and £79 a year in the UK.
Subscription fees are an important source of income for Amazon: the company made $9.7 billion from them last year, mainly from Prime but also from ebooks, audiobooks and Prime Video. Amazon also collects subscription fees for Amazon Music Unlimited, which now has “tens of millions” of customers, Mr Bezos said.
On average, Prime members spend $1,300 a year each on Amazon compared with $1,000 for non-members, research by Consumer Intelligence Research Partners suggests. So Amazon has in recent years tried to make Prime memberships “sticky” with benefits. It helps to keep them loyal, with only 5 per cent saying that they would ditch their subscriptions when the time comes.
Analysts worry that Prime will remain a club for the wealthy. They believe that Amazon has struggled to sign up members from homes with an annual income of less than $75,000 a year and will find it hard to replicate Prime’s success in poor countries. If this is the case, there is a ceiling to the scheme’s member base. However, Amazon is attempting to raise the ceiling with monthly Prime memberships for $5.99 for American homes with government-issued welfare or medical aid cards.
Amazon shares were knocked at the start of the month under a Twitter barrage from President Trump, probably because of his dislike of the Bezos-owned Washington Post. It’s unlikely, though, that the president will be able to act on his threats to limit the company’s power. Amazon shares are a little off their 52-week high of $1,617.54. They are valued at 340 times earnings but the figure is misleading because Mr Bezos continues to pour Amazon’s vast ecommerce revenues back into the business, at the expense of profits. In his letter, he described his customers as “divinely discontent”.
“People have a voracious appetite for a better way, and yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’,” he said. “I see that cycle of improvement happening at a faster rate than ever before. You cannot rest on your laurels.” He has shown over the past 20 years that Amazon is up to the challenge.
ADVICE Buy
WHY Prime memberships are fuel for Amazon’s growth and are rising faster than expected
Acacia Mining
Acacia Mining is facing questions about its future. Unfortunately, most of the answers are not within its control.
The Tanzanian group, which has three mines in the country, was confronted last year by a series of demands from the government there. An export ban was imposed on the gold and copper concentrate that accounted for more than a third of Acacia’s output. The group was left burning through cash to produce concentrate that it couldn’t sell, eventually forcing it to suspend its dividend. It mothballed the main affected mine last year and production figures yesterday showed a slump as a result.
Tanzania has also passed laws to take a stake in the mines and last summer hit the company with a $190 billion tax bill, a demand that the company regards as “spurious”.
Yet such is the power dynamic that the best outcome Acacia can hope for is to cough up $300 million, accept an increased government stake, get the export ban lifted and “set the slate clean” on the whole sorry mess. These were the terms of a provisional deal struck last year between Tanzania and Barrick Gold, Acacia’s majority owner, which is handling the talks.
That agreement is still up in the air. If it is not signed off, Acacia will fall back on lengthy international arbitration. “It is a waiting game here at the moment,” Giles Blackham, its head of investor relations, admitted.
What’s to stop something similar happening again? First, Acacia thinks that Tanzania taking a stake in the mines will align their interests. Second, that talks with Chinese investors over a potential stake in the mines may come to fruition, which would add the weight of Chinese diplomatic pressure in any future dispute. It could also help provide sorely needed cash to deal with that $300 million bill since Acacia has net cash of $50 million. Selling the $240 million of stockpiled concentrate should also help, but it seems unlikely that Acacia will be able to reinstate the dividend soon.
Acacia shares, down more than two thirds in the past year, fell 20½p to 134¾p yesterday. Anyone who bought at the highs may as well hold on and hope. For those considering investment, the advice is: don’t.
ADVICE Avoid
WHY Its fate is not in its own hands
