This article is based on analyst commentary and market reporting from July 2017, sourced from Investor’s Business Daily (investors.com).
A Surprise Earnings Miss Puts Amazon’s Investments in the Spotlight
Amazon.com (AMZN) delivered a surprise second-quarter earnings miss in 2017, sending its shares down roughly 2.5% and reigniting a long-running debate among Wall Street analysts: is Amazon spending too much, and will all of its bets pay off?
Revenue topped analyst estimates, but profit fell sharply short of expectations. The shortfall drew attention to the breadth of Amazon’s capital commitments — spanning cloud infrastructure, fulfilment centres, artificial intelligence, international expansion, and, most controversially, internet video.
AWS: The Investment That Already Proved Its Critics Wrong
Amazon Web Services (AWS) is the clearest example of a long-term, margin-pressuring investment that eventually delivered outsized returns. By 2017, AWS was the dominant provider of public cloud computing services, holding a significant lead over rivals including Microsoft Azure, Google Cloud (Alphabet), and others.
AWS took years of heavy capital expenditure before it became the high-margin business that now subsidises Amazon’s retail operations. That history gave many analysts reason to trust Amazon’s instincts on new investment cycles — even when near-term profits suffered.
Michael Olson, analyst at Piper Jaffray, maintained an overweight rating on Amazon stock despite the miss, noting: “An irony in the Amazon margin story is that we don’t believe investors would disagree with any of the initiatives to which Amazon is committing significant capex or opex dollars.”
Video Streaming: A Strategic Bet With Less Obvious Returns
Unlike cloud computing — where Amazon was an early pioneer with little established competition — internet video put Amazon in catch-up mode. In 2017, Amazon Prime Video was competing against Netflix, Google’s YouTube, and HBO (then owned by Time Warner), all of which had significant head starts in content libraries and subscriber bases.
Amazon had responded by stepping up investment in original content production and expanding Prime Video internationally. But the financial logic differed from AWS in an important way: video was not being sold as a standalone profit centre. Instead, Amazon positioned it as a customer-acquisition and retention tool for Amazon Prime.
Mark Mahaney, analyst at RBC Capital, summarised Amazon’s own rationale: “Amazon strongly believes that its video content offerings efficiently enable conversion of customers into paid Prime subscribers and lead to greater spend per subscriber.”
At the time, Amazon Prime had approximately 80 million U.S. members paying $99 per year, with the subscription bundling free shipping, video, music, and other perks. The argument was that video spending was effectively a customer-acquisition cost, not a pure media investment.
Analyst Scepticism: Not All Investments Are Created Equal
Not all analysts were convinced that the video analogy to AWS held up. Scott Devitt at Stifel was cautious:
“Amazon is spending aggressively on everything under the sun. It may all work but it is clear that investment levels will be heightened in the near term. The most recent investment cycle created a buying opportunity once certain investments received reduced allocations based on limited success — China and mobile phone. We see a lot of positive in this cycle but note two areas that could eventually be viewed as problematic by investors: video and various new retail initiatives such as grocery.”
Scott Devitt, Stifel
Devitt’s reference to past failures — Amazon’s exit from the Chinese e-commerce market and the discontinuation of the Fire Phone — served as a reminder that not every Amazon investment cycle ends with an AWS-like outcome.
The Broader Investment Landscape
Video was just one line item in a long list of Amazon spending priorities in 2017. Other significant investment areas included:
- Fulfilment centre buildouts — expanding physical logistics infrastructure to support same-day and two-day delivery at scale
- Artificial intelligence and Alexa — developing voice interfaces and machine-learning capabilities across product lines
- Retail grocery — Amazon had announced its intent to acquire Whole Foods, signalling a push into physical retail
- International markets — heavy spending in India, where Amazon was competing aggressively with local players
- Engineering and sales headcount — growing the workforce needed to support all of the above
Michael Graham, analyst at Canaccord Genuity, observed: “The fulfilment and AWS waves may dissipate, but the video investment seems early.” His point was that AWS infrastructure spending and fulfilment centre build-outs were maturing investments likely to ease over time, whereas video content spending looked like it was still accelerating.
The Core Debate: Proven Playbook vs. Unproven Territory
The 2017 earnings miss crystallised a fundamental tension in how analysts valued Amazon. The company had earned significant goodwill by converting years of margin sacrifice into AWS dominance — a move that, in hindsight, looked like obvious genius. That track record encouraged investors to extend the benefit of the doubt across new initiatives.
But AWS succeeded in a category Amazon effectively created for the enterprise market. Video streaming required Amazon to compete head-on in an already crowded consumer market, spending on content whose value is inherently difficult to measure in unit economics terms.
The debate was not simply about whether Amazon would win in video — it was about whether the financial logic that made AWS a success could be applied to a very different kind of business. For DevOps and cloud practitioners watching Amazon’s strategic bets, the earnings discussion was a useful reminder that even the most successful technology companies face genuine uncertainty when expanding beyond their core competencies.
Original reporting by Investor’s Business Daily (investors.com), July 2017.