Amazon.

com Analysis of the Profits-Revenues Data

1. Summary
The profits-revenues data for Amazon.com, since its inception on July 5, 1994, is analyzed here. The data reveals two periods: the first from 1995-2002 when Amazon reported a loss each year and the second from 2003-2011, when Amazon has reported a profit every single year. The general equation y = hx + c = h(x x0) describes the relation between revenues x and profits y in both these periods. Here x0 = - c/h is the breakeven revenue, the minimum revenue needed before profits will appear. (This is shown to be equal to the cut-off, or breakeven, revenue predicted using the breakeven analysis for profitability of a company.) The numerical values of h and c can be estimated from a straightforward linear regression analysis. The slope h determines the rate of conversion of revenues, in excess of the cut-off value x0, into profits. In the first period, losses decrease (which is mathematically equivalent to increasing profits) as the revenues increase. The rate of conversion of revenues into profits (or reduced losses) is rather high with the slope h = 0.252. Losses turn into profits when revenues exceed the minimum x0. In the second period, profits again increase with increasing revenues but at a lower rate, with a slope h = 0.0381, i.e., reduced by a factor of 6.6. The profit margin, the ratio of profits to revenues (y/x) is also shown to increase as the revenues increase, following exactly the predictions of the linear law. Since, y = hx + c, the profit margin y/x = h + (c/x). Hence, the graph of profit margin (y/x) versus revenues (x) is predicted to be a rising hyperbola (the constant h is positive and the constant c is negative). A brief comparison of these trends with the data for other successful companies, notably Google, Southwest Airlines, and Microsoft is also provided. All these
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companies reveal the same linear relation y = hx + c = h(x x0) between profits and revenues. Finally, the linear law revealed here is shown to be a special case of a more general nonlinear law, y = mxn [e-ax/(1 + be-ax)] + c, which predicts the existence of a maximum point on the profits-revenues graph. Such a maximum has indeed been observed with several companies. Some noteworthy examples are the old General Motors (before the bankruptcy), Air Tran (before the merger with Southwest Airlines), Southwest Airlines, Ford Motor Company, and Yahoo.

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Table of Contents
No.
1. 2. 3. 4. 5. 6.

Topic
Summary Introduction Amazon Profits-Revenues data The Profit Margin versus Revenues data Brief Discussion Appendix I: Average value of any property U for a complex system Maximum Point on Profits-Revenues graph of Ford Motor Company (1990-2011) and Type I to Type III transition Appendix II: List of References Appendix III: Bibliography of Related Articles

Page No.
1 4 7 10 12 15 20 22 25

7. 8.

Q1
Heat Source

Q2
Heat Sink Money Source

M1

M2
Money Sink

W
Diagram of Heat Engine

P
Diagram of Profits Engine

The Heat Engine analogy for the analysis of Profits-Revenues Data. Energy in Physics = Money in Economics (and vice versa) http://www.scribd.com/doc/106003088/A-Brief-Review-of-the-Historical-USGovernment-Surplus-Receipts-Relation http://www.scribd.com/doc/106220758/The-Efficency-of-Government-Comparedto-Thermal-Efficiency-of-a-Heat-Engine
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 2. Introduction
The main purpose here is to analyze the profits-revenues data for Amazon.com, following up on the analysis of the profits-revenues data for Trulia (click here, see Refs. [1,2]) and Zillow (click here, see Refs.[3,4]), two online service companies (in the Real Estate sector) that only recently went public (Zillow on July 18, 2011, and Trulia on Sep 19, 2012). Amazon, of course, is an early, and successful, example in this genre of online companies. Amazon was founded in 1994 and it finally turned the corner in 2003, with profits being reported continuously for each year since then, see Table 1.

Table 1: Profits-Revenue data for Amazon since its inception

Revenues, x, Profits, y, Profit margin%, $ billions $ billions 100(y/x) 48.077 0.631 1.31 2011 34.204 1.152 3.37 2010 24.509 0.902 3.68 2009 19.166 0.645 3.37 2008 14.835 0.476 3.21 2007 10.711 0.190 1.77 2006 8.490 0.359 4.23 2005 6.921 0.588 8.50 2004 5.264 0.035 0.66 2003 Year Revenues, x, Profits, y, Profit margin%, $ millions $ millions 100(y/x) 6921 588 8.50 2004 5,264 35 0.66 2003 3,933 -149 -3.79 2002 3,122 -567 -18.16 2001 2,762 -1,411 -51.09 2000 1640 -720 -43.90 1999 610 -125 -20.49 1998 147.8 -27.59 -18.77 1997 15.746 -5.78 -36.11 1996 0.51 -0.303 -59.30 1995 Data Sources: 2011, 2007, 2002, and 1997 Annual Reports. http://phx.corporateir.net/phoenix.zhtml?c=97664&p=irol-reportsannual . No revenues data for 1994.
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Year

Trulia has never reported a profit (Ref. [5], click here, the closing price of its stock on Monday Sep 24, 2012 was $22.10, up from IPO price of $17.00 on the previous Thursday, Sep 20, 2012). Zillow, on the other hand, has reported a profit for 4 out of 14 quarters for which data is available (from Q1 2009 to Q2 2012). Nonetheless, the profits-revenues data for both of these young and emerging companies can be shown to follow the simple linear law y = hx + c = h(x x0) where x is revenues, y is profits (or loss), h is the slope of the straight line describing the profits-revenue data, c the intercept made by the straight line on the y-axis (profits axis) and x0 = c/h is the intercept made on the x-axis (revenues axis). It was also shown, using the classical breakeven model for the profitability of a company, that: Slope h = 1 (b/p) Depends on the unit variable cost b and unit price p

y-axis Intercept c = -a Depends on the fixed cost a x-axis Intercept, x0 = ap/(p b), breakeven revenues, depends on (a, b, p) This can be readily deduced as follows. For a company making and selling N units of a product, the total cost C is the sum of the fixed cost a and the variable cost bN. Hence C = a + bN. The total revenues generated R = pN. Hence, it follows that the profits P = Revenues R Costs C = pN a bN = (p b)N a. Since N = R/p, we get, P = [(p - b)/p] R a, which can be rewritten as y = hx + c = h(x x0) with x being revenues and y the profits, with the slope h and intercept c having the values as given above. Even after the revenues exceed the fixed cost (- a), only the portion (pN bN) of the additional revenues appears as profits due to the variable costs associated with the operation. Hence, the breakeven revenue is greater than the fixed cost. The rate at which additional revenues are converted into profits is given by the slope h. This depends on both the unit variable costs and unit price p, while the breakeven revenue x0 = ap/(p b) reflects the interaction of the three constants (a, b, p) in the simple breakeven model. As we see from the analysis of the profits-revenues data for many companies, see bibliography list, this amazingly simple linear law also extends to real world companies. In what follows here we will consider the example of Amazon.com (founded July 5, 1994, Ref. [6], click here).

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Empirical observations suggest that the numerical values of the constants h and c in the linear law, for real world companies, can be either positive or negative. This gives rise to at least three types of profits-revenues behavior (click here, Ref. [7], called Type I (h > 0, c < 0), Type II (h > 0, c < 0), and Type III (h < 0, c > 0, or even h < 0, c < 0). The transitions from Type I to Type II or Type III behaviors imply nonlinearity and the general nonlinear law (which also reveals a maximum point on the profits-revenues graph) can be written as follows. y = mxn [e-ax /(1 + be-ax) ] + c and, dy/dx = [(y c)/x] (n ax axg(g -1) ] where, g = 1/(1 + be-ax) (1) (2) (3)

A brief justification for equation 1, based on statistical arguments, is provided in Appendix I of this article. The maximum point occurs when the slope of the curve dy/dx = 0. This can be appreciated by considering the simpler case of b = 0. y = mxne-ax + c and, dy/dx = (n ax)(y c)/x, since g = 1 with b = 0 (4) (5)

The maximum point occurs at x = n/a. If a = 0 and b = 0, there is no maximum point and the graph of profits versus revenues is a continuously rising curve, with profits growing at either a decelerating rate (n < 1) or an accelerating rate (n > 1, which cannot be sustained indefinitely for obvious reasons). For n = 1, we recover the linear law. Note that for n = 1, a = 0, b = 0, dy/dx = (y c)/x which agrees with the equation for a straight line if we set dy/dx = h. Quite surprisingly, it is NOT widely known that such a maximum point on the profits-revenues graph has been observed with several companies, most notably the old General Motors, Ford Motor Company (Figure 6 in Appendix I), Yahoo, and several others, see Refs.[8-10]. More commonly, however, we observe the linear law (as we see here with the Amazon data), with its various ramifications, such as the Type I, Type II, Type III behavior (and also their INVERSES, the INVERSE of Type I being profits and revenues decreasing following a line of positive slope, and so on). The nonlinear law has also been observed in some cases; see Facebook (n < 1) and Google,
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Refs.[11,12], but this should be treated cautiously since extrapolations based on the nonlinear law can lead to misleading short term predictions. The longer term behavior is often a Type I, Type II, or Type III with clear transitions between these three linear modes (see Figure 7 in Appendix I).

3. Amazon Profits-Revenues data

The profits-revenues data can be divided into two periods: 1995-2002 with increasing revenues and generally decreasing losses (mathematically equivalent to increasing profits) and 2003-2011, with increasing revenues and generally increasing profits. Hence, the large drop in the profits for 2011, relative to earlier years, is noticeable. The data is plotted in Figures 1 to 3.
1,500

Annual Profits, y [$, millions]

1,000

500

y= hx + c = h (x x0) y = 0.252x 1214.8 = 0.252(x 4821) r2 = 0.962

1998

2004

2003

-500

x0

-1,000

2000
-1,500 0 2,000 4,000 6,000 8,000 10,000

Annual Revenues, x [$, millions]

Figure 1: The profits-revenues data for Amazon for the early years (1995-2004). Ignoring chronological ordering of the data, we find a general increase in profits (i.e., reduced losses) as revenues increased.
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As we see from Figure 1, between 1995 and 1998, losses increased at first with increasing revenues (data points close to the origin). However, subsequently a general trend of decreasing losses with increasing revenues was established and eventually the losses turned into profits in 2003 and 2004. This overall trend of increasing profits (or decreasing losses) is described mathematically by the equation y = hx + c = h(x x0) where the constant h and c are determined using the well-known linear regression analysis. The data for 1995-1998 and 2000, a year of exceptional loss (which is obviously can outlier), were neglected to derive this regression equation. The best-fit line has the equation y = 0.252x 1214.8 = 0.252 (x 4,821) for 1999-2004 with r2 = 0.962

1.40

Annual Profits, y [$, billions]

1.20 1.00 0.80

2004
0.60 0.40 0.20 0.00 0 10 20 30 40

2011

y= hx + c = h (x x0) y = 0.038x 0.101 = 0.038(x 2.644) r2 = 0.9525

50 60

Annual Revenues, x [$, billions]

Figure 2: The profits-revenues diagram for Amazon after it started reporting a profit consistently (2003-2011). Ignoring the chronological ordering of the data, we find a general increase in profits (i.e., reduced losses) as revenues increased, with some extreme points (or outliers) representing either low or high profits.
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Notice the high linear regression coefficient, once the data is sorted out as just discussed. This regression equation is also consistent with the conclusion, based on the simple breakeven analysis for the profitability of a company, that the intercept made on the x-axis (revenues axis) is, indeed, equal to the breakeven or cut-off revenue, the minimum revenues needed before profits will be reported. As we see here, a small profit was reported in 2003 when revenues ($5,264 million) exceed the breakeven value of $4,821 million predicted by this equation. Also, although not in chronological order, the profits for 2002, when revenues were higher ($6,921 million) were higher than for 2003.

2.50

Annual Profits, y [$, billions]

2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00

y= hx + c = h (x x0) y = 0.038x 0.101

y= hx + c = h (x x0) = 0.252x 1214.8

10

20

30

40

50

60

70

Annual Revenues, x [$, billions]

Figure 3: Composite plot of the profits-revenues data for Amazon since its inception (1994) to the present (2011). Notice the dramatic change in the slope h after Amazon finally turned the corner and started reporting a profit consistently since 2003. Ignoring chronological ordering of the data, we find a general increase in profits (i.e., reduced losses) as revenues increased, with some extreme points (or outliers) representing either low or high profits.
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An exactly similar linear relationship is observed when we consider the data for the period 2003-2011 when a profit was reported (the two overlapping years, 2003 and 2004 are included here since profits were reported). The best-fit line has the equation (with 2004 and 2011, with profits of about $0.6 billion being excluded): y = 0.0381 0.101 = 0.0381 (x 2.644) for 2003-2011 with r2 = 0.9525 Both sets of data are combined and plotted in Figure 3. The rather drastic change in the slope h, i.e., the rate of increase of profits with increasing revenues, after Amazon starting reporting profits consistently, is quite noticeable. The slope has decreased by almost one order of magnitude, from h = 0.252 to h = 0.038. (The slope decreasing from h = 0.25 to h = 0.025 would represent exactly one order of magnitude, or a factor of 10.) The slope h represents the rate of conversion of additional revenues (past breakeven x0) into profits.

4. The Profit margin versus Revenues data Hyperbolic relation between profit margins and revenues
The linear law y = hx + c also explains the commonly observed trend of either increasing or decreasing profit margins (the ratio y/x) with increasing revenues. At least three different possibilities are suggested depending on the numerical values of h and c in this equation. The profit margin y/x = h + (c/x) will therefore either increase or decrease with increasing revenues, as follows. Type I behavior: Positive slope, negative intercept (h > 0, c < 0): Both profits y and the profit margins y/x increase with increasing revenues x. This is the situation with Amazon, as we see from Figures 1 to 3. The graph of profit margin y/x versus revenues x is a rising hyperbola, see Figure 4. Type II behavior: Positive slope, positive intercept (h > 0, c > 0): Profits y increase but the profit margins y/x decrease with increasing revenues x. This too is observed with other companies (examples are Microsoft, see Ref. [13,14], click here, and Air Tran, see Ref. [15], click here). This could represent a transition from

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one Type I mode to another, as in the case of Microsoft, or a transition from a Type I to Type II to Type III mode, as with Air Tran. Type III behavior: Negative slope, positive intercept (h < 0, c > 0): Both profits and profit margins decrease with increasing revenues, see for example General Motors before its bankruptcy. Other examples are Air Tran, Ford Motor Company (click here), and Yahoo (click here, see Ref. [17]). With Amazon, a Type I behavior is observed which also means increasing profit margins with increasing revenues. This is illustrated by the theoretical graphs in Figure 4, with the hyperbolas being computed using the linear relations deduced by regression analysis presented in the last section.
0.05

Profit Margin, y/x = h + (c/x)

y = 0.038x 0.101 y/x = 0.038 (0.101/x)

0.04

0.03

0.02

0.01

y = 0.038x 0.185 y/x = 0.038 (0.185/x)

0 10 20 30 40 50 60 70

Annual Revenues, x [$, billions]

Figure 4: Since the profits-revenue relation is linear, y = hx + c, this also means that the profit margin y/x = h + (c/x) will either keep on increasing (h > 0, c < 0) or keep on decreasing (h > 0, c > 0) as the revenues increase. Fractional value instead of percentage is plotted here (5% equals 0.05 and so on.) For a Type I

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behavior (with h > 0, c < 0), this means that the graph of profit margin versus revenues is a rising hyperbola, as shown here. The upper curve in Figure 4 is the graph of the equation y/x = 0.0381x (0.101/x) deduced from the linear regression analysis. The lower dashed curve, is shifted slightly by adjusting the value of the constant c = - 0.185 instead of c = -.101, which implies a change in the fixed cost. This numerical value of c can be justified if we consider the equation of the straight line joining the points 2003,, 2006, and 2010 which lie along this curve. All of the data can be seen to lie between these two curves. The highest profit margin (for 2004), although not shown here, is NOT being overlooked. This can be interpreted as a short term shift in the fixed costs which is related to the constant c as already shown in the text.

5. Brief Discussion
As revenues x increase, we expect profits y to increase. However, it is not immediately clear how profits will increase as revenues increase. As we see here, Amazon spent many years in the negative territory before it began to report profits consistently. Microsoft, on the other hand, has reported a profit for every single year, since it was founded 26 years ago, in 1986. It reported its first ever quarterly loss in June 2012 but on an annual basis it still reported a profit for the FY2012. A remarkably linear relationship between profits and revenues is also observed when we analyze the historical data for Microsoft (see Refs. [13,14]). Google is another example of a highly successful company which reveals a linear profits-revenue relation. Google was founded in 1998, and reported a loss for 1999 and 2000 before it reported a small profit in 2001. Since then, Google has reported a profit for every single year, see Ref. [12,18] and the profits-revenues diagram for the early years in Figure 5. Between 1999 and 2000, the loss increased slightly (mathematically equivalent to decreasing profits) as revenues increased before the trend was reversed beginning 2001. This is the same as the pattern observed with Amazon, with losses increasing at first before a steady decline in losses (equivalent mathematically to increasing profits) with increasing revenues.

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Southwest Airlines is another example of a company, which has reported a profit for every single year, for 37 years, since 1973. Like Google, it reported a loss for 1971 (partial year of operation) and its first full year of operation in 1972. Again a linear relationship between profits and revenue is observed with this low cost airline, see Ref.[19], click here. The significance of the linear law, y = hx + c = h(x x0), especially the meaning of the nonzero intercept c begins very obvious when we consider the early data for successful companies like Google, Southwest Airlines, and now Amazon. A minimum revenue must be exceeded before profits are observed. Even after the fixed costs are exceeded, not all of the revenues will appear as profits because of the variable costs. Only a portion of the additional revenues (pN bN) will appear as profits where p is unit price, b is the unit variable cost and N the number of units sold. Thus, the slope h = 1 (b/p) tells us the rate of conversion of the additional revenues, beyond the breakeven x0, into profits.
120

Annual Profits, y [$, millions]

100 80 60 40 20 0 -20 -40

Google 1999-2002

y= hx + c = h (x x0) y = 0.348x 21.34 = 0.348(x 61.34) Joins 2000 and 2002

0 50 100 150 200 250 300 350 400 450

Annual Revenues, x [$, millions]

Figure 5: Profits-Revenues diagram for Google for the early years, 1999-2002.
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It is also of interest to note that exactly the same pattern is observed when we consider the Budget data for the US Government, see Refs.[24-26]. As the governments receipts increase (similar to revenues of a company), the budget deficits (akin to losses of a company) decrease and eventually move into the positive territory, yielding a surplus (like profits of a company). This has been observed for brief periods in US history, most recently during the Clinton years, with a budget surplus for four consecutive years [18,20-22]. The more general law is, of course, the nonlinear law, given as equation 1, which can be derived using statistical arguments, as shown in Appendix I. The Type I, Type II, and Type III behavior discussed here (and more completely with examples in Ref.[7]) are linear segments of this more general curve. However, it is the simpler linear law that is often observed, when we consider short term behavior. The nonlinear law becomes obvious only when we consider historical data, covering many years, especially when a company exhibits Type III behavior over a significant period (notable examples being the old GM, Air Tran, Southwest Airlines, Yahoo, and Ford Motor Company), see Figures 6 and 7 in Appendix I.

Q1
Heat Source

Q2
Heat Sink Money Source

M1

M2
Money Sink

W
Diagram of Heat Engine

P
Diagram of Profits Engine

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 6. Appendix I Average value of any property U

The nonlinear law, given as equation 1 arises because, in the real world, we must deal with N product streams, each with its own (a, b, p) triplet and associated revenues and profits streams. Hence, we must consider an averaging process to account for the distribution of profits and revenues from the N product streams. In his December 1900 paper, which marks the beginning of modern quantum physics, Max Planck derives the expression for the average energy of N entities which are referred to as oscillators. Instead of distributing energy between the N entities, we can apply the same arguments to distribute money (say revenues, or profits), or any other property of interest (lets call it U), between the N entities. M. Planck, The Quantum Hypothesis, in Great experiments in physics, Edited by Morris H. Shamos, Dover Publications (1959) pp. 301-314. R. P. Feynman, R. B. Leighton, and M. Sands, The Feynman Lectures on Physics, Addison Wesley, Reading, MA, Sixth Printing, see volume which deals with Quantum Mechanics, 39-1 to 41-10. M. S. Longair, Theoretical concepts in physics, Cambridge University Press (1984). An English translation of Plancks original paper can be found in the first of the above cited references. N is a very huge number. Plancks N oscillators can be visualized as microscopic entities (with an electrical charge) which vibrate about some mean position and radiate electromagnetic energy at all possible frequencies. This gives rise to a complex radiation spectrum. Planck wanted to provide a theoretical explanation for the appearance of a maximum point on the radiation spectrum curve. (The intensity of radiation goes through a maximum at a finite frequency f. This could not be explained using per-1900 physics.) To enable this, Planck derives the expression for the average energy by making some simple assumptions. The N oscillators have a fixed (total) energy which can
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be distributed in many different ways. In the example given by Planck, which is based on a similar example given by Boltzmann in his 1877 paper (click here and here) the N oscillators have 100 units of energy.

Illustration of a microstate and distribution of property U

Entity no. Units of 1 7 2 38 3 11 4 0 5 9 6 2 7 20 8 4 9 4 10 5

There are obviously many different ways of distributing the same total energy. One of the ways is given above. The first entity has 7 units, the 2nd has 38 units, and the 4th has 0 units, and so on. Thus, we can also write UN = NU = P Or, P/N = U/ (A1)

Here N and P are large integers. Equation A1 gives two different ways of writing the same product, much like 108 = 27 4 = 36 3. The many distributions give rise to a number of microstates for the same macrostate and an important property called entropy associated with this system of N entities. Entropy, briefly put, is a measure of the extent of disorder, randomness, or chaos in a system. The mathematical formula for entropy used by Planck (originally due to Boltzmann) is: SN = k log + S0 (A2)

Here k is a constant (called the Boltzmann constant in physics) and is the total number of ways of achieving the same macroscopic distribution. S0 is an unknown nonzero constant that must be included (similar to the nonzero intercept c in the general equation for a straight line). The entropy relation is logarithmic since the number N is very large. The general expression for , using the elementary theory of combinations and permutations is well-known even to those from finance, business, or economics community. = (N + P 1)! /(N 1)! P! (N + P)N+P /NNPP (A3)
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Here x! means the factorial of x and is given by x! = x(x -1)(x 2) 3 2 1. Thus, 4! = 24, and so on. The factorials can be replaced by the exponents when N and P are large numbers. (This is called Stirlings approximation.) Thus, the total value of the property of interest is UN = NU = P where U is the average value. The expression for the average U can be derived as follows. This is described by the Nobel laureate Richard Feynman in his famous Lectures on Physics and also by Longair, in his book Theoretical concepts in physics, see references cited earlier. Let the N entities be distributed as follows in the various microstates denoted as N0, N1, N2, etc. Let N1 = N0t, N2 = N0t2 and so on to very large values of the subscript numbers. Here t is a parameter which will be fixed later. The total number of entities is therefore given by the sum, N = N0 + N0t + N0t2 + . = N0 (1 + t + t2 + ..) = N0 / (1 t) (A4) Here we have used a well-known series expansion which can be found in most texts on mathematics (example, Wolfram). Next, we determine the sum UN after invoking the following assumption. Let U0 = 0, U1 = , U2 = 2, U3 = 3 and so on. Hence, UN = (N0t) + (N0t2) 2 + . (N0t) [1 + 2t + 3t2 + ] = (N0) [ t/(1- t)2 ] (A5) Again, we used another well-known series expansion to arrive at this sum. Both the series used here may be found in the treatment given by Longair (click here); the formulae given here as 14.21, 14.22, and 14.23 are the ones of interest. Note that we have not yet specified the meaning of t or the elementary unit . The average value U = UN/N is now readily determined. U = (N0) [ t/(1- t)2 ] / [ N0 / (1 t) ] = [ t /(1 - t) ] (A6)

Notice that the unknown N0 disappears when we determine the average value U. The average value is determined entirely by , the elementary unit, multiplied by
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the factor [t /(1 t)]. If we set the parameter t = e-ax which introduces the exponential factor, we arrive at the average value U as: U = [ t / (1 t) ] = [ e-ax / (1 e-ax) ] (A7)

This is also the expression obtained by Planck. In the very last step, Planck sets = hf where h is a constant and f is the frequency. The constant a also has a special meaning in physics. Instead we will take = hx, with the variable x replacing the frequency f. This completes the proof for the cut-off factor containing the exponential function. In the final step, Planck simply introduces the expression for U into the power-law and sets = hx (where x is taken as frequency f in physics, here we have any general x of interest). The power-law given as equation 1 in the main text can be written as y = Mxn-1U and substituting for U leads us to the desired result y = Mxn-1U = Mxn-1 (hx) [ e-ax/(1 e-ax) ] = mxn [ e-ax /(1 e-ax) ] ..(A8) To generalize this further we replace the denominator of the cut-off factor (which yields the maximum point) with (1 + be-ax) where we now allow for b = 0, b = +1, and b = -1, to describe various rules associated with the microstates of the N entities. In physics, these are called Maxwell-Boltzmann statistics, Fermi-Dirac statistics, and Bose-Einstein statistics. Finally, as applied to problems beyond physics, perhaps the parameter t in the expression for U could be replaced with mathematical functions other than the exponential. This would lead other nonlinear curves (such as the parabola for GMs profits-revenues data), not necessarily the Planck curve, with or without the maximum point. An alternative proof, following Plancks original paper, is described in Ref. [28], click here.
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Now, we will illustrate the application of equation A8, which is the same as equations 1 and 4 in the main text, with the profits-revenues data for Ford Motor Company, for the years 1990-2011, compiled in Table 2, see also Ref.[16].

Table 2: Profits-Revenues data for Ford Motor Company

Year Revenues, x, $ billions Profits, y, $ billions 98 0.9 1990 89 -2.2 1991 101 -0.1 1992 109 2.5 1993 129 5.3 1994 138 4.1 1995 148 4.4 1996 155 6.9 1997 146 6 1998 162 6.5 1999 172 5.4 2000 163 -5.4 2001 163 0.3 2002 165 0.9 2003 172 3.6 2004 178 2.2 2005 2006 162 -12.6 172.5 -2.7 2007 2008 146.3 -14.7 116.283 2.717 2009 128.954 6.561 2010 2011 136.264 20.213 Source: Various Annual Reports of Ford Motor Company; see also Table 10.1 in the article by Glenn Mercer, http://www.glennmercer.com/MercerFordChapter.pdf A careful examination of the data shows that profits increase (or losses decrease) with increasing revenues and go through a maximum when revenues are about $150 billion to $160 billion; see data for 1997-2000. The x-y graph thus reveals a maximum point, see Figure 6, even without the aid of any theory. The two curves superimposed on to the data, with a maximum point, are two members of the family of curves described by the equation 4, y = mxne-ax + c, with slightly
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different values of the constants m, n, a, and c, as indicated. This simpler version of Plancks law (b = 0) was also used by Einstein in his 1905 paper where he puts forward the far-reaching idea of a quantum of light to explain the photoelectric effect; see Refs. [29-32].
10

Annual Profits, x [$, billions]

y = 0.076 x1.65 e-0.016x 53.5

5

A
0

B
-5

-10

-15

y = 0.075 x1.75 e-0.012x 79

-20

20

40

60

80

100 120 140 160 180 200 220 240

Annual Revenues, x [$, billions]

Figure 6: The maximum point on the profits-revenue graph for Ford Motor Company. The data plotted is for the period 1990-2011. Ford reported an extraordinarily high profit of $20.213 billion for 2011. This is outside the scale of this graph. For curve A, m = 0.076, n = 1.65, a = 0.016 and c = -53.5 and the maximum occurs at x = n/a = $156 billion. For curve B, m = 0.075, n = 1.75, a = 0.012 and c = -79 and the maximum occurs at x = n/a = $150 billion. The family of curves here are exactly analogous to the family or radiation curves observed for a heated body as its temperature is varied (contained in the constant a in Plancks original theory). The same data can also be interpreted as revealing a transition from Type I to Type III behavior, see Figure 7.

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Annual Profits, x [$, billions]

12.00 10.00 8.00 6.00

Type I behavior y = 0.219x 21.72

4.00
2.00 0.00 -2.00 -4.00 -6.00 -8.00 -10.00 0 20 40 60 80 100 120 140 160 180 200 220 240

Type III behavior y = -0.269x + 50.04

Annual Revenues, x [$, billions]

Figure 7: The same profits-revenue data for Ford Motor Company is envisioned here as a transition from Type I (positive slope, negative intercept, h > 0, c < 0) to Type III behavior (negative slope, positive intercept, h < 0, c > 0). At low revenues, both profits and the profit margins increase with increasing revenues as revealed by the Type I line with the positive slope. Beyond the peak of about $150 to $160 billion, there is an abrupt reversal to Type III behavior. Profits decrease with increasing revenues. Ford reported an extraordinarily high profit of $20.213 billion for 2011. This is outside the scale of this graph. The Type III trend has been observed since 1997 and is thus a long term trend. The old GM revealed the same Type III behavior for a sustained before being forced into bankruptcy (click here). The same Type III trend was also observed with Air Tran, before it was forced into a merger with Southwest Airlines. Southwest Airlines (prior to the merger) is also operating past the maximum point, in the Type III mode. A similar behavior is also observed with Yahoo (click here). These points have been discussed in the references cited, along with the detailed graphs.
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 7. Appendix II List of References

1. Trulia After its IPO, Analysis of Profits-Revenues Data, Published Sep 21, 2012, http://www.scribd.com/doc/106573459/The-Trulia-IPO-Analysis-ofProfits-Revenues-Data 2. The Trulia IPO: Analysis of Profits-Revenues Data, vlaxmanans Instablog, Published Sep 21, 2012, http://seekingalpha.com/instablog/958073vlaxmanan/1096481-the-trulia-ipo-analysis-of-profits-revenues-data 3. A Look at Zillow after Trulias IPO: Analysis of Profits-Revenues data, Published Sep 22, 2012, http://www.scribd.com/doc/106626486/A-Look-atZillow-After-Trulia-s-IPO-Analysis-of-Profits-Revenues-Data 4. A Look at Zillow after Trulias IPO, vlaxmanans Instablog, Published Sep 22, 2012, http://seekingalpha.com/instablog/958073-vlaxmanan/1098001-alook-at-zillow-s-profits-revenues-data-after-trulia-s-ipo 5. Why are Real Estate Listing Sites Hotter than Listings, By Alison Rogers, Sep 24, 2012, moneyland.time.com, http://moneyland.time.com/2012/09/24/why-are-real-estate-listing-sites-hotterthan-listings/ 6. Amazon, United States Securities Exchange Commission, 10-K Filing for year ending Dec 31, 1997, see Item 6, Selected Financial data, http://media.corporate-ir.net/media_files/irol/97/97664/reports/123197_10k.pdf 7. Three Types of Companies: From Quantum Physics to Economics, May 24, 2012, http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics 8. GM Before the Bankruptcy: Maximum point on the profits-revenues graph, http://www.scribd.com/doc/103938349/GM-Before-the-Bankruptcy-MaximumPoint-on-Profits-Revenue-Graph , Published August 25, 2012. 9. The New GM: A Brief Analysis of the Profits-Revenues Data, http://www.scribd.com/doc/103600274/The-New-GM-A-Brief-Analysis-of-theProfits-Revenues-Data-through-1Q2011, Published May 9, 2011 and again on
August 22, 2012, Discussion of the new GM data from 1Q2010 to 1Q2011.

10.Why Cant GM be more like Microsoft? The New GM Just May be. http://www.scribd.com/doc/103607023/Why-Can-t-General-Motors-be-morelike-Microsoft-The-new-GM-may-just-be Published August 22, 2012.
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11.The Future of Facebook I, May 21, 2012, Power law behavior with n < 1, http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I 12.Google: A Lovable One-trick Pony, July 1, 2012, http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology 13.A Fresh Look at Microsoft after its Historic Quarterly Loss, Published July 25, 2012, http://www.scribd.com/doc/101062823/A-Fresh-Look-at-MicrosoftAfter-its-Historic-Quarterly-Loss 14.A Second Look at Microsoft after its Quarterly loss, Published July 30, 2012, http://www.scribd.com/doc/1015181/A-Second-Look-at-MicrosoftAfter-the-Historic-Quarterly-Loss 15.The Air Tran Story: The Merger and the Maximum Point on the ProfitsRevenues Graph, August 14, 2012, http://www.scribd.com/doc/102832984/The-Air-Tran-Story-The-Merger-andMaximum-Point-on-Profits-Revenues-Graph 16.Mount Profit Revealed by Ford Motor Company, May 29, 2012, http://www.scribd.com/doc/95140101/Ford-Motor-Company-Data-RevealsMount-Profit 17.Some Examples of Corporate Financial Behavior, June 4, 2012, http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-Revenues-Data 18.The Clinton Budget Surpluses, http://www.scribd.com/doc/105819500/TheClinton-Budget-Surpluses-Treating-Government-like-a-Business, Published Sep 13, 2012 , Google financial data for early years may be found in Table 2. 19.The Future of Southwest Airlines, August 14, 2012, http://www.scribd.com/doc/102835946/The-Future-for-Southwest-AirlinesThe-Unknown-Story-of-Rising-Costs-and-the-Maximum-Point-on-ProfitsRevenues-Curve 20.The Amazing US Government Surplus (Deficits)-Receipts Relation during the Clinton Presidency, http://www.scribd.com/doc/105821230/The-AmazingUS-Government-Receipts-Surplus-Relation-during-the-Clinton-Presidency, Published Sep 13, 2012. 21. A Brief Review of the Historical US Government Receipts-Surplus (Deficit) Relation, http://www.scribd.com/doc/106003088/A-Brief-Review-of-the-HistoricalUS-Government-Surplus-Receipts-Relation , Published Sep 15, 2012. 22. The Efficiency of the Government Compared to the Thermal Efficiency of a Heat Engine, Sep 18, 2012, http://www.scribd.com/doc/106220758/The-Efficencyof-Government-Compared-to-Thermal-Efficiency-of-a-Heat-Engine
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23.What is Entropy? June 3, 2012, http://www.scribd.com/doc/95728457/Whatis-Entropy 24.Planck, Quantum, and Historians, By Clayton A. Gearhart, http://employees.csbsju.edu/cgearhart/Planck/PQH.pdf 25.M. Planck, The Quantum Hypothesis, in Great experiments in physics, Edited by Morris H. Shamos, Dover Publications (1959) pp. 301-314. 26.R. P. Feynman, R. B. Leighton, and M. Sands, The Feynman Lectures on Physics, Addison Wesley, Reading, MA, Sixth Printing, see volume which deals with Quantum Mechanics, 39-1 to 41-10. 27.M. S. Longair, Theoretical concepts in physics, Cambridge University Press (1984). 28. Plancks Blackbody Radiation Law Re-derived for the general case, May 30, 2012, http://www.scribd.com/doc/95329905/Planck-s-BlackbodyRadiation-Law-Rederived-for-more-General-Case 29.On a Heuristic Point of View about the Creation and Conversion of Light, by A. Einstein, esfm2005.ipn.mx http://www.esfm2005.ipn.mx/ESFM_Images/paper1.pdf . See also, hermes.ffn.ub.es
http://hermes.ffn.ub.es/luisnavarro/nuevo_maletin/Einstein_1905_heuristic.pdf

30.Einsteins Quanta, Entropy, and Photoelectric Effect, sigmapisigma.com, by Dwight E. Neuenschwander, Fall 2004, http://www.sigmapisigma.org/radiations/2004/elegant_connections_f04.pdf
Hot off the press articles: Is Trulia Worth $595 million? Unlikely, By Intangible Valuation, Sep 24, 2012 http://seekingalpha.com/article/884951-is-trulia-worth-595-million-unlikely

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 8. Appendix III Bibliography of Related Articles

Posted at this website Since Facebook IPO on May 18, 2012
The first article listed below discusses a little known mathematical property of a straight line. Figures 1 to 3 in this article provide the philosophical basis for considering the significance of a nonzero intercept c as it applies to many problems in the real world. We make observations (x and y values of interest to us) to deduce y/x, usually called rates, ratios, or percentages. 1. http://www.scribd.com/doc/102000311/A-Little-Known-MathematicalProperty-of-a-Straight-Line-Strange-but-true-there-is-one Published August 4, 2012. Financial data (Profits-Revenues) analysis and Generalization of Plancks law beyond physics. 2. http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-RevenuesData Current article with all others above cited for completeness, Published June 4, 2012 with several revisions incorporating more examples. 3. http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics Basic discussion of three types of companies, Published May 24, 2012. Examples of Google, Facebook, ExxonMobil, Best Buy, Ford, Universal Insurance Holdings 4. http://www.scribd.com/doc/96228131/The-Perfect-Apple-How-it-can-bedestroyed Detailed discussion of Apple Inc. data. Published June 7, 2012. 5. http://www.scribd.com/doc/95140101/Ford-Motor-Company-Data-RevealsMount-Profit Ford Motor Company graph illustrating pronounced maximum point, Published May 29, 2012.

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6. http://www.scribd.com/doc/95329905/Planck-s-Blackbody-Radiation-LawRederived-for-more-General-Case Generalization of Plancks law, Published May 30, 2012. 7. http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I Facebook and Google data are compared here. Published May 21, 2012. 8. http://www.scribd.com/doc/94103265/The-FaceBook-Future Published May 19, 2012 (the day after IPO launch on Friday May 18, 2012). 9. http://www.scribd.com/doc/95728457/What-is-Entropy Discussion of the meaning of entropy (using example given by Boltzmann in 1877, later also used by Planck to develop quantum physics in 1900). The example here shows the concepts of entropy S and energy U (and the derivative T = dU/dS) can be extended beyond physics with energy = money, or any property of interest. Published June 3, 2012. 10.The Future of Southwest Airlines, Completed June 14, 2012 (to be published). http://www.scribd.com/doc/102835946/The-Future-for-SouthwestAirlines-The-Unknown-Story-of-Rising-Costs-and-the-Maximum-Point-onProfits-Revenues-Curve Published August 14, 2012. 11.The Air Tran Story: An Important Link to the Future of Southwest Airlines, Completed June 27, 2012 (to be published). http://www.scribd.com/doc/102832984/The-Air-Tran-Story-The-Merger-andMaximum-Point-on-Profits-Revenues-Graph Published August 14, 2012. 12.Annies Inc. A Single-Product Company Analyzed using a New Methodology, http://www.scribd.com/doc/98652561/Annie-s-Inc-A-SingleProduct-Company-Analyzed-Using-a-New-Methodology Published June 29, 2012 13.Google Inc. A Lovable One-Trick Pony Another Single-product Company Analyzed using the New Methodology. http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology, Published July 1, 2012. 14.GT Advanced Technologies, Inc. Analysis of Recent Financial Data, Completed on July 4, 2012. (To be published).
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15.Disappearing Brands: Research in Motion Limited. An Interesting type of Maximum Point on the Profits-Revenues Graph http://www.scribd.com/doc/99181402/Research-in-Motion-RIM-Limited-WillDisappear-in-2013 Published July 5, 2012. 16.Kia Motor Company: A Disappearing Brand http://www.scribd.com/doc/99333764/Kia-Motor-Company-A-DisppearingBrand, Published July 6, 2012. 17.The Perfect Apple-II: Taking A Second Bite: A Simple Methodology for Revenues Predictions (Completed July 8, 2012, To be Published) http://www.scribd.com/doc/101503988/The-Perfect-Apple-II, Published July 30, 2012.
18. http://www.scribd.com/doc/101062823/A-Fresh-Look-at-Microsoft-After-itsHistoric-Quarterly-Loss Microsoft after the quarterly loss, Published July 25, 2012.

19.http://www.scribd.com/doc/101518117/A-Second-Look-at-Microsoft-After-theHistoric-Quarterly-Loss , Published July 30, 2012. 20.http://www.scribd.com/doc/103265909/A-Brief-Analysis-of-Groupon-s-ProfitsRevenues-Data Published August 19, 2012. 21.http://www.scribd.com/doc/103027366/Groupon-Analysis-of-ProfitsRevenues-Data-and-its-Business-Model Published August 16, 2012. More detailed analysis including discussion of the idea of a work function. 22. http://www.scribd.com/doc/103369016/Analysis-of-Zynga-s-Profits-RevenuesData-Maximum-point-on-the-profits-revenues-curve Published August 20, 2012.

General Motors Financial Data 23.http://www.scribd.com/doc/103600274/The-New-GM-A-Brief-Analysis-of-theProfits-Revenues-Data-through-1Q2011, Published May 9, 2011 and again on August 22, 2012, Discussion of the new GM data from 1Q2010 to 1Q2011. 24.http://www.scribd.com/doc/103607023/Why-Can-t-General-Motors-be-morelike-Microsoft-The-new-GM-may-just-be Published August 22, 2012. 25.http://www.scribd.com/doc/103938349/GM-Before-the-Bankruptcy-MaximumPoint-on-Profits-Revenue-Graph GM Before the Bankruptcy: Maximum point on the profits-revenues graph, Published August 25, 2012. ******************************************************************
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The Unemployment Problem: Evidence for a Universal value of h in the unemployment law. 26.http://www.scribd.com/doc/100984613/Further-Empirical-Evidence-for-theUniversal-Constant-h-and-the-Economic-Work-Function-Analysis-ofHistorical-Unemployment-data-for-Japan-1953-2011 Single universal value of h for US, Canada and Japan in the unemployment law y = hx + c, Published July 24, 2012. 27.http://www.scribd.com/doc/100939758/An-Economy-Under-StressPreliminary-Analysis-of-Historical-Unemployment-Data-for-Japan, Published July 24, 2012. 28.http://www.scribd.com/doc/100910302/Further-Evidence-for-a-UniversalConstant-h-and-the-Economic-Work-Function-Analysis-of-US-1941-2011-andCanadian-1976-2011-Unemployment-Data Published July 24, 2012. 29.http://www.scribd.com/doc/100720086/A-Second-Look-at-Australian-2012Unemployment-Data, Published July 22, 2012. 30.http://www.scribd.com/doc/100500017/A-First-Look-at-AustralianUnemployment-Statistics-A-New-Methodology-for-Analyzing-UnemploymentData , Published July 19, 2012. 31.http://www.scribd.com/doc/99857981/The-Highest-US-Unemployment-RatesObama-years-compared-with-historic-highs-in-Unemployment-levels , Published July 12, 2012. 32.http://www.scribd.com/doc/99647215/The-US-Unemployment-Rate-Whathappened-in-the-Obama-years , Published July 10, 2012. **************************************************************** Traffic-fatality and Teen pregnancy problem 33.http://www.scribd.com/doc/101982715/Does-Speed-Kill-Forgotten-USHighway-Deaths-in-1950s-and-1960s Published August 4, 2012. 34.http://www.scribd.com/doc/101983375/Effect-of-Speed-Limits-on-FatalitiesTexas-Proofing-of-Vehciles Published August 4, 2012. 35.http://www.scribd.com/doc/101828233/The-US-Teenage-Pregnancy-Rates-1 Published August 2, 2012. 36.http://www.scribd.com/doc/102384514/A-Second-Look-at-the-US-TeenagePregnancy-Rates-Evidence-for-a-Predominant-Natural-Law Published August 8, 2012.
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Government and National Debt 37.http://www.scribd.com/doc/104663110/The-United-States-Postal-Service-ATest-Case-to-Understand-the-US-Government-Inefficiencies-and-Budget-CutsAhead United States Postal Service: A Test case for government inefficiencies, Published Sep 2, 2012. 38.http://www.scribd.com/doc/104833993/Are-You-Better-Off-Than-You-WereFour-Years-Ago Published Sep 4, 2012. Briefly highlights the slowing down the debt growth rate as we cross the $16 T mark. The national debt could have been as high as $19.5T on August 30, 2012 if the high rate at the end of the Bush presidency had continued. 39.http://www.scribd.com/doc/104803209/The-Rate-of-Growth-of-the-NationalDebt-The-Obama-versus-the-Bush-years Published Sep 3, 2012. The importance of the debt growth rate h = dD/dt, as opposed to the debt level D, is emphasized. The significance of the debt growth rate does not seem to have been recognized, at least in the popular discussion. 40.http://www.scribd.com/doc/104677653/The-US-National-Debt-Brief-HistoryGood-News-The-Rate-of-Growth-of-the-Debt-is-Slowing-Down , Published Sep 1, 2012. Brief summary of the historical debt data starting with President George Washington with attention being drawn to the recent slowing down of the debt growth rate. The importance of the debt growth rate, as opposed to debt levels, does not seem to have been recognized, at least in the popular discussion. 41.http://www.scribd.com/doc/104659108/The-US-National-Debt-and-the-LongTerm, first published on June 17, 2011, and republished Sep 1, 2012. 42.http://www.scribd.com/doc/104659448/The-US-National-Debt-RetirementProgram, first published on June 23, 2011, before the debt default crisis which led to lowering of the US rating, republished Sep 1, 2012. 43.http://www.scribd.com/doc/104662291/A-Radical-Proposal-to-PermanentlyReduce-the-Unemployment-Rate, first published on October 13, 2011, republished Sep 1, 2012. 44. http://www.scribd.com/doc/104661297/Is-Taxing-the-Rich-an-Option-forBudget-Deficit-Reduction, first published on July 3, 2011, republished Sep 1, 2012.

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About the author V. Laxmanan, Sc. D.

Email: vlaxmanan@hotmail.com The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by
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Planck, referred to here as the generalized power-exponential law, might actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law, as we see here, and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton.

Cover page of AirTran 2000 Annual

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