Amazon: From A to Z
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world’s largest online retailer, Amazon (NASDAQ: AMZN), recently reported their second quarter results. The news wasn’t as bad as Nokia’s billion dollar loss or as eye catching as Microsoft’s $6 billion write off, however Amazon's results weren’t particularly good either. Since going online in 1995, Amazon has undergone several strategic shifts; they started out as an online bookstore. Amazon then diversified into a full throated online retailer and has knocked it out of the park becoming the world’s largest book seller and largest online retailer. Amazon is now undergoing another strategic shift. In addition to their retail operations over the past few years, Amazon has jumped into both consumer electronics and digital services. These new initiatives will define Amazon going forward, especially as digital services have the potential to become a high margin business, something Amazon has never had.
Amazon reported net income of $191 million, or one cent per share, down 96% year over year. Part of this decline was due to an estimated $65 million loss on the acquisition and integration of Kiva Systems, which Amazon purchased to help automate their distribution centers. Unfavorable foreign currency exchange rates also helped lower Amazons profits. Net sales rose by 29% to $12.89 billion, and by 32% excluding currency exchange rates. During their earnings call, Amazon stated that they had 180 million active customers, but they did not elaborate on customer growth. They did announce that third party sellers are making up more of the sales on Amazon; they accounted for 40% this quarter, up from 39% last quarter and 36% this quarter last year. Amazon has opened six of their planned 18 new distributions centers, so money will continue to flow into new infrastructure for what it does best, selling stuff.
Amazon is historically very tight lipped on what internal figures they release with their earnings; customer growth for example is almost never released. In this tradition, Amazon rarely if ever releases specific sales figures when it comes to their Kindle devices. This continued this quarter when they stated that the Kindle Fire remained the bestselling item Amazon sold, without giving actual sales. There are a lot of items sold on Amazon and most tablets are either purchased directly from the manufacturer, or from a cell phone carrier if there is a subsidy offered with them. Additionally because Amazon makes the Kindle devices Amazon.com is one of the only places to purchase a Kindle, though Amazon does have some deals with brick and mortar retailers. The last reason for the Kindle’s continued success on Amazon.com is that Amazon has a large advertisement for their Kindle’s on the homepage that millions of people see daily. However this may be the last quarter the Kindle Fire sees such excellent sales.
Google (NASDAQ: GOOG) recently launched a $199 tablet, the Nexus 7. The Nexus 7 is more powerful than the Fire, running a better operating system, directly supported by Google and has the Google digital services built in. One model of the Nexus 7, the slightly higher end 16GB model for $249, sold out for a time, and the $199 8GB model is in short supply at many of Google’s brick and mortar partners. Additionally, rumors have been swirling recently about Apple (NASDAQ: AAPL) launching an iPad ‘mini.’
This rumored 7.85 inch tablet would feature all of Apple’s elegance with a lower price point, and a similar form factor to the Kindle Fire. Estimates of Kindle Fire sales vary but the competition that the Fire faces is about to get much stiffer. In addition to the iPad Mini rumors, there are also rumors that Amazon is working on a larger Kindle Fire to compete with the current iPad. The larger tablet market is also set to get more competitive as Microsoft (NASDAQ: MSFT) throws their hat into the ring with their Surface tablets. The first of the tablets should launch in October alongside Windows 8, and the second model should come three months later. Intel reported that they are watching 20 Windows 8 based tablets that should be launching in late 2012 or early 2013.
Beyond building a good piece of hardware with a decent operating system, the content available on these tablets will make their success--or failure. Google and Apple have the developer support with hundreds of thousands of applications, and both companies offer content through their stores. At the moment, the content through Apple’s iTunes is superior to Google’s Play store and Google is working hard to build up their offerings. Microsoft currently does not have the application support for their Windows 8 tablet edition nor do they have a content store similar to iTunes or Google Play. However the common core between Windows Phone 8 and Windows 8 will make Microsoft a worthy competitor.
Amazon’s content offerings are good, in fact they are excellent. Amazon offers a music service, TV and Movie streaming service, app store and digital storage locker. With their Amazon Prime two day shipping service customers get access to their streaming TV and Movie library with over 18,000 titles for no additional charge and Amazon gives away 5GB of cloud music storage. These services were a big selling point for the Kindle Fire and they are the way Amazon plans to make money from the Kindle Fire as they are selling the Fire at cost. Amazon’s digital services are also available on traditional computers through the web and other Android devices through Amazon apps.
Amazon continues to invest in their retail business, which is the lion’s share of their revenue while at the same time diversifying into digital and consumer electronics. They also run a major online hosting service called S3. Amazon faces stiff competition in the tablet market and they face competition for their digital services from non-tablet making companies like Netflix, Hulu and Wal-Mart’s video streaming service Vudu. As a bookseller and then an online retailer Amazon is not afraid of competition and knows how to run a business with a razor thin margin. The higher margin digital services Amazon offers should somewhat compensate for the lack of margin on the current Kindle Fire, and going forward Amazon has the leadership and strategy to compete.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.