Are Kindle Ads A New Direction For Amazon?
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The next time you buy a Kindle from Amazon.com (NASDAQ: AMZN) you may have to put up with ads on the welcome screen.
The Kindle Fire is the most popular product that Amazon currently has on offer. As a result, the company’s advertising department is taking the idea of using the welcome screen on the Kindle Fire as an advertising space very seriously. Basically, ad agencies will only be able to make use of this if they are willing to pay $600,000 for any advertising package that includes an advertisement on the home screen. What will the ad agencies get for that price? The right to have their ad run on the kindle for 2 months and “also include inventory from Amazon's "Special Offers" product”. The higher the price that the ad agency is willing to pay the more ad inventory it will receive. Also, for $1 million, the ad agency could be included in Amazon’s public relations push.
As Amazon has not yet commented on these reports it is still unclear whether this ad service will run on the Kindle Fires currently on the shelves or if it is earmarked for the future version of the device which we should start seeing from July on. To me, it would seem that it is quite a steep price to ask for a product that is not yet on the shelves, so my best guess is that this is something that will run on the current Kindle Fires.
So far we really do not have a lot of information about these ads. The question is whether these ads will appear in a similar way to the ads that already run on Kindle, i.e. when you’re not really using the device. We need more information about this new ad idea before we can come to a final decision about whether or not this is a good or bad move on the part of Amazon.
There are two reasons why this ad story might not get off the ground, though. For one, there is not much of a guarantee at this juncture how the ads will be displayed. Ad agencies are unlikely to pay up for an uncertain amount of ad coverage. Secondly, it may drastically interfere with the consumer experience. People who have owned Kindles for a while do not want to suddenly have to start dealing with advertisements that have never appeared before.
The reason why Amazon is doing this is to deal with a problem that is getting bigger each and every day: the fact that its profits are lagging behind its sales. This has led many, including Greenlight Capital (GLRE) co-founder David Einhorn, to describe the company as a “riddle.” By charging enormous prices to advertise on the Kindle home screen the company may be able to combat this lack of profit from its actual sales. So, although the company’s revenue has increased substantially over the years that it has been in operation, its operating profits have not. The best that can be said for Amazon is that its future is unclear and we don’t know exactly what to expect. If stability and a degree of predictability is what you are looking for in a stock, then Amazon is a questionable option for you to choose.
A look at Amazon.com competitors: While Amazon is almost chasing advertisers away with its high prices for an uncertain service, eBay (NASDAQ: EBAY) Australia has segmented its online shoppers into “tribes” in order to attract more and more advertisers. Basically advertising agencies will be able to see what advertising activity the various “tribes” have been up to in a four week period. This will help them to narrow their focus when launching ad campaigns. eBay has increased its advertising significantly recently.
Barnes & Noble’s (NYSE: BKS) online service, one of the bigger competitors that we will look at here, recently announced that it is the leader in terms of customer satisfaction in that particular industry. Although Amazon offers a similar service to Barnes & Noble, it is not at this point in time, able to compete with the older company in terms of the level of customer satisfaction achieved. This is a very important aspect of a successful company. Look for Barnes & Noble to try and play this leadership in its pitch to sell Nook, its own e-reader against Amazon’s Kindle in a battle to capture more market share. The Nook has historically not faired well against the Kindle, but an annoyance from home screen ads may drive some former Kindle lovers into Barnes & Noble’s hands.
Microsoft (NASDAQ: MSFT) is developing a service that will allow you to migrate from Android to Windows on your Android phone. Basically, with the click of a button the system will find a Windows OS version that closely matches the Android one that you are currently running, and, if no match is found, a note will be made and you will be informed of future versions that do match. The move will help integrate Windows system into a new line of smartphones the consumers who use them.
Last but not least, Cisco (NASDAQ: CSCO) recently experienced a major stock decline. This led Barclays to upgrade the stock from “Equal Weight” to “Overweight” on the basis that, should the economy stabilize, Cisco's stock could rise significantly, and because Cisco has a history of recovering well from such slumps. In addition, shares are unlikely to drop any further than they already have even if the economy continues to get worse and worse in the months to come.
Amazon needs a solid plan to get its profits back to a healthy point. The Kindle has been a hot ticket for the company, and it will need to keep it this way. Ads can be a risky move. If they are integrated into the Kindle user experience well enough they may not drive any customers away and bring in solid ad revenue for Amazon. Keep an eye on customer reviews of any Kindles that come with these new ads.
QueenBC has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.