11/1/2011 7:28 PM ET|
Is Amazon about to catch fire?
Infrastructure built for customers
Above all, Amazon is investing heavily in keeping customers happy. A big part of why Amazon is popular is that its site is so easy to use. Your stuff arrives on time and usually in good shape. And if it is broken, or you want to exchange it, the process is fairly painless. You don't even have to pick up the phone, a real blessing in this era of highly annoying and time-wasting phone trees.
With Amazon growing so rapidly, posting sales growth of 39% a year and customer growth of 20% a year over the past four years to hit 152 million in October, the company needs to invest heavily in infrastructure just to stay ahead of all those customers.
"We're seeing the best growth which we've seen since 2000 . . . . And so with this strong growth, we're investing in a lot of capacity," finance chief Tom Szkutak said in Amazon's Oct. 25 conference call. "We remain heads down, focused on driving a better customer experience...We believe putting customers first is the only reliable way to creating lasting value for shareholders."
Amazon is adding 17 fulfillment centers to its base of 52 centers where people package and ship orders. And it may well add the same number next year, believes Deutsche Bank analyst Jeetil Patel, who has a buy rating and a 12-month price target of $246 on the stock. Indeed, Patel takes the aggressive investment in capacity as a very bullish statement by Amazon that "future prospects look solid, especially internationally, where a majority of these centers were opened."
Morningstar analyst R.J. Hottovy predicts Amazon sales will grow 28% a year, on average, over the next four years.
A bite of Apple's action
For Amazon, investing for the long term isn't just about keeping customers happy. To put it bluntly, it's about keeping them away from Apple.
Consumers love Apple devices, of course, because they're cool and easy to use. But from a competitive perspective, they're also a trap, as well. For all Steve Jobs' affable alternative aura, we learn from Walter Isaacson's just-published biography that he was also a bit of control freak. This is reflected in the Apple ecosystem.
Apple customers load their stuff into an iTunes library, then download tons more stuff from iTunes store. Customers with a variety of Apple gadgets tend to stay inside the virtual iTunes mall, and Apple controls who can sell there and who can't.
Amazon risks getting shut out of the digital content shopping mall as consumers increasingly migrate from desktops and laptops to tablets, a segment currently dominated and controlled by Apple. And it can't let that happen, says Eric Johnson, a professor at Dartmouth College's Tuck School of Business, and the director of the Glassmeyer/McNamee Center for Digital Strategies. "The strategic consequences are way too high."
So Amazon has invested heavily in a line of tablets meant to challenge the iPad -- starting with the Kindle Fire.
To date, Amazon has sold e-readers, Kindles that let users read books on a black-and-white screen. In contrast, the Fire has a color LCD display and will provide access to streaming movies and TV shows. Users also get access to downloadable songs, books and magazines, all of which can be stored in Amazon's cloud, a vast network of computers accessed via the Web.
The Fire's Silk browser pushes computing tasks to the cloud, making it run faster. And here's the kicker: The browser naturally makes it very convenient to buy digital content, and other stuff, from Amazon.
Given how big a hit the iPad has been, will consumers go for the Kindle Fire? I think it's a no-brainer.
First off, Amazon has a great record with its Kindle e-readers. Growth has been great. Amazon is secretive about device sales data, so I turned to IDC, which makes sales estimates based on intelligence gathered from supply-chain contacts. As of the end of June, Amazon had shipped 6 million of the devices this year. So the company already was well on its way to beating last year's shipment total of 6.9 million. In the second quarter, Amazon sold 52% of all e-readers, says IDC. In short, Amazon clearly knows how to sell devices.
And with the Kindle Fire, Amazon is following its forever clock rule, which will virtually assure good sales. It's almost giving away the device. The Fire's price, at $199, is well below the $499 starting price for the iPad. It is also as much as $55 below what it costs Amazon, when you include manufacturing and marketing, says Deutsche Bank's Patel.
That's fine with Amazon, because it thinks it will be able to sell enough books, magazines and music to cover its costs and earn a profit over the lifetime of the device. "Amazon is, in effect, seeding the market with their devices," says Danielle Levitas, vice president of IDC's consumer, broadband and digital marketplace division.
"This is typical Bezos," says Davidowitz. "He is buying market share. Isn't that his record with everything he does?"
Essentially, Amazon's approach is the flip side of Apple's. Apple makes money via premium prices on devices, and not so much on content. In contrast, Amazon is selling devices at a loss, with an eye toward making money on content.
JPMorgan Chase (JPM, news) analyst Doug Anmuth thinks Amazon will sell 5 million Kindle Fires in the fourth quarter. For context, Apple shipped 11.1 million iPads in the third quarter, according to IDC. In other words, in a single quarter Amazon will vault into the position of being a serious iPad competitor.
To be clear, the Fire is no iPad substitute. For one thing, the Fire has a seven-inch screen, compared with the iPad's 10-inch screen. But Tom Mainelli, a research director at IDC, thinks Amazon will roll out a Kindle Fire with a 10-inch screen in 2012. "I think Amazon ships at least half as many units as Apple, in 2012, if not more," he said.
Others burned by Fire
While primarily designed to take on Apple, Amazon's Fire is going to burn several innocent bystanders in the process. Things don't look too good for the Nook Color media tablet offered by Barnes & Noble (BKS, news). It costs $50 more than the Fire, and it doesn't offer such deep access to content or cloud storage. The BlackBerry PlayBook, the 7-inch tablet from Research In Motion (RIMM, news), also looks like a potential victim, given its now-absurd price tag of $450.
Amazon looks set to do even more damage to established players in digital streaming content, like Netflix (NFLX, news). This is a huge, early-stage consumer trend. There are currently 9 million households in the U.S. watching digital streaming content like movies, a twofold increase over last year, says Levitas of IDC. Watching streaming digital content, as opposed to DVDs, will continue to grow rapidly as people become more comfortable with it. The Kindle Fire will no doubt help that happen -- and put more consumers in the hands of Amazon, instead of Netflix, in the process.
All of this means Amazon is being punished by the market for investments that look to start paying off as soon as next year. Remember the forever clock rule, ignore the naysayers, and an investment today could pay off for years to come.
At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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Great column! I have had serious discussions with friends about why I think Apple will fade (Cook is a manager, not an inspired leader like Jobs) and Google will have serious issues ahead (they own marketshare but not content, and no consumer will pay Google directly for what they have always given away for free).
I shop - a lot. Always have, probably always will, and have the money to do it even in these uncertain days. The Net is my preferred method to shop, and Amazon is THE first place I turn to. I have not been in a mall in two decades. Yup, I'm Amazon Prime and it's worth every penny to me. These days less than 30% of my orders with Amazon are books; the remainder are Marketplace orders.
I have a lot of Millennial friends. Some use Apple, some don't; but every one of them uses Google and Amazon. The Netflix debacle has many of them seriously considering signing up for Prime to see if they can drop their Netflix and cable accounts. Amazon was smart - no, brilliant - to design better ways to sell content and get their fees from both consumer and vendor. Bezos is the real genius, not Jobs....oh, and he's a better manager than Jobs was, too.
for billcccc please learn to spell---in 3rd grade you learned to drop the y and add ed the word it TRIED not tryed even at the bottom of the post there is a check spelling use it.
to RPM---umm you pay the sales tax not the store, and since Amazon is in many different states which one should they pay sales tax on? and if they want they could just move to South Dakota or another state that does not have sales tax.
trkntrlman---if you buy something from Wal-Mart or a local store and you open it up and find it used you would get into you car and drive yourself to the store to return it, you would not demand a new one until you return the used one....Amazon is just like a store return it then you will get your new one.
Man I think Amazon is a great company I buy there all the time wish I had the money to buy enough of their stock to matter but 200+ is a little rich for my blood I mean 100 shares is 20,000 dollars I have to work with smaller dollars than that. For instance how about Spanish Broadcasting Systems. SBSA with a P/E of 1.43 Beta of 1.21 and earnings per share of $0.72...whats not to like? A Hispanic media and entertainment company which owns and operates 21 radio stations in New York, Los Angeles, Miami, Chicago, San Francisco and Puerto Rico. SBSA is based in Coconut Grove Florida and also owns 2 T.V. stations reaching 5.6 million people. This stock is currently selling for around a dollar a share. Earnings of 72 cents a share! Thats what gets me. Better than lots of stocks I've looked at. An undescovered gem if ever I saw one. By the way they have been around since 1983 and the 52 week high was $12.00. Check it out for yourself!
Sales Tax ! Ah Yes. Arizona like 22 other states is requiring (2011 is the first year in Arizona) that you report and pay sales taxes on your online purchases ~ on your individual income tax return! Amazon has reversed its position regarding a national solution to this sales tax issue (looks like they are going to eventually charge, collect and remit sales tax ~ they are looking to profit by charging a fee for performing the sales tax compliance for all the smaller companies selling on Amazon).
From an investors standpoint ~ this cannot help Amazon sales. Imagine the shock customers will have when they complete their state individual income tax returns and realize they owe sales tax on their Amazon purchases. This will probably help the Wal-Marts all the way down to the local merchants as it levels the playing field.
If Amazon continues to not back there buyers, and allows their seller to get away with selling Used Items as new, they won't last to long. I purchased a NEW item from the seller and Received a used one . when confronted the seller agreed to Send me a new item along with an RMA and return postage...I'm still waiting for my new Item. When I receive it He will get the old one back...
But he refuses to send the new Item, after agreeing to do it..
Amazon refuses to honor their guarantee unless i return the Item, thus leaving me in the cold, they screwed me once, not again...They need to send a new Item.... More proof that the internet will give you the shaft, if your not careful... Amazon could care less, they just want the bucks......
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