Category Archives: Amazon

Techpinions Podcast Episode 2

I had the pleasure of recording the second episode of the new Techpinions podcast with Bob O’Donnell and Ben Bajarin on Friday, and the podcast went up on Saturday May 3rd. The podcast focused mostly on Amazon’s potential entry into the smartphone market, and we mentioned a few things on the podcast which I thought would be worth linking to.

  • First off, Ben’s post from this week on Amazon’s smartphone potential
  • Bob referred to this chart I shared earlier this week about the upgrade rate for smartphones among the major US carriers – it’s the second one from the bottom on this piece (more analysis on some of these numbers here)
  • My earlier Techpinions post on the potential impact of changing device subsidy models and how it might hurt carriers on the one hand, and help certain OEMs on the other
  • A tweet from a week or two ago about Amazon’s testing of installment plans for Kindles
  • You can see the number of apps on the Amazon Appstore for Android which are tablet vs. phone optimized about one scroll down in the left sidebar

I’m excited about the Techpinions podcast, because it will give the varied group of people that write for Techpinions an interesting new channel for sharing their views and insight. I’m looking forward to doing future episodes from time to time too.

Thoughts on Amazon earnings for Q1 2014

Amazon’s earnings are sort of the opposite of Microsoft’s: whereas Microsoft’s earnings and especially its 10-Q are packed full of little nuggets and details that you can tease out, Amazon’s earnings are about as sparse as Google’s in terms of finding interesting details. But there’s still some interesting stuff, and I’ve done my best to tease out some of the more meaningful bits below. As a reminder, this is one of a series of posts about major tech companies’ Q1 earnings – you can see them all here.

Profits and growth

The first thing that strikes you when you look at Amazon’s results is how amazingly small its operating margins are compared to all the other leading tech companies. When you plot revenue and operating profit on the same chart, you almost can’t even see the operating profit bars because they’re so small. It wasn’t always quite this bad, though: Amazon long-term marginsThere was a time when Amazon regularly generated 4-6% operating margins (still low by the standards of its peers) but over the last couple of years it’s settled into a very consistent 1% operating margin over 4 quarters. On the other hand, look at that growth line – there’s no other company that grows so consistently and sharply at this scale in the tech industry. This chart perfectly captures Amazon’s current strategy: very high growth at 1% operating margins, with the low margins caused by massive investment in the infrastructure necessary to drive growth. It very much feels as though Amazon recognizes that there’s a limited window of opportunity for it to build the sort of scale and infrastructure necessary to dominate e-commerce before anyone else does, and it’s scraping by with minimal margins in order to capture as much as possible of that opportunity before it closes. Continue reading

Amazon’s Prime Problem

Amazon announced on its earnings call last Thursday that it plans to raise the price of its Amazon Prime service by between $20 and $40, or 25-50%, in the near future. The reason given was that the service launched back in February 2005 at $79, and the price hasn’t risen since, despite rising transportation and fuel costs. But I’m skeptical  of that reasoning and I suspect the price hike is really about all the free stuff Amazon gives away with Prime beyond free shipping. Below, I’ll explain why.

Trends in shipping costs

Much of Amazon’s business is a black box – we have no idea how many Prime subscribers it has, how many Kindles it sells, what it makes from or charges for digital vs. physical media and so on. But shipping is actually one of the few things Amazon is pretty transparent about: each quarter, it reports total shipping costs, total shipping revenues (including some of its revenues from Prime), and the difference between the two. As such, we can calculate what percentage of Amazon’s total shipping costs were covered by shipping revenues, as shown below:

Amazon shipping costs covered by shipping revenueIn its early history, Amazon made a profit on shipping – just over 20% in 1997 and 1998. But it soon realized that discounting shipping (a) removed one of the biggest competitive disadvantages it suffered against brick and mortar retails and (b) therefore was a very cost-effective form of marketing. Interestingly, over time, the net cost of shipping has come to very closely mirror actual marketing spend, even though it is not reported as such: Continue reading