[freudling]

I had mentioned some months back about how myself, and others around the Web, were concerned with Amazon's low margin business. I talked about how going global and expanding meant a lot more costs and risk, and that in Amazon's annual reports, they talk about this a lot.

I just saw their most recent quarterly report, and it's alarming. Yes, I wish I had a company doing $10 billion in sales, with increased sales year-over-year. That's all great. However, they have half of 1% profit margins. Their operating income, despite increased sales, is down 73% year-over-year. To me Amazon has always been just another junk retailer, a glorified Ebay. But in the US, they have a lot of action and strong brand recognition.

Interesting though: their margins are super razor thin. It could go really good or bad for them, really, really fast. Just ask HP about low margins...

Amazon net sales up, net income down for Q3 2011 -- Engadget

[The Final Dakar]

Originally Posted by freudling 

I just saw their most recent quarterly report, and it's alarming. Yes, I wish I had a company doing $10 billion in sales, with increased sales year-over-year. That's all great. However, they don't even have half of 1% profit margins. Their operating income, despite increased sales, is down 73% year-over-year. To me Amazon has always been just another junk retailer, a glorified Ebay.

They put a bunch of money into their kindle Fire and long-term investments. So it's not the margins, it's the R&D.

[SpaceMonkey]

How do their margins compare to other retailers? Margins in retail are always relatively low.

[The Final Dakar]

[freudling]

Originally Posted by The Final Dakar 

They put a bunch of money into their kindle Fire and long-term investments. So it's not the margins, it's the R&D.

If their margins are .006% this year, and last year they were 73% more... when they didn't spend "money on the Kindle Fire and long-term investments" then that means that their margins last year were around 1%. How is this good?

[freudling]

By the way, Amazon loses money on every sale of the Kindle Fire. The little money they make from each customer on their low margin content won't change much of their bottom-line. Amazon = K-Mart.

[Sealobo]

Kindles to AMZN is like Apple Stores to AAPL. AMZN wants to sell contents through kindles just like AAPL wants to sell iWhatever through the Apple Stores.

[turtle777]

Apple should buy all the Kindles, and drive AMZN loses through the roof

-t

[turtle777]

Originally Posted by Sealobo 

Kindles to AMZN is like Apple Stores to AAPL. AMZN wants to sell contents through kindles just like AAPL wants to sell iWhatever through the Apple Stores.

Apple never sold products or services at a loss to subsidize another product.
Apple Stores are highly profitable for Apple.

I think we have seen plenty of attempts in tech to sell a product at a loss in hopes of helping another product. It almost never works.

-t

[besson3c]

Originally Posted by The Final Dakar 

They put a bunch of money into their kindle Fire and long-term investments. So it's not the margins, it's the R&D.

Not only that, but Amazon EC2 which is huge. For starters, it powers Dropbox, it is rumored to help power iCloud, and of course is used with the Kindle too.

[besson3c]

What is Amazon's reported profits with EC2?

[Sealobo]

Originally Posted by turtle777 

Apple never sold products or services at a loss to subsidize another product.

Apple Stores are highly profitable for Apple.

I think we have seen plenty of attempts in tech to sell a product at a loss in hopes of helping another product. It almost never works.

-t

well... depends on how you look at it; unless AAPL spins off the entire retail operation, Apple Store is a cost center. Apple Stores are creating sales for Apple, but can't really say that they're "highly profitable" because the stores are not financially independent as a business.

accounting can be confusing.

[turtle777]

Originally Posted by Sealobo 

accounting can be confusing.

Maybe for you. I'm sorry for that

Originally Posted by Sealobo 

well... depends on how you look at it; unless AAPL spins off the entire retail operation, Apple Store is a cost center.

False dichotomy. You can run a profit center even w/o spinning off the retail operation.

At any rate, do you have any sources for the idea that Apple Stores are run as a cost center ? And even if it was, it would shift the profit to another area of the corporation.

When Apple previously sold Macs to independent 3rd party retailers, they sold them at a lower (wholesale) price, to allow for S&D and profit of the retailer.
Now, that S&D and profit become Apple's own margin (minus their own S&D cost).

There is no doubt that Apple shifted Sales from 3rd party to company owned stores.

-t

[Sealobo]

Originally Posted by turtle777 

False dichotomy. You can run a profit center even w/o spinning off the retail operation.

-t

hm... i didn't say you can't. I am only saying that no one can really judge the profitability of the Apple Stores independently because the stores' operation is hardly independent. That was my point.

On page 32 of AAPL's latest quarterly financial filed to the SEC, it states that the Retail expense was booked along with AAPL's R&D and other general/administrative expense.

The Operating Income from the Apple Stores was however reported individually (as in AAPL gave the breakdown).

You can't really tell what kind of margin AAPL is "allowing" the Apple Stores to have regarding Apple's own products.

[turtle777]

Sure, I think we agree.

Overall, they SHOULD get a positive impact *somewhere* from pulling sales from 3rd party stores into their own.

-t

[Waragainstsleep]

I would be VERY surprised if Apple Stores weren't turning a hefty profit.

As for selling tech at a loss to push services, cellular phones, TV set-top boxes and broadband modems all spring to mind as successful examples.

[turtle777]

Originally Posted by Waragainstsleep 

As for selling tech at a loss to push services, [...]broadband modems all spring to mind as successful examples.

Not in the US.

All my broadband providers would rent out a box to you, at a quite high price (like $5-7 / month). You can buy those boxes for less than a year's rent price on the open market.

-t

[OldManMac]

Originally Posted by Waragainstsleep 

I would be VERY surprised if Apple Stores weren't turning a hefty profit.

They are. Poor analogy.

[freudling]

Apple Stores are profitable. They profited $679 million last quarter, over 10 times more money than Amazon's entire business profit for their last quarter. Apple's total profit for the quarter was $6.62 billion. At Amazon's approximately $100 million in profit per quarter, Apple profits more in 1 quarter than Amazon does over the span of 16 years!

[Waragainstsleep]

Originally Posted by turtle777 

Not in the US.

All my broadband providers would rent out a box to you, at a quite high price (like $5-7 / month). You can buy those boxes for less than a year's rent price on the open market.

-t

They used to sell them to you in the UK. Nowadays they give you the modem/router. Usually they have wifi which they call a feature of their broadband package. Some of them even try to force you to use their box instead of your own.

[besson3c]

If Amazon is investing in EC2 and that is why their profit margins are low, that might be a good long term strategy. That infrastructure might prove to be vitally important to computing in the years to come.

[freudling]

Originally Posted by besson3c 

If Amazon is investing in EC2 and that is why their profit margins are low, that might be a good long term strategy. That infrastructure might prove to be vitally important the computing in the years to come.

I don't think you've been paying attention. This is NOT why Amazon's profits are so low. They've been low for years. The reason they are low is because Amazon is a low margin company. Now, they're virtually giving away their Kindles, losing money on the Fires.

My prediction is that this may not work. I tend to agree with Jobs: the recession could continue for another 10 years. I think the reason why Apple is successful is because they make the best products. Even though they are expensive, Apple sells them because it's what consumers want, and was one of the only retailers to show growth at the height of the recession. People are willing to penny pinch and do without things to have iPhones and iPads. But they won't be spending money on junk, which is what Amazon sells, albeit a decent eReader if you're into eReaders.

In other words, what I'm saying is that you can give away devices or lose money on them, but that doesn't mean you're going to make any money. If people don't have money, good luck generating revenues off them after you take a bath on selling/giving away a device to them. The type of person out there looking for deals... Groupon... retailers/restauranteurs have been disappointed because the people that come in are so cheap... they don't make any money off of them... they just come once with these coupons and never return... don't order extras, etc.

I think Bezos is walking a fine line here, and I'll be interested to see how it all turns out.

[besson3c]

Originally Posted by freudling 

I don't think you've been paying attention. This is NOT why Amazon's profits are so low. They've been low for years. The reason they are low is because Amazon is a low margin company. Now, they're virtually giving away their Kindles, losing money on the Fires.

My prediction is that this may not work. I tend to agree with Jobs: the recession could continue for another 10 years. I think the reason why Apple is successful is because they make the best products. Even though they are expensive, Apple sells them because it's what consumers want, and was one of the only retailers to show growth at the height of the recession. People are willing to penny pinch and do without things to have iPhones and iPads. But they won't be spending money on junk, which is what Amazon sells, albeit a decent eReader if you're into eReaders.

In other words, what I'm saying is that you can give away devices or lose money on them, but that doesn't mean you're going to make any money. If people don't have money, good luck generating revenues off them after you take a bath on selling/giving away a device to them. The type of person out there looking for deals... Groupon... retailers/restauranteurs have been disappointed because the people that come in are so cheap... they don't make any money off of them... they just come once with these coupons and never return... don't order extras, etc.

I think Bezos is walking a fine line here, and I'll be interested to see how it all turns out.

I don't understand your point and I don't think you understand mine.

Any company that offers multiple products is going to have fluctuating profits coming from different areas at different times. You are fixated on the Kindle, but I'm saying that maybe Amazon's strategy involves EC2 far more than you think. Maybe Amazon expects their overall profits to pick up as EC2 grows? If they do, the low profits of the Kindle might be a moot point, the Kindle might be seen as a catalyst to grow and test EC2, like the iTunes Music Store is a means to grow the iPod infrastructure...

[Waragainstsleep]

I think Freudling has a point. Risky business tactics and low profits are not a great mix.

Taking risks giving away hardware at a loss when you could/should be consolidating what profit you can to offset against investment and running costs for the more robust data centre based aspects of the business during tough economic times seems unwise to me.

[besson3c]

Originally Posted by Waragainstsleep 

I think Freudling has a point. Risky business tactics and low profits are not a great mix.

Taking risks giving away hardware at a loss when you could/should be consolidating what profit you can to offset against investment and running costs for the more robust data centre based aspects of the business during tough economic times seems unwise to me.

Isn't a time when profits are low the right time to be taking calculated risks?

[Waragainstsleep]

Maybe. Personally I think that trying to sell electronic book readers when most gadget lovers already have two or three devices each that they can read books on during a time when people are saving their money for things which are either necessary or highly prized is a hell of a risk.

For me spending money on cloud infrastructure is the calculated risk. It'll start paying off sooner or later, but in case its later you shouldn't be taking bigger risks when you have already restricted your operating flexibility.

[freudling]

Originally Posted by Waragainstsleep 

Maybe. Personally I think that trying to sell electronic book readers when most gadget lovers already have two or three devices each that they can read books on during a time when people are saving their money for things which are either necessary or highly prized is a hell of a risk.

For me spending money on cloud infrastructure is the calculated risk. It'll start paying off sooner or later, but in case its later you shouldn't be taking bigger risks when you have already restricted your operating flexibility.

[freudling]

Originally Posted by besson3c 

I don't understand your point and I don't think you understand mine.

Any company that offers multiple products is going to have fluctuating profits coming from different areas at different times. You are fixated on the Kindle, but I'm saying that maybe Amazon's strategy involves EC2 far more than you think. Maybe Amazon expects their overall profits to pick up as EC2 grows? If they do, the low profits of the Kindle might be a moot point, the Kindle might be seen as a catalyst to grow and test EC2, like the iTunes Music Store is a means to grow the iPod infrastructure...

Bess my point is that I've read Amazon's annual reports and quarterly reports going back years. I just studied their 2010 Annual Report in detail the other day as well, so it's all pretty fresh in my mind. The point is that razor thin margins are nothing new for Amazon. They've had razor thin margins for years. It's not investment in EC2 that's causing them to have low margins. It's their entire approach to business and business model that's causing them to continue to have low margins: very low margins.

We're talking about a company teetering on the brink of losing money. This economy sucks. As others have mentioned in this thread, making a bet that people are going to buy dedicated eReaders by the bushel, and then buy a bunch of content from you, when the iPhones and and the iPads, and the other well-to-do smartphones are what everyone's buying. And these things are everybody's multi-purpose devices.

This is a huge risk to sell at cost and sell at a loss when you're profit margins are already virtually zero. "I'm just saying'"... It's a bit alarming, and I raised this issue about Amazon months ago. And I'm not the only one concerned about Amazon. People are starting to talk about it. As soon as people realized that Bezos was Bullshitxing by keeping up the Kindle as the best selling product on Amazon for so long, the reality is that there's a loss of confidence with the company... not just because of that, but by virtue of their earnings.

I'm telling all of you here again: just wait until the Retina iPad 3 and iPhone 5 with larger screen. Nobody is going to buy the Fire.

[Waragainstsleep]

How many people have a Kindle but not a smartphone? I'd bet not many.

[freudling]

Go take a look at the Nokia Lumia from today: the N9 running WP7. It's got a huge, gorgeous 3.7" display. This is where things are heading. Not tweener tablets like the Fire or dedicated eReaders.

[nonhuman]

If Amazon's profit margins have been incredibly thin fora very long, and yet they manage to keep turning a profit despite everyone wailing about how bad the economy is lately, then perhaps their business model is slightly more resilient than everyone seems to think.

[nonhuman]

Also, I've never, until now, heard anyone suggest that the point of the Kindle line of products is to be a direct money maker for Amazon. Everyone, since the day the first Kindle was announced, has always assumed that it's purpose was purely and simply to get people buying content from Amazon. The Kindle Fire is no different, generally, and the only real difference is that it's designed to encourage people to consume Amazon's video and music content as well as text.

[Wiskedjak]

freudling,
why do you care so much about this?

[mduell]

Amazon has been holding their profit margin to nearly 0% for years with aggressive expansion - and it's paying off, revenues are through the roof.

[OldManMac]

Originally Posted by mduell 

Amazon has been holding their profit margin to nearly 0% for years with aggressive expansion - and it's paying off, revenues are through the roof.

You forgot the sarcasm tag.

[freudling]

Originally Posted by nonhuman 

If Amazon's profit margins have been incredibly thin fora very long, and yet they manage to keep turning a profit despite everyone wailing about how bad the economy is lately, then perhaps their business model is slightly more resilient than everyone seems to think.

They're now selling devices at a loss. They *must* make money off of content: now they're under the gun to do so.

[freudling]

Originally Posted by nonhuman 

Also, I've never, until now, heard anyone suggest that the point of the Kindle line of products is to be a direct money maker for Amazon. Everyone, since the day the first Kindle was announced, has always assumed that it's purpose was purely and simply to get people buying content from Amazon. The Kindle Fire is no different, generally, and the only real difference is that it's designed to encourage people to consume Amazon's video and music content as well as text.

You're leaving me scratching my head. This is what everyone assumes. That the Kindle is a vehicle to revenues. Without the Kindle, people aren't tied to Amazon for books. Give the device to people dirt cheap, and hope they buy content... that's Amazon's mantra.

It's the *hope* that has some people concerned.

[freudling]

Originally Posted by Wiskedjak 

freudling,
why do you care so much about this?

Is this a tech forum?

[Wiskedjak]

Originally Posted by freudling 

Is this a tech forum?

Sure, where we talk about cool new gadgets and what can be done with them, but you say you're "concerned with Amazon's low margin business". Why are you "concerned"? If their risk doesn't pay off, then they go out of business and a new venture emerges to fill the void. Capitalism. I can understand that investors and employees would be concerned, but why are *you* "concerned"?

You say you've "read Amazon's annual reports and quarterly reports going back years" and have "studied their 2010 Annual Report in detail". What makes you take such a strong interest in Amazon's business?

[nonhuman]

Originally Posted by freudling 

You're leaving me scratching my head. This is what everyone assumes. That the Kindle is a vehicle to revenues. Without the Kindle, people aren't tied to Amazon for books. Give the device to people dirt cheap, and hope they buy content... that's Amazon's mantra.

It's the *hope* that has some people concerned.

The key word in my statement was direct. Amazon does not expect to make money selling Kindles. They expect to make money selling content for Kindles (ETA: which works just as well if it's a Kindle Fire or the Kindle app on your iPad).

[besson3c]

Originally Posted by freudling 

I'm telling all of you here again: just wait until the Retina iPad 3 and iPhone 5 with larger screen. Nobody is going to buy the Fire.

And this will not upend Amazon's business. The Kindle is probably just a little experiment, not a key product.

[freudling]

Originally Posted by nonhuman 

The key word in my statement was direct. Amazon does not expect to make money selling Kindles. They expect to make money selling content for Kindles (ETA: which works just as well if it's a Kindle Fire or the Kindle app on your iPad).

Right, that's what we all understand and see as their business model here. What I'm saying, what some others are saying... is that Amazon might be surprised this time around. They might not get a lot of revenues out of people because 1) People don't have as much money with the global recession. Yes, I know, the recession has been around for some years now, but it's not going away. Reason 2 may perhaps be deeply linked to why people may not be spending much money with Amazon, or even buying their Kindles. 2) Smartphones. Smartphones have exploded and serve as general purpose devices. In many instances, they compete with Kindles (iBooks App on the iPhone/iPad). These are the devices people use and carry everyday, not Kindles. Thinking people, with limited budgets, are going to be a "third" or "fourth" device, when everybody's buying smartphones and iPads, could be foolish. 3) The iPad. I don't have to explain why this multi-purpose tablet computer has been and continues to be a threat to the Kindle.

I think the Kindle eReader will be relegated to a very niche market (Old Americans vacationing in Mexico), and the Fire will sort of burn out quickly after an initial rush.

We'll see what happens.

[ort888]

That what is so weird about it. They sell it at cost, hoping to recoup their costs in content sales... but how good are content sales? Apple only makes a sliver of it's profit on content sales. Apps, songs and movies are sold practically at cost.

I mean, I know this is a long game they are all playing, but in the short run, it seems like Amazon could be losing a lot of money for a long time. Then again, that's pretty much what they've been doing for a long time.

[freudling]

Originally Posted by ort888 

That what is so weird about it. They sell it at cost, hoping to recoup their costs in content sales... but how good are content sales? Apple only makes a sliver of it's profit on content sales. Apps, songs and movies are sold practically at cost.

I mean, I know this is a long game they are all playing, but in the short run, it seems like Amazon could be losing a lot of money for a long time. Then again, that's pretty much what they've been doing for a long time.

You've partially nailed it. Everybody loves to waves their hands and stuff and be the antithesis. But the iPad isn't going anywhere, and neither is the iPhone. Out of all the closed businesses and crashed industries in this global meltdown, these are some of the few things that people are spending the little money they have on. Because they're very useful to people's lives.

Amazon is a Website, and a bloated one at that. When you look at what I discussed earlier, how it would take Amazon 16 years to reach Apple's profits in 1 quarter, it's not hard to see where the money from consumers is going.

Ask yourself this: why doesn't Apple make a black and white eReader? It's just niche market stuff, that's why, and way too limited. Now Amazon is going into the multi-touch tablet fray with the Fire, and losing money on every single sale. I think it's a mistake, and a big one. I could be wrong though. Time will tell.

[Wiskedjak]

Originally Posted by freudling 

I'm telling all of you here again: just wait until the Retina iPad 3 and iPhone 5 with larger screen. Nobody is going to buy the Fire.

And, give that Amazon is losing money with each Fire, they're probably just as happy if you use Kindle on the iPhone or iPad. But, if you're considering a 7" colour-screen ereader, Amazon would probably prefer it if you didn't buy a Nook.

I also find it funny that you're still desperately holding on to the myth of a larger screen iPhone.

[Wiskedjak]

Originally Posted by freudling 

Ask yourself this: why doesn't Apple make a black and white eReader?

Probably because Apple isn't seriously in the eBook market.

Originally Posted by freudling 

Now Amazon is going into the multi-touch tablet fray with the Fire, and losing money on every single sale. I think it's a mistake, and a big one.

So, you think it's a mistake. That's nice. Amazon clearly thinks it's a good idea. One of you will be wrong and one will be right. But, why do you continue to harp on it?

[freudling]

Originally Posted by Wiskedjak 

Probably because Apple isn't seriously in the eBook market.

Ha. Funny. Of course they are. They even highlighted and pronounced the fact that the iBooks Store has now had over 180 million downloads. Apple IS in the eBook business: they have a global eBook Store called the iBooks Store, and has been shown in surveys and downloads to be in the top 4 favourite Apps on the iPad for adults.

[Wiskedjak]

Originally Posted by freudling 

Ha. Funny. Of course they are. They even highlighted and pronounced the fact that the iBooks Store has now had over 180 million downloads. Apple IS in the eBook business: they have a global eBook Store called the iBooks Store, and has been shown in surveys and downloads to be in the top 4 favourite Apps on the iPad for adults.

I said "isn't seriously in the eBook market".

180 downloads, but how many of those downloads were sales? Calling out "downloads" rather than "sales" makes me a bit suspicious.

[Wiskedjak]

I still don't get why you're so concerned about Amazon's business models. It seems to me that you'd be *happy* to see them fail.

[freudling]

Originally Posted by Wiskedjak 

I said "isn't seriously in the eBook market".

180 downloads, but how many of those downloads were sales? Calling out "downloads" rather than "sales" makes me a bit suspicious.

Blah blah.