Amazon income drops as Kindle Fire burns margins

Posted:
in iPad edited January 2014
Online retailer Amazon announced on Tuesday lower than expected third quarter earnings and guided for potential losses in the fourth quarter, as its low-margin strategy with the Kindle Fire could pose a threat to future profits.



The company revealed sales for the recent September quarter grew 44 percent year over year to $10.88 billion, but it was unable to convert the growth into earnings. Operating income shrank from $268 million in third quarter 2010 to just $79 million. According to Investor's Business Daily, Amazon's 14 cents a share earnings missed average analyst estimates by 10 cents.



Guidance for the fourth quarter predicted a broad range for operating income -- a lower limit of a loss of $200 million and an upper limit of $250 million in profits. Such a loss would represent a 142 percent decline year over year for the retailer. Net sales for next quarter are expected to be between $16.45 billion and $18.65 billion, with growth between 27 percent and 44 percent



The earnings miss shook investors' faith in the company last Tuesday. Shares of the company slid $10.46, or 4.4 percent, in the day's trading and plummeted $28.26 to $198.89 during after-hours trading.



Founder and CEO Jeff Bezos also announced in the earnings press release that pre-orders for the Kindle Fire tablet have been better than expected, with the company "increasing capacity and building millions more" units than initially planned.



Though Amazon CFO Thomas Szkutak dodged analyst questions of whether the Kindle is affecting margins, he did hint at a low-margin strategy during a Q&A session with analysts to discuss the results, as covered by Seeking Alpha.



"We think about the economics of the Kindle business, we think about the totality," he said. "We think of the lifetime value of those devices. So we're not just thinking about the economics of the device and the accessories. We think about the content.



"We are selling quite a bit of Special Offers devices which includes ads. We're thinking about the advertisement and those Special Offers and those lifetime value. So those are the things certainly that are impacting, as well as investments in other areas impacting our Q4 guidance. So we feel very good about where we are right now and the opportunities that we have in front of us."



Amazon unveiled the first ad-based Kindle with Special Offers in April, then made the subsidized versions the default for new Kindle and Kindle Touch models.







Amazon announced the aggressively-priced $199 Kindle Fire in late September. The 7-inch multitouch tablet goes on sale on Nov. 15.



J.P. Morgan analyst Douglas Anmuth said Kindle Fire production has risen sharply as of late. He expects Amazon to sell 5 million Kindle Fire units in the fourth quarter.



But, some analysts have questioned whether Amazon's strategy will pay off in the long-term. Piper Jaffray's Gene Munster estimates that the company will lose $50 per Kindle Fire sale. J.P. Morgan's Mark Moskowitz said he's "not impressed" with the device, adding that the Fire's low price could actually deter customers.



For his part, Apple CEO Tim Cook responded to the notion that the Kindle Fire represents a threat to iPad sales during the company's most recent quarterly earnings conference call.



"We've seen several competitors come to market to try to compete with the iPad over time. Some had different form factors, different price points. I think it's reasonable to say that none of these have gained any traction thus far."



According to recent projections from Gartner, Apple will hold on to a dominant 73.4 percent of the tablet market in 2011. The company sold a record 11.12 million iPads in the September quarter, up 166 percent from a year ago.
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Comments

  • Reply 1 of 68
    "Fire burns margins" -- pun intended?
  • Reply 2 of 68
    bdkennedy1bdkennedy1 Posts: 1,459member
    Consumers are not stupid. You get what you pay for. If you want good food, you pay more. If you want a good education, you pay more. If you want a nice house, you pay more. If you want good technology, you pay more. If you want a $25 netbook, then you can live in poverty in India. Part of bettering yourself is to strive for something better. If you shop at Walmart your whole life, then you will have nothing better to offer your children when you die than Walmart items.
  • Reply 3 of 68
    First of all, I love my iPad2. Coupled with MobileMe and now iCloud, it allows me to manage appointments, enter contacts, take notes, etc. Sync them with the iPhone and iMac. and besides that Filemaker Go allows me to work with my FM11 database resident on my iMac. I'm in business.



    Allow me to gloat, second. When the Kindle Fire had the center of attention pre-iPhone 4s for all about 2 seconds, we had to hear from all of the press and all of the Kindle Fire fanatics that the Kindle Fire would DESTROY the iPad, that the Kindle Fire set the price point for tablets in the future, that Jeff Bezos would be the next Steve Jobs, blah, blah, blah.



    Now, gee, no shit, Amazon is following the same failed strategy as the netbook. Flood the market with OK quality product at a low price. Watch your margins shrink.



    Oh wait, though, they would make it back on content sales. But yet again, you have another dumbfuck company looking at the wrong target. IT'S NOT CONTENT THAT MAKES APPLE RICH, IT'S THE HARDWARE, DUMMIES!!! When will these companies learn.



    Steve (RIP) said it best, "They just don't get it."
  • Reply 4 of 68
    Quote:
    Originally Posted by bdkennedy1 View Post


    Consumers are not stupid. You get what you pay for. If you want good food, you pay more. If you want a good education, you pay more. If you want a nice house, you pay more. If you want good technology, you pay more.



    Not "good", but "better". i.e. If you want a better house, you pay more. If you want better technology, you pay more... etc.



    Just because I don't like in a mansion and drive a Ferrari doesn't mean my house and car aren't any good.



    There are already going to be people in society that have the means and the will to pay for "better" or even "the best", but everyone else is going to settle for "good enough".







    Quote:
    Originally Posted by bdkennedy1 View Post


    If you shop at Walmart your whole life, then you will have nothing better to offer your children when you die than Walmart items.



    I would hope when I die my children would know of love, kindness, generosity and humility and that the people they meet in life cannot be simply defined by the color of their skin, the number of 0's on their bank balance or where they decide to do their bloody shopping.



    Each to their own though.
  • Reply 5 of 68
    nairbnairb Posts: 253member
    Developing a new tablet like this was a necessary evil for amazon. With electronic books being the next big thing, amazon is fighting for its life. By altering android they also help create their own ecosystem somewhat isolated from google. Only problem here is they need to keep developing and innovating with their core software instead of the frills around the edges.



    Only time will tell if it was worth it.
  • Reply 6 of 68
    nairbnairb Posts: 253member
    Quote:
    Originally Posted by bdkennedy1 View Post


    Consumers are not stupid. You get what you pay for. If you want good food, you pay more. If you want a good education, you pay more. If you want a nice house, you pay more. If you want good technology, you pay more. If you want a $25 netbook, then you can live in poverty in India. Part of bettering yourself is to strive for something better. If you shop at Walmart your whole life, then you will have nothing better to offer your children when you die than Walmart items.



    So when Samsung release their next tablet that will be more expensive than Apples, you will be ditching your iPad. Good to see.
  • Reply 7 of 68
    tylerk36tylerk36 Posts: 1,037member
    Ok so this fire device, it doesn't have a cell unit built in and from what it looks like to me it is a bit small for books. I mean the color screen and the size of that screen isn't as nice to read a book on compared to the standard liquid paper model. I wonder if they think they have a cheaper version of the iPad that in my opinion "you get what you pay for". I have seen other people in this posting say the same thing. I guess we will have to wait and see. Oh and one more thing. I went to amazon and looked at this device. The specs are vague. Really they don't explain the specs very well.
  • Reply 8 of 68
    cash907cash907 Posts: 893member
    Everyone had a bad 3rd quarter, even Apple. Wait till after the Holidays, and then we'll see what's what with whom.
  • Reply 9 of 68
    Quote:
    Originally Posted by Psych_guy View Post


    ...Oh wait, though, they would make it back on content sales. But yet again, you have another dumbfuck company looking at the wrong target. IT'S NOT CONTENT THAT MAKES APPLE RICH, IT'S THE HARDWARE, DUMMIES!!! When will these companies learn.



    Steve (RIP) said it best, "They just don't get it."



    Hardware without the content is USELESS. Apple created the ecosystem to tie Mac, iPhone, and iPad together. Likewise, the reverse is also true. You can have the best content but subpar hardware won't get you anywhere. Amazon is ALMOST right. It has the contents, but it needs to improve on the hardware to compete.
  • Reply 10 of 68
    drdoppiodrdoppio Posts: 1,132member
    Quote:
    Originally Posted by tylerk36 View Post


    ...I mean the color screen and the size of that screen isn't as nice to read a book on compared to the standard liquid paper model...



    I guess it's mostly meant for video and games; Amazon still has the e-ink Kindles that are better suited for reading.
  • Reply 11 of 68
    Quote:
    Originally Posted by Nairb View Post


    Developing a new tablet like this was a necessary evil for amazon. With electronic books being the next big thing, amazon is fighting for its life. By altering android they also help create their own ecosystem somewhat isolated from google. Only problem here is they need to keep developing and innovating with their core software instead of the frills around the edges.



    Only time will tell if it was worth it.



    Yup...Amazon is going scorched earth with this.



    Lets see whether it pays off.
  • Reply 12 of 68
    Quote:
    Originally Posted by Cash907 View Post


    Everyone had a bad 3rd quarter, even Apple. Wait till after the Holidays, and then we'll see what's what with whom.



    Ummm....there is a huge difference between Apple's more than 100% growth in profit year over year, and a record quarter, and Amazon's 73% DROP in profit.



    I don't think the word bad means what you think it means.
  • Reply 13 of 68
    I am worried that Amazon is trying to repeat its initial success strategy with the Kindle Fire. Amazon burnt through millions of dollars in the beginning, not making any profits for the first many years of their existence. This paid off for them because their competitors were largely Web Startups created in the boom, who went bust after the dot-com crash. Amazon was essentially the only remaining e-retailer.



    However, that strategy won't work against deep pocketed rivals like Apple, Samsung, and heck even RIM. I am just not seeing the payoff for Amazon here, unless they think that content purchases will be strong enough to lock users in. Maybe Amazon intends on eliminating their Android and iOS Kindle apps in the future, to convince users to move to the Fire...
  • Reply 14 of 68
    slurpyslurpy Posts: 5,382member
    Quote:
    Originally Posted by Cash907 View Post


    Everyone had a bad 3rd quarter, even Apple. Wait till after the Holidays, and then we'll see what's what with whom.



    Apple had an incredible Quarter. Record Mac sales. Record iPad sales. The 'disappointment' was that they 'only sold' 17 million of a soon to be replaced phone in a single quarter. Think about that for a second. Only a few years ago, selling 4 million iPods in a whole YEAR was considered a tremendous success. The standard by which Apple is judged at is in a completely different universe than every other company. Because they didn't match the numbers conjured from analysts' asses means nothing in regards to their performance in the real world.



    As for Amazon? Their margins are already razor thin. They'll be selling this tablet at cost, or at a loss. Extremely risky business model. We'll see.
  • Reply 15 of 68
    Quote:
    Originally Posted by tylerk36 View Post


    Ok so this fire device, it doesn't have a cell unit built in and from what it looks like to me it is a bit small for books. I mean the color screen and the size of that screen isn't as nice to read a book on compared to the standard liquid paper model. I wonder if they think they have a cheaper version of the iPad that in my opinion "you get what you pay for". I have seen other people in this posting say the same thing. I guess we will have to wait and see. Oh and one more thing. I went to amazon and looked at this device. The specs are vague. Really they don't explain the specs very well.



    Amazon are really the only competitor to Apple in the tablet space. Not because of the HW, anyone can do that, but because of the vertically integrated system of content and delivery to back it up. Apple have it with iTunes and Amazon have it through their webstore and Kindle eBooks.



    As for the HW specs, I was walking through another mall the other days and saw the ads for the 4S. "Dual Core A5 CPU, 8Mpix camera, iOS5". HW specs, but what does that mean to the public? This surprised me. Stating HW specs isn't the way Apple works, they are more about the total experience than the overall speed of the device. This is why, for example, they don't list the sub-GHz clock speed of their CPU. Nearly all modern Android devices have faster CPUs but it is pretty much a moot point as the user experience is down to a combination fo the applications, OS and HW.
  • Reply 16 of 68
    Quote:
    Originally Posted by addicted44 View Post


    I am worried that Amazon is trying to repeat its initial success strategy with the Kindle Fire. Amazon burnt through millions of dollars in the beginning, not making any profits for the first many years of their existence. This paid off for them because their competitors were largely Web Startups created in the boom, who went bust after the dot-com crash. Amazon was essentially the only remaining e-retailer.



    However, that strategy won't work against deep pocketed rivals like Apple, Samsung, and heck even RIM. I am just not seeing the payoff for Amazon here, unless they think that content purchases will be strong enough to lock users in. Maybe Amazon intends on eliminating their Android and iOS Kindle apps in the future, to convince users to move to the Fire...



    Exactly.



    The difference between Apple and Amazon is... Apple has always sold its own stuff at high margins... while Amazon has always sold other people's stuff at low margins.



    Although Amazon entered the hardware game with the original Kindle... Amazon's main strategy is still being an online retailer of goods.



    Apple's #1 is selling you hardware... while content (iTunes, App Store, etc) is a distant #2



    It sounds like Amazon is doing the opposite: losing money on selling you the Kindle Fire and hopes to make it up with you buying content.



    It sounds risky... but I think Amazon is also counting on people getting hooked on buying everything through Amazon from now on. Those pennies they get when you buy toilet paper add up over time.



    And that's been Amazon's strategy all along... they are the Wal-Mart of the web selling other people's stuff. I can't imagine they're making a lot of money on the $79 Kindle either.
  • Reply 17 of 68
    Quote:
    Originally Posted by KaptainK View Post


    Amazon are really the only competitor to Apple in the tablet space. Not because of the HW, anyone can do that, but because of the vertically integrated system of content and delivery to back it up. Apple have it with iTunes and Amazon have it through their webstore and Kindle eBooks.




    Don't forget... Apple makes billion of dollars on hardware... but only a fraction of that from iTunes and the App Store.



    Apple is and will always be a hardware company. iTunes and the App Store do make some money... but it pales in comparison to their hardware sales.



    Now imagine if Apple didn't make any money on hardware... and only relied on iTunes and the App Store for profit. That would be suicide.



    Well that sounds like what Amazon is doing.
  • Reply 18 of 68
    Eh. I'll wait and see before passing judgement
  • Reply 19 of 68
    Quote:
    Originally Posted by bdkennedy1 View Post


    Consumers are not stupid. You get what you pay for. If you want good food, you pay more. If you want a good education, you pay more. If you want a nice house, you pay more. If you want good technology, you pay more. If you want a $25 netbook, then you can live in poverty in India. Part of bettering yourself is to strive for something better. If you shop at Walmart your whole life, then you will have nothing better to offer your children when you die than Walmart items.



    As another poster pointed out with more words and less directly...you are what's wrong with the world.



    Good should be the standard. Better should cost more.
  • Reply 20 of 68
    The funny thing about the kindle fire is.... I have no idea what I would use it for.... if I didn't have an iPad I still find it too small and crippled to even browse the web.



    If, and that's a big IF, M$ and it's partners come up with a decent competitor to the iPad maybe there will be some real competition, but android based tablets are a waste of time.
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