Money Jungles

Bring In The Bulls: Amazon’s Losses Are Amazon’s (And Maybe Your) Gain

 Bring In The Bulls: Amazons Losses Are Amazons (And Maybe Your) GainAmazon.com’s quarterly results are out, and OMFG THEY POSTED A PROFIT DECREASE! Why? Because they priced that fancy new Kindle Fire thing on the cheap, is why. People are freaking out, an analyst gave them a “sell” rating, and their shares are dropping. Are people overreacting?

First, consider the tech savvy of people who look at valuations and stock prices and make enormous moves off of how they understand these companies. As evidenced by Groupon—a company some think is a massive Ponzi scheme, which (let’s face it) Wall Street has had a hard time catching in recent years—analysts are not the last word.

Next, consider the reasons Amazon priced their Kindle Fire so low. At $200 cheaper than the iPad, even if Amazon’s profits are marginal because of the sunken price, they’re selling what essentially amounts to a license to buy more stuff from Amazon.com, in the same way buying an iPad or an iPhone—the reasons you don’t even need a computer anymore to operate at full functionality—is a license to buy from the iTunes Store. They’re betting on the lesser profits on the Fire to equal an uptick in purchasing from Amazon. Makes enough sense, no?

These $200 Fire units have yet to go on sale. The problem with iPad imitators is that they’ve thus far been too expensive and too associated with brands the general consumer isn’t fully acquainted with (Motorola, HP). Unlike Amazon, who’ll be running Google’s Android on the Fire. Amazon + Google = Companies People Are Well-Acquainted With. But here’s the really interesting piece of analysis on Amazon, buried all the way at the bottom of Bloomberg’s report:

Amazon also is at risk from the drop in sales of traditional media, even as it benefits from the shift to digital, Gillis said. “Amazon is neither the fastest growing, or most profitable, company in our coverage and given the disruption occurring in physical books, music and movies, it is hard to justify the premium valuation,” he said.

Let’s not forget, Amazon sells way more than simply media, “traditional” (i.e. analog?) or otherwise. They’re becoming a publishing imprint that makes the transaction between author and reader a significantly more direct one, in a format people are used to working with. For example, are consumers more likely to trust book reviews on iTunes or on Amazon, based on appearances alone? Furthermore, who goes to Wal-Mart and walks out with only that which they came to shop for? Apple’s limited in its ability to upsell merchandise once the customer is in the store to, well, computer stuff and media.

Question: What else can customers be upsold on at Amazon once you’re already inside, purchasing digital content?

Answer: How many different brands of cat scratch boards do you think are out there?

As The Register put it a few weeks ago:

Amazon wants it both ways: use the Fire as a loss-leader as IHS suggests, and use it as a free razor-handle into which you can insert an endless stream – pun intended – of disposible-blade digital content. And, it should also be noted, use it to drive the public’s perception of what a tablet should cost down into that magic sub-$200 range. Cupertino may continue to charge a premium for its iPad hardware – ever hear that said of Apple before? – but other fondleslab punters are now in a whole new world: one that starts at $199. And without Amazon’s vast digital and real-world retail offerings surrounding competing tablets, it will be hard for them to continue that competition – as if they’re doing all that well at present.

Amazon’s planning for the future of future growth, which isn’t going to show at the moment while their units are costing them a pretty penny. It’s smart; it’s sacrifice. It might’ve hurt them more than they expected, but so goes the delayed gratification of working ahead of a curve. It’s a pretty simple case of spending money to make money, and their stock is dropping because simple thinking sees a low number and jumps ship. Don’t mistake it for a sophisticated play. Amazon didn’t get where they are by not planning for the future, or past that, making a ton of cash and putting their competition to bed in the process.

fkamer@observer.com | @weareyourfek

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Comments

  1. Hailey Eber says:

    Amazon didn’t post a loss. It reported a big drop in profits and forecast a possible loss for next quarter. Catchy about the cat scratch boards though.