Amazon’s River of News Ahead of Earnings

by Scot Wingo
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Amazon doesn’t announce results for Q4 2011 until next Tuesday (January 31). So far we’ve had a good showing from eBay (NASDAQ:EBAY) and Google (NASDAQ:GOOG) missed on revenue and CPCs declined substantially. You can see the Channel Adviser’s eBay coverage here.

eBay and Google’s results have created a veritable cacophony of speculative noise around Amazon’s results:

  • eBay was light on GMV growth both domestically and international – also the BMV+CES categories were in serious decline – was Amazon a beneficiary of this (or a cause), or will they show the same trends?
  • Google – you can surmise from their Google Prime initiative that they are reacting to what must be a big chunk of consumers (Amazon Prime subscribers) searching for products using google ‘less’. In his Q4 Google analysis, Henry Blodget pins the blame on Google’s revenue miss squarely on Amazon’s shoulders. Here’s the core of his argument: “as Amazon grows and offers a more comprehensive and informative product selection, more people may be starting their product searches at Amazon. This would cut Google out of the process entirely.” Further supporting this thesis, Google announced management changes in their e-commerce group that is adding fuel to the ‘Amazon caused the miss’ fire.

See the full Trefis analysis for eBay Google and Amazon

A Veritable Flood of Amazon News!!

While all of this speculation happens while we wait, there’s also been a raft of interesting Amazon news this week that I believe has ramifications for all retailers, that also isn’t widely disseminated and I wanted to capture here for you. I’ve tried to put the news into these buckets:

  • Fulfillment centers
  • Showrooming
  • World dominance
  • Fire Update

Amazon FC (Fulfillment Center) News

We track ~40 Amazon FCs in the US alone and today Amazon announced another SC FC in beautiful Spartanburg County (full disclosure -I’m from SC and excited to see the state get some much needed jobs). I’ve talked to a lot of retailers that are confused about why Amazon is embracing the fair tax act. The simple answers is that Amazon clearly wants FCs (many many FCS) in every state – fair tax is a good way to compromise on tax complexity and yet get FCs everywhere. Imagine offline retailer’s surprise when Amazon builds 40 FCs in their backyard and implements one-day Prime (gulp).

What is even more interesting in FC gossip is this AM, Ben Schachter over at Macquarie reports that he has information that Amazon is building their first FC in India. At ChannelAdvisor we have offices globally and I can tell you first hand that retailers in Australia, Brazil and India are all nervously awaiting the day that Amazon enters their space. It’s interesting that Amazon appears to have chosen India as the next geography to expand into. Given their explosive growth in China, it makes sense. Here’s a blurb from the report and you can read the entire report here:

A number of current job listings on AMZN’s India webpage (highlighted in a recent Reuters report) suggest that the company is staffing its first fulfillment center in India, to be located in Mumbai. While the company is not commenting, we take this as signaling a likely expansion into India as AMZN’s next dedicated geography (first since Spain in September 2011).

Amazon vs. Target – A new phrase, Showrooming, is born

Amazon Strategies friend Deb Weinswig (rockstar retail analyst) over at Citi broke the news this week that Target contacted suppliers and started talking about a strategy to stop Showrooming – consumers coming to Target to find items, to then buy them at Amazon. I recommend everyone read the entire report here, but here’s a summary of the three actions that Target is taking to stop Showrooming:

  • Strategy #1: Differentiated, Guest-Focused Assortment – TGT’s first proposed strategy would provide a differentiated assortment from online-only retailers that would also include best sellers (see pg. 2 for details). We believe this strategy would put greater emphasis on exclusives at TGT that would not be available at competitors.
  • Strategy #2: Offer the Same Pricing as Online-Only Retailers – The second strategy would provide pricing that is the same as online-only retailers without lowering TGT’s margins (see pg. 2). Given its size, we believe TGT is exercising leverage over its vendors to achieve the same pricing that smaller, online-only retailers receive. This strategy would help TGT compete with retailers like AMZN on like-for-like products.
  • Strategy #3: Subscription-Based Pricing – The final strategy outlined in the letter includes developing membership- or subscription-based pricing online to compete with online pricing models in the market (see page 2). We believe that the online pricing models referred to are programs like AMZN’s Subscribe and Save, which launched in 2007 and offers regular shipments of frequently-purchased items at a discount.

This has also increased the noise that Amazon will begin experimenting with Apple-store-esque stores where you can try items and get them delivered via Amazon. Amazon has a patent on a store concept that looks like this:

Amazon World Dominance

I recently pointed readers to Jason Calacanis’ piece about ‘the Cult of Amazon Prime’ and the power of the program.

Jason has an interview out with O’Reilly (tech publisher) on Youtube that’s worth a watch if you enjoyed the first piece.

The funniest part is when Jason speculates that Amazon will acquire UPS. While you may not agree with everything he says and he’s purposely over the top, it does get you thinking.

Amazon Fire

Digitimes reports that Amazon sold 6m units of Kindle Fire in Q4 (crushing our 5m prediction which was ‘crazy high’ at the time). They are also anticipating that Q1 will be more like 3m. There’s speculation that Amazon worried that iPad3 will slow Fire sales. That’s somewhat silly to me as they are entirely different markets – the iPad3 buyer at $500 isn’t the Fire $199 buyer. It’s probably just a mix of seasonality and supply chain management.

I’m on record for predicting 20m Fires sold in 2012, so at 3m/Q we are at 12m and need to drum up another 8m units. Rumors are floating around that Amazon will either 2.0 the current Fire or come out with a larger 9/10 inch unit (or both) which should get us there. Also Q4 2012 will be another at least 6m unit Q so 20m shouldn’t be too hard to hit.

One area of controversy around Fire is the profitability. Bears will point out that Amazon loses ~$20 per Fire sold and you can paint a doomsday scenario where for those 6m units, amazon is going to lose $120m in Q4.

Bulls (yes i’m in this camp on this issue) have long thought that Amazon will be profitable very quickly from the up-sells of ebooks, video, prime and physical goods. RBC’s analyst Ross Sandler has a great survey out from Kindle Fire buyers that has some interesting data from a survey of 200 buyers. This is a great report and I’ve tried to boil it down to these three charts: (click to enlarge).

In this first one, they ask Fire owners if they are likely to stay with Prime. The great news is that only 13.5% say they are not likely and 32% are moderately. That suggests that half of Fire users are likely to sign up for prime. If half of the 6m for Q4 are not Prime and half of them sign up, that’s 3m new prime users – BOOYAH!

Next, here’s how many books people have ALREADY purchased – remember this survey was done in early Jan and most of these Fires by definition had to be purchased in Q4. The bulk of people have already purchased 3-5 books (already at break-even).

Finally Ross puts all of this data into a lifetime of the user model and comes up with this interesting analysis that in yr1, the user generates 10% margin and that surges to 21% by year3.

Up next…Earnings preview

Later this week, we’ll have a preview of Amazon’s Q4 report and what we’re looking for in the announcement. Sound off in comments until then – do you think they will crush or miss?

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