Amazon soars 15 percent as digital sales boost margins

SEATTLE, Fri Apr 27, 2012 – Amazon.com Inc.’s stellar quarterly results are helping convince skeptics on Wall Street that a bout of intense spending is beginning to pay off for an Internet retailer trying to transform itself into a technology company.

Shares in Amazon leapt 15 percent on Friday after it reported first-quarter earnings and margins well above investors’ most bullish expectations, tacking on some $10 billion in market value and marking its biggest single-day gain since October 2009.

CEO Jeff Bezos has tried to convince investors to stick with the company for the long term as it flirted with losses in recent quarters. He is trying to transform Amazon from an online version of a big-box retailer like Wal-Mart into a provider of technology services.

Some investors argue that its valuation of over 70 times forward earnings – dwarfing companies like Apple Inc. and Google Inc. that produce record profits – is justified because Amazon is on track for enormous margin expansion as it expands into more-profitable services from hosting websites in the cloud to providing an online marketplace connecting buyers and sellers.

“These services will become an increasingly important part of Amazon’s overall business and will be a driving force of profitability going forward,” Bernstein Research analyst Carlos Kirjner wrote.

Amazon is trying to be “not a bookseller or a retailer, but a company that uses technology and (now) its scale to transform whole value chains” from retail to publishing and video distribution.

Amazon shares fall 12 percent as outlook disappoints

SEATTLE – Amazon.com Inc’s shares slid 12 percent in early trade on fears that heavy spending would hurt the retailer’s profits even as revenue growth falls short of Wall Street expectations.

On Tuesday, the online retailer warned that it may post an operating loss for the first quarter, as it spends heavily on new categories like tablets and on infrastructure for digital media and cloud computing services.

“While we had suspected Amazon’s first-quarter margin guidance would underscore its ongoing investment spend, we were surprised by its lower-than-expected first-quarter revenue guide,” Barclays Capital analyst Anthony DiClemente, who cut his price target on the stock 16 percent to $190, said in a note.

However, several analysts said the company’s recent shift to more third-party sales and strong growth of digital media and services would continue to lift margins even as it slows revenue growth.

“Third party margins are considerably higher than those of direct (sales) as there are essentially no costs of goods and only limited fees overall for credit cards and bad debt,” J.P. Morgan analyst Doug Anmuth noted.

Amazon gets about 5-15 percent commission on transactions done by other sellers on its website, as opposed to recognizing the full retail price as revenue on items it sells, according to Canaccord Genuity analyst Michael Graham.

The company had to rely more on third-party sales last year as the Thailand floods dented supply in such segments as disk drives, cameras and peripherals.

24 million customer accounts hacked at Amazon’s Zappos

SEATTLE ― Online shoe retailer Zappos told customers this weekend that it has been the victim of a cyber attack affecting more than 24 million customer accounts in its database.

The popular retailer, which is owned by Amazon.com, said customers’ names, e-mail addresses, billing and shipping addresses, phone numbers and the last four digits of credit cards numbers and scrambled passwords were stolen.

But it said the hackers had not been able to access servers that held customers critical credit card and other payment data.

“We were recently the victim of a cyber attack by a criminal who gained access to parts of our internal network and systems through one of our servers in Kentucky,” Zappos CEO Tony Hsieh said in an email to staff which was posted on the company’s blog on Sunday.

“We are cooperating with law enforcement to undergo an exhaustive investigation,” he added.

Zappos said it was recommending that customers change their passwords including on any other website where they use the same or similar password.

The company, which is well known for its customer service, said due to the high volume of customer calls it is expecting it will temporarily switch off its phones and direct customers to contact via e-mail.

Amazon may benefit as digital goods sales jump

SEATTLE, Wash. ― Digital goods are the fastest-growing category online this holiday, led by e-books, suggesting Amazon.com Inc’s strategy of blanketing the world with cheap e-readers and tablet computers may be producing some early gains.

Sales of digital goods, which also include music and videos, are up about 30 percent this holiday season, compared to the same period last year, according to comScore data.

That is ahead of sales of consumer electronics and jewelry and watches, which are up about 25 percent versus last year’s holiday season, and apparel and accessories, which are growing in line with overall e-commerce at roughly 15 percent, comScore data show.

The only other holiday season that digital goods grew the fastest was in 2006, when sales jumped 83 percent from a smaller base, according to comScore. At that time, Apple Inc’s iTunes music store drove a lot of the growth of the category.

“Music is a much more stable market at this point. The real new growth is coming from e-books,” said Andrew Lipsman of comScore.

“The increased proliferation of devices, such as tablets and e-readers, has led to more forms of digital content being downloaded,” he added. “People are downloading e-books in a way they had not previously.”

Amazon launched its $199 Kindle Fire tablet ahead of the holidays and slashed prices on its range of Kindle e-readers.

Earlier this month, Amazon said customers were buying more than one million Kindles a week and analysts at Goldman Sachs estimate the company will sell 14 million units during the fourth quarter.

Amazon priced these products aggressively and many analysts estimate the company is making little or no profit on the devices. Instead, Amazon is hoping to make money from higher sales of digital goods, according to Aaron Kessler, an analyst at Raymond James.

“Tablets and Kindles are selling a lot this season and that should ultimately benefit Amazon’s digital sales,” he said.

Still, a lot of these devices were bought as gifts this holiday, so the full impact on digital content sales will probably not come until Christmas Day and the weeks that follow, Kessler added.

Amazon’s tablet serious challenge to Apple’s iPad, analysts say

SEATTLE ― Amazon.com Inc., which revolutionized reading with its Kindle e-reader, is expected to unveil a tablet computer this week that analysts say will seriously challenge Apple’s market dominating iPad.

Amazon on Friday invited media to a press conference to be held in New York on Wednesday, declining to provide further details.

But analysts were confident that the world’s largest Internet retailer will introduce its long-awaited tablet computer this year to expand in mobile commerce and sell more digital goods and services.

“Wednesday is tablet day,” BGC partners analyst Colin Gillis told Reuters.

The tablet has been awaited as a strong competitor to Apple Inc’s iPad. Apple has sold about 29 million of the devices since its launch in April 2010.

“The real issue here is that, you know, it is likely going to be good for consumers; is this going to be good for shareholders?,” Gillis said. He wondered whether Amazon would price the tablet below those of rivals — and thereby do little to boost margins.

“Knowing Amazon, it is likely to be a very aggressive price,” Gillis said.

In much the same way Amazon’s Kindle e-reader was priced low to quickly get traction among readers the company is likely to keep the price of its tablet low to attract users and sell other content and services, one analyst said.

“It’s a marketing tool to build a relationship with customers and sell them cloud (computing) services,” said James McQuivey, an analyst with Forrester Research.

While Amazon has remained tight lipped even about the device’s existence, the TechCrunch blog earlier this month said the Amazon tablet also will be called Kindle.

It will be a 7 inch device with a full color, touch screen, run on Google’s Android software and cost $250, the blog said, well below the price of the least expensive iPad.

Robert Baird & Co analyst Colin Sebastian said in a note last month than an Amazon tablet would be a “game-changer.” Sebastian forecast the device could sell 3 million units in its first year.

The tablet could pose a major threat to Apple because of the Kindle’s popularity and the movie and music services Amazon sells.

Forrester’s McQuivey said the device also takes aim at Barnes & Noble Inc’s. NookColor device, which hit the market last year and features tablet functionalities.

Several technology companies like Research In Motion and Samsung have introduced tablets that sold poorly. Hewlett Packard Co. announced recently it would abandon its tablet.

Amazon shares finished the day up 0.2 percent at $223.61 on Friday on Nasdaq. The stock had traded as low as $219.06, but rallied as invitations to the media event began arriving.

Amazon in talks to launch digital book library, according to report

NEW YORK ― Amazon.com Inc is in talks with book publishers about launching a media library service similar to Netflix Inc. for tablets and other digital books, The Wall Street Journal has reported.

Seattle-based Amazon, which makes the popular Kindle electronic reader, is also expected to release a tablet to rival Apple Inc.’s iPad in coming weeks, the Journal reported.

Under the proposal for a digital media library, customers would pay an annual fee to access a library of content, the Journal reported, citing people familiar with the matter.

It is unclear how much traction the talks have received, the Journal reported, citing the people familiar with the matter.

Several unnamed publishing executives said they are not enthusiastic about the idea because it could lower the value of books and could strain their relationships with other retailers that sell their books, the newspaper reported.

An Amazon spokesperson was not immediately available for comment.

New Kindle ‘@author’ feature lets readers ask writers questions from inside books

SEATTLE, Wash. ― Amazon.com today unveiled a new Kindle feature, @author, that will let readers ask questions of authors while reading their books. Confused about the motivations of a particular character? Curious about the author’s literary influences? Need to clarify a particular step in that how-to book? Now you can ask questions from within the e-book itself.

As the name implies, the @author feature leverages Twitter. (And yes, Amazon has secured the @author Twitter account.) Here’s how the process works, as explained by Amazon’s Kindle Daily Post:

To ask one of these authors a question from a Kindle book, just highlight a passage using the five-way controller, type “@author” followed by your question, and Share. Kindle will tweet the question to the author and post it on the Author Page; you’ll automatically receive an e-mail if the author answers your question.

You can also ask a question from the Author Page of a participating author; look for the “Ask a question” link beneath the author’s biography or next to one of the author’s books if you want to ask a question specifically about that book.

Amazon has lined up about 15 authors to participate initially.

Could old connections lead Hulu into the arms of Amazon.com?

LOS ANGELES ― Bids for the online video service Hulu are expected Wednesday, and The Wall Street Journal reports that Amazon.com, Google, Yahoo and DirecTV are considering offers.

Amazon could be an interesting suitor, especially given the company’s plans to expand into tablet computers. (Imagine the gadgets pre-loaded with a Hulu channel). Amazon also has been expanding deeper into online video, inking a deal last month with CBS to stream classic TV shows such as Cheers and Star Trek.

But a Hulu buyout may come with too high of a price tag. The Journal reports that bids could range between $500 million and $2 billion. If bidding goes to the upper end of the range, that would be the largest acquisition in Amazon’s history. (Topping the more than $800 million paid for online shoe retailer Zappos).

Here’s why there’s such a big potential gulf in the bidding prices, according to the Journal:

The often diverging interests of the media owners and Hulu management is a reason the controlling owners decided to explore a sale around June, people familiar with the matter have said. Now the owners expect they will have to decide what sort of rights they are willing to give what sort of buyer, and to address that different buyers may value rights differently, according to one of the people familiar with the matter.

If the digital rights get sorted out, Hulu could make a pretty interesting target. And here’s why:

Hulu CEO Jason Kilar previously worked at Amazon.com, writing the original business plan for the online retailer’s expansion into DVDs and movies. In that role, he reported directly to Amazon.com CEO Jeff Bezos.

Could he soon be reporting to his former boss again?

Certainly, a lot of things would need to be sorted out, and the purchase price would have to make sense. But Amazon may make for one of the more interesting suitors.

And with Google — owner of YouTube — now trying to digest Motorola for $12.5 billion it could be an interesting time for Amazon to put a stake in the sand as it relates to online video.

However, as noted above, Hulu may just be too rich for Amazon’s blood. After all, the company’s cash position stood at just $2.6 billion at the end of the second quarter.

Amazon still trying to figure out grocery delivery business

SEATTLE ― It has been nearly four years since online retailer Amazon started rolling out the Amazon Fresh grocery delivery service here, but the company doesn’t appear to be in a rush to expand to other parts of the country.

CEO Jeff Bezos said during the company’s shareholder meeting yesterday that Amazon is “still tinkering” with the economics of the Amazon Fresh business to try to come up with a workable formula.

It’s an issue close to the hearts of many people in the Seattle region, largely because of the former presence of HomeGrocer, one of the icons of the dot-com boom around. HomeGrocer was acquired in 2000 by Webvan, which later went bankrupt. Amazon now owns Webvan, which ships groceries via the webvan.com portal.

Here’s what Bezos said about Amazon Fresh:

“Amazon Fresh is a test. It’s only in Seattle. The customer experience is good. The economics, we’re still tinkering. The reason it’s a test is because we’re still tinkering with the business to try to make the economics acceptable. It’s an expensive service to provide.

“We’re basically working on it here in Seattle, seeing if we can get it to work. It’s a similar kind of operation to what HomeGrocer did 10 years ago, what Webvan did 10 years ago. We like the idea of it, but we have a high bar on what we expect in terms of the business economics for something like Amazon Fresh in terms of profitability and return on investment capital. We continue to think about that.”