Analysis: Shining a light on Amazon

It's on a constant push to keep growing, but what does this mean for the bottom line?
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Etail giant Amazon is something of an enigma. It is omni-present, featuring in countless sectors from manufacturing to retail to cloud space, but while its sales keep going up, profits don’t always reflect this

In its most recent financial results, $12.83 billion sales turned into a ‘mere’ $7 million in net income for the quarter ending June 30th 2012.

It’s a pattern that’s been visible for some time. Massive sales, much smaller profit – often smaller than expected, which must worry shareholders. In fact, the firm reports that it expects to see an operating loss of between $50 million and $350 million in its Q3 this year.

That’s not quite the bad news it may seem on the surface. Amazon has a convenient excuse (or reason – you choose) thanks to constant investment and expansion into new areas.

It acquired Kiva Systems in Q2 for example – it’s a firm that creates warehouse picking automatons – which is said to have cost Amazon around $65 million – hardly what you’d call small change. It also built 17 new distribution centres last year.

Stephen Mader, senior analyst for Kantar Retail, tells PCR: “In the short term, it’s in investment mode. It’s willing to take short-term hits for the long-term benefits and Amazon’s investing heavily right now to get to where it wants to be.”

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Not least amongst those investments is a new digital centre in London, as PCR reported last month. This is an eight-floor building in London that will house the teams for streaming firms Lovefilm and Pushbutton along with software engineers, user-interface experts and graphic designers that will, according to Amazon, focus on the creation of a number of interactive digital services for TVs, consoles, phones and PCs. They’ll also work on services and APIs for Amazon generally.

“London is a hotbed of tech talent and testament to that fact is Amazon choosing the capital as the location for the new global Digital Media Development Centre,” says Paula Byrne, managing director of the centre in London. “Innovation is part of the Amazon DNA and we are creating a British centre of excellence to design and develop the next generation of TV and film services for a wide range of digital devices.”

WHAT NEXT?

That’s all very nice, but what does it mean for everyone else in the technology space? It’s a demonstration of Amazon flexing its muscles as it seeks to expand and to find new sectors where it can take the lead. This is a company that knows it can’t be complacent, that it must deliver content to devices as well as packages to people’s doors as the retail environment changes.

Kantar Retail’s Mader says Amazon is long-experienced in rolling out new features from the US into European markets, and expects that we’ll continue to see new developments arrive in that way.

“Amazon’s been using the US to roll out new features and then migrate them across different markets – usually to the UK, then Germany, then elsewhere. We’re talking about services rather than products here – and programmes like Subscribe and Save or Amazon Prime will be tweaked for each market they go into.”

PRIME NUMBERS

Mader points out that Amazon Prime in the US is a very different proposition to the Amazon Prime we see in the UK. This is a £49 membership programme that offers one-day delivery on a huge selection of Amazon’s portfolio, with no minimum purchase required, that can be shared with up to four family members.

In the US, there are more benefits available: “Prime isn’t necessarily just about shipping,” Mader says. “It also offers a whole host of additional benefits around content. In the US you can get thousands of movies and TV shows for free streamed from Amazon.”

Prime runs at a loss, but it gives Amazon a chance to compete with Netflix – and as it has competitor Lovefilm here in the UK, don’t be surprised if the UK Prime pops up with extra benefits one of these days.

It’s not just about the competition either, as Mader points out that: “The shoppers that are Prime members spend a disproportionate amount of their annual spend at Amazon.”

This is something that other retailers would kill for, and a sign that it’s not just infrastructure that’s leading to Amazon’s small and/or disappearing profits, but also an eagerness to grow and grow without ever stopping to rest.

It’s about maintaining and expanding all borders, regardless of whether they are virtual or physical.

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Amazon has been steadily extending its cloud services to consumers in the US. Amazon Cloud Drive can be used to store up to 5GB of data for free, whilst Amazon Cloud Player stores and streams music. If these services succeed in hooking American consumers into the overall Amazon experience, they might soon be replicated over here.

The UK Amazon operation is most certainly growing on the physical front. As well as the new digital centre and a growing number of distribution centres, Amazon has also got collection lockers for picking up orders scattered about the country. These are largely in shopping malls, but there are now a handful in Co-operative stores too (see picture, right). And just last month, the retailer signed up 5,000 corner shops as delivery destinations through Paypoint’s Collect+ scheme.

MADE BY AMAZON

Of course Amazon is not just about retail and web-development. It’s a manufacturer too. The Kindle, you cry, of course! It’s done enormously well for the firm, has been a Christmas best-seller and in fact ebooks now outsell print books on Amazon.co.uk.

Kindle and Kindle Touch are still selling well in the UK, but many are wondering when the Kindle Fire, released in the US in 2011, is set to appear. The latest Fire-related rumours suggest that an announcement about new models is expected next week from Amazon.com, with potential for a release in the UK.

As to why the original Fire didn't appear over here, it might well be to do with the success of Google’s Nexus 7 - ie by the time the retailer considering putting Fire in the UK market, it might have felt somewhat behind the times. With something new, it can make a bigger impact.

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However, the Kindle isn’t the firm’s only foothold in the world of manufacturing. Back in 2009 it created its own-brand called AmazonBasics – basic items that appear across its electronics section from mice and keyboards to cases and cables.

They’re manufactured in Taiwan and China, and Amazon says they’re designed to be ‘robust and user-friendly’ as well as inexpensive.

It’s all part of Amazon’s long-term plan to grab every bit of market-share it can. Even the revenue from these cheaper products will begin to add up, and hopefully eat into a few of those investment costs it keeps drumming up whilst it finds new sectors to explore.

What sector’s next? No doubt we’ll find out very soon.

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