| SAN FRANCISCO/NEW YORK, April 26
SAN FRANCISCO/NEW YORK, April 26 Amazon.com Inc
appears to have figured out the secret to being more
profitable: sell less physical stuff.
The company reported slowing revenue growth and offered a
disappointing outlook for this quarter on Thursday, exacerbating
uncertainty about the health of its business beyond the United
But that may be masking a fundamental shift in its business
on home turf. The Internet retail giant that once specialized in
moving books and other physical items quickly is increasingly
trying to do the same in the digital world, where profit margins
are higher, partly because e-books, music and video files and
are transmitted electronically at high speed.
Throw in a fast-expanding third-party merchant business,
where Amazon simply books a cut of sales from seller listings on
its website, and the retail giant's margin outlook is looking a
"Over the long term it does help margins," said Ben
Schachter, an analyst at Macquarie. "You don't have to put these
things on a truck and ship them."
In the first quarter, net shipping costs stood at 4.7
percent of sales, down from 5.1 percent a year earlier.
Amazon has been doing all the things a retail business will
usually do to goose margins, like putting its distribution
closer to customers and charging partners more to ship goods.
But it has also diversified aggressively into other revenue
streams like digital content, advertising and the Amazon Web
Services cloud computing business.
In its news release Thursday, Amazon listed 14 highlights
for the first quarter - all but one related to its digital
Chief Executive Jeff Bezos talked about Amazon's effort to
make its own TV shows, which will be delivered over the
Internet, rather than in DVD form.
Notably, Amazon's top-10 selling items in the first quarter
were digital goods or Kindle gadgets, which are tablets or
e-readers used to buy and consume digital content, Chief
Financial Officer Tom Szkutak told analysts during a conference
"That is the first time that we have seen that," he said.
In the short term, the Internet retail giant that started
out as a book-retailing business faces several challenges. Its
business faces a sluggish European economy and inconsistent
efforts to break into emerging markets such as China, where
competition from the likes of Alibaba is intense.
Amazon's shares slid 3 percent to about $267 in Thursday
after-hours trade, after executives pointed out the
But longer term, analysts say Amazon's focus on aggressively
pushing digital content - such as by selling Kindles at close to
cost, undercutting much of the competition - is a winning
Amazon has largely focused on using price as a lever to get
its content in front of more customers.
Whether selling Kindle e-book readers and Kindle Fire
tablets cheaply, or bundling on-demand streaming video with
subscriptions to other services, Amazon has bet that it can keep
people once it has their attention.
Lately, it has branched into creating original video
content. Last week the company posted 14 pilot TV shows online,
intending to let reviews decide which ones it turns into full
Amazon has also been gaining on Apple Inc in the
digital music business, tripling its market share over the last
five years - albeit to a level still just a third of Apple's.
At the same time, the company has also made much of its
cloud computing unit, Amazon Web Services, which provides data
services to a broad range of companies. AWS, as it is commonly
known, generated $1.8 billion in revenue last year and is
expected to grow rapidly.
In the most recent quarter, net sales in Amazon's "other"
line, which includes AWS in North America as well as advertising
services, rose 59 percent.
"What we're seeing is that Amazon is really getting leverage
from shipping costs. AWS is becoming a big part of their mix.
They are also benefiting from a greater mix of advertising
revenues. We'll continue to see that improve," Topeka Capital's
Victor Anthony said.