Tag Archives: AMZN

demise of the e-reader: implications

December 27, 2012 By in Current Market Thoughts, e-readers, Entertainment, Industry Analysis, Publishing, Stock ideas Tags: , , , , , , , , , , Leave a comment

e-reader sales

A Christmas Eve Financial Times article indicates that while e-reader sales in 2012 will still be robust, the category may be on the brink of a rapid decline in popularity.  Its source is IHS iSuppli.   I’ve found the data in a graph from emarketer.com (note the convoluted chain of attribution–PSI cites emarketer, which in turn cites CNET citing IHS).

The reason for the falloff?   …the rise of light, powerful cheap multi-function tablets, which can serve as e-readers as well as do a lot of other stuff, for within a reasonable distance of the price of a dedicated e-reader alone.  This development wouldn’t be surprising, since the multi-function smartphone has replaced the dedicated music player for many users.

(The above is what I see as the consensus view. It’s not a unanimous one, though.   The Market Intelligence and Consulting Institute, which presumably has special insight into the Taiwanese companies that actually make the e-readers, predicts a bounceback in sales for 2013.  So we should at least keep in mind that the consensus may not be correct.)

Implications, if the FT is right?

In a world where the decision on what merchant to buy an e-book from hinges on what dedicated e-reader you own, the firm with the largest number of e-readers in circulation (Amazon) should be the dominant factor.  Other, non-compatible e-reader makers, like Barnes and Noble, should have small relative market shares.  Other would-be booksellers are footnotes, at best.

The game changes substantially, I think, if the key decision becomes what app the potential buyer has on his tablet.  That’s because any customer can download a new book app with a couple of taps.  Unlike the case with music, where users may want to construct playlists, it probably doesn’t matter much whether one’s entire library is on one app or several.  So the key factor in the purchase decision probably comes down to price.

It’s possible that AMZN can develop a tablet that’s the full equivalent of a Samsung or Google offering.  The performance of the Kindle Fire suggests that’s not likely.  But, if it can, perhaps AMZN can preserve its “ecosystem” with avid readers for a while longer.  And in doing so it would be able to bar the download of other booksellers’ apps onto its machines.

Personally, I doubt Barnes and Noble will be able to create a viable tablet.  Yes, it does have its alliance with MSFT.  But that only seems to me to guarantee that BKS can have the Zune of tablets.

AAPL is in an unusual position.  Its strategy has been to generate superior profits by selling up-market devices at premium prices.  Does it want to compete in the (eventual) $100 tablet market?  My off-the-cuff guess is that it doesn’t.  By default, this makes AAPL less of a player in the e-book market.

On the one hand, this would make the big publishers’ alliance with AAPL of a few years ago look extremely short-sighted.  On the other, it creates the opportunity for them to have a common app that bypasses both BKS and AMZN.

the stocks?

Any restructuring book distribution by cutting out dedicated e-readers is obviously not a reason for the companies that control the e-reader market to celebrate.  The biggest single loser, I think, is potentially BKS, since AMZN has 3x the market share in e-books that BKS has.  It isn’t that AMZN escapes the change unscathed.  But it already has lower prices than BKS; its large relative size gives it another big advantage in the price-drive. environment I think will develop.  Also, it’s not clear that AAPL will abandon the up-market strategy that snatched it out of the jaws of bankruptcy to become a serious competitor in the mass tablet market.

All in all, I score the situation as a net plus for AMZN.

The wildcard is potential new competitors who might be able do offer superior app performance.

why did Amazon (AMZN) just issue $3 billion in bonds?

November 29, 2012 By in Amazon, Industry Analysis, internet, Recent Market Action, Stock ideas Tags: , , , , , , , , Leave a comment

I’ve known about AMZN since its inception.  I’ve never owned the stock, however–which has, since 2006, been an embarrassing oversight on my part.  But as one of my former bosses used to say, in her characteristically non-PC way, “You can’t kiss all the pretty girls.”

AMZN is clearly a pivotal company in the transformation of US–and ultimately global–retailing.  But at its typical 100 times earnings or so, I’ve always found the valuation a bit too steep.  I am an Amazon customer, though, and an Amazon Prime subscriber.  I also use a Kindle (and an iPad) to read.

Anyway, several things about this week’s issue of $3 billion in AMZN bonds caught my eye:
–the interest rate, which is at only about a 60 basis point premium to Treasuries

–the stated purpose of the issue, namely the boilerplate “general corporate purposes”

–the lack of relevant commentary, although I really shouldn’t be surprised.  I’ve read some suggestion that part of the net proceeds will go to pay for the company’s new $1.16 billion HQ in Seattle.  AMZN does mention in a supplement to the original prospectus that it has agreed to buy the complex.  But it would be weird for the company to disclose that and not mention the buildings as a use of proceeds if that were so.  My assumption is that the new HQ will be financed separately with non-recourse debt.

looking at AMZN financials

–capital spending is up very sharply recently, from around $200 million a year in 2007 to $1.8 billion in 2011 and the current $23 billion annual rate (I’m taking all figures in this post from the Value Line Investment Survey, the industry bible for such data). That’s slightly more than the cash generated by operations, not counting working capital changes (see the second item below this one).

–operating margins are down.  They were more than 6% of sales a half-decade ago.  They’re under 4% currently.  I interpret this is the effect of selling e-books and kindles for little or no profit, or at a loss.

I don’t think this is necessarily bad.  I point it out only as further evidence of the dedication to expanding its digital footprint–even at the expense of profits–that has marked the company for the past few years.

–$5.2 billion in cash?…yes, and no.  The September balance sheet for AMZN shows that figure.  But look at Payables (the amount AMZN owes suppliers) and Receivables (the amount customers owe AMZN).  They’re $8.4 billion and $2.4 billion, respectively.  The difference is $6.0 billion.  In other words, all the cash on the balance sheet (plus another $800 million) is explained by the fact that customers pay AMZN very quickly and suppliers don’t get their cash very fast.

There’s nothing wrong with running a negative working capital business.  In fact, it’s great.  But the cash it generates is only there as long as sales are stable or rising.  If they start to shrink, so too does the cash level.  So spending this money on capital projects, where AMZN can’t get to it quickly, has some risk attached to it.

why the offering?

I think it signals AMZN’s belief that the current environment of intense competition for digital dollars, of low margins and of capital spending larger than cash flow isn’t going to change any time soon.

I wonder whether Wall Street realizes this.  I also wonder how many remember the long struggle toward profitability AMZN had up until 2002.  The average analyst earnings estimate for AMZN in 2013 is $1.80 per share, with one analyst projecting close to $4.  I haven’t done any numbers, but, to me, the just-completely bond sale implies even the $1.80 is probably much too aggressive.

AMZN and the new (generic) Top Level Domain names on the internet

June 15, 2012 By in generic Top Level Domain (gTLD) names, Industry Analysis, internet Tags: , , , , , , , 1 Comment

gTLDs

The Internet Corporation of Assigned Names and Numbers (ICANN) unveiled the list of approved applicants for a new set of generic Top Level Domain (gTLD) names it proposes to issue.  The addition is intended to expand the number of such TLDs significantly from the current twenty or so (.com, .net, .gov etc.).

why?

The move has two goals:

–to introduce TLDs that use non-Latin based characters.  This means languages like Arabic, Chinese, Japanese or Russian will have domain names in local language characters for the first time.  This will make it easier for people whose first language is not Latin-based to use the internet.  After all, that’s where most of the future growth will be coming from.

Users may not be conversant withLatin-based characters, for example.  And they may have to take elaborate steps with their access devices just to be able to type them.

–to expand the available universe to TLD names beyond those that ICANN finds useful, and to align naming with the specific needs of internet users.

squatters need not apply

…penniless ones, at least.  One provision of the application process is that any entity bidding for the right to control and administer a specific name (that is, to say who can use the TLD and who can’t) already have the infrastructure in place to do so.

who’s bidding?

Here’s the list.

what catches my eye

–Despite the ICANN precautions, most applicants appear to be companies formed specifically to acquire and hold TLD names.  donuts.com, which is funded to the tune of $100 million by venture capital and private equity, is an example.

–there’s little match between the 1900+ TLDs requested and the most expensive search terms–like attorney, insurance or rehab–that internet advertisers buy.

–traditional advertising “grabbers” like “Free” or “Buy” aren’t in great demand, either.

–the most highly contested names are “Apps,” with 13 applicants, and names like “Home,” “Like” and “LLC.”

–the largest companies appear content to stake out their company name and the names of their chief brands, so that no one else can control them.  Other than that, they’ll wait on the sidelines to see the process evolve.

AMZN is the one exception

AMZN has applied for over 30 TLDs in Latin script, as well as filing 10 of the 116 requests for non-Latin TLDs.

Some of the names are what you’d expect, like “.Amazon,” “.author,”  “.book.”

That AMZN also wants “.AWS,” “.cloud,” “.fire,” or “.app” probably isn’t too surprising, either.

But it is also asking for “.bot,” “.box,” “.coupon,” “.drive,” “.deal,” “.free,” “.got,” and “.now”.

I think the AMZN move makes a lot of sense, for it anyway.  The company has more spare server capacity than just about anybody, so the cost for it to corral these names isn’t high.  And this many turn out to be just like the earliest days of the internet, when ordinary (albeit geeky) people bought basic domain names like “home.com” and “work.com” just to use for themselves–and later were able to sell them to corporations for tons of money.

The next step in the ICANN process?  …a seven-month call for comments.  The “list” link above will take you there if you want to chime in.

the Silk browser on the Kindle Fire

October 6, 2011 By in e-readers, Industry Analysis, internet, Publishing, Retail, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

what a browser does…

A web browser is a software program that finds web pages for you and renders them on your computer.  It locates the page you want and then reads and follows the HTML instructions it finds there.  The instructions may require the browser to travel to separate locations so it can get detailed–and sometimes complex–formatting instructions, or favicons, or to call up images that belong to the page.

…takes time and effort

All this can mean lots of round trips communicating between your browser and the page you’ve asked it to look for.  Once you’re on a given page, you’ll most likely want to follow links to other pages, either to watch a video, read an article or get more details about a possible purchase.  That’s a bunch more round trips.  Yes, we’re talking milliseconds (1/1000 of a second) for each one, but even milliseconds eventually add up if there are enough of them.

how AMZN makes Silk “super-fast”

Most of this has to do with the massive “cloud computing” infrastructure AMZN has built in becoming the online department store to the world.

In particular,

–AMZN links directly to the internet backbone.  So it can connect Silk to “outside” web pages up to 20x faster than other services.

–AMZN maintains continuous connections to the “top sites on the web,” eliminating the need for initial introductions between you and the page you want.

–AMZN has a big web hosting business, so lots of sites are inside the AMZN cloud already; AMZN caches others.  No need to go hunting for them.

–for the most popular destinations, AMZN cuts through the back-and-forth between browser and web page and starts to send information it knows you need, even before your browser asks for it.

–AMZN studies how people generally behave on a given page.  Based on its conclusions, it pre-loads content on your browser that it anticiates you may ask for next.

pretty impressive–

In fact, AMZN’s description sounds an awful lot like AOL back in the heady days when dial-up was king and the AOL server farms were all the internet many people ever used.

one caveat

Anyone using the Silk browser may well spend most or all of his time inside the “walled garden” of the AMZN cloud.  This means that, like AOL decades ago, or GOOG or AAPL today, AMZN will be able to see–and analyze–large chunks of the internet life of any such customer.

This stands to give a tremendous marketing advantage to AMZN, in two ways:

–in all likelihood, AMZN will “own” the Silk customer in the way AAPL “owns” users of its app store, and

–AMZN will be able to collect huge amounts of new data about consumer behavior.

Will customers balk at giving so much personal data to AMZN?  …not at all, in my opinion.  But AMZN will have to walk a finer line than before between using customer data for marketing analysis and respecting the privacy of users.

—

4 points about the Kindle Fire

October 4, 2011 By in Current Market Thoughts, e-readers, Entertainment, Industry Analysis, internet, Publishing, Retail, Stock ideas Tags: , , , , , , , Leave a comment

1. Thank book publishers for the Kindle Fire.

AMZN’s initial strategy for e-books was to compete on price.  In fact, it started out offering e-books as a loss leader.  It was paying the publishers $12.50 for a new release and selling it as an e-book for $10.

The book industry didn’t like this one bit, however, because it feared the tactic would destroy the independent bookstore distribution channel.    So it forced AMZN, by threatening not to sell books to the company, to charge $13-$15 an e-book for new releases and keep 30% for itself (see my posts on Kindle economics for more details).  Take that, AMZN!

As I pointed out then–nothing requiring much insight, only having watched Jeff Bezos operate over the years, I thought AMZN would likely shift to using its hardware as a loss leader to build up sales volume.  The process took a little longer than I anticipated, but the Kindle Fire is the result.

According to iSuppli, the components in the Fire and their assembly cost AMZN about $210 a unit, meaning the company gets no recovery of its research and development costs, and loses $10+ for each unit sold, to boot.  If AMZN marked up the Fire the way AAPL does the iPad, it would sell for $275-$300.  Vintage Bezos.

Presumably, though, the early devices have a lot of redundancy built in (what a disaster if the first ones broke a lot).  But component prices will fall, and the device will gradually be simplified.  My guess is that AMZN will cross the breakeven line in the second half of next year.

2.  Fire is the star, but there’s a mini-explosion of regular Kindles as well. 

Along with the 7″ color-screen Fire, AMZN is introducing a new 6″ e-ink Kindle with audio and text-to-speech.  The latter comes in touch screen and physical keyboard models.  With 3G connectivity, they cost $189.  They’re $40-$50 less with wi-fi only (which is what the Fire has).  You can knock another $30-$40 off is you’re willing to accept advertising.

And, of course, there’s still the original 6″ Kindle at $109 and the jumbo-size 9.7″ Kindle DX at $379.

3.  AMZN is already offering Fire extras.

For example, there’s:

–a two-year extended warranty, that also covers three instances of accidental damage, for $44.99,

–a cover for, $24.99-$44.99, and

–streaming of TV shows and movies through Amazon Prime–which costs $79 a year and also gets you free two-day shipping on all AMZN purchases.

4.  AMZN’s formidable cloud computing capabilities back the Fire, too. 

AMZN is promising super-fast internet browsing with the Silk browser every Fire comes equipped with.

How so?

AMZN’s on-line retailing operations require massive server banks.  Because the company has to have enough capacity to handle surges in demand during peak selling periods, it can often be left with as much as 90% of its servers idle.  Years ago, it turned to providing cloud computing services to third parties as a way of using this asset better.  Its careful study of its customers’ behavior while on the Amazon site has also given it the ability to anticipate their needs–meaning it will be able to pre-load onto a Fire device likely next pages even before the user tells the browser to request them.

More about this tomorrow.

my thoughts

Fire may not have the upscale cachet of the iPad.  But the price is right at the level where surveys of US consumers suggest they’re willing to buy a tablet.  It’s small, weighs less than a pound and has a battery life that AMZN puts at 8 hours of active use. 

It seems to me the Fire will prove very attractive to consumers on the go, just as the early netbooks drew traveling businessmen for their light weight and essential functionality.  I doubt the form factor will stagnate in the way that netbooks did, though, and I don’t expect the iPad will move downmarket to challenge.  AMZN could easily be a very big winner with the device.