Is that the end of the honeymoon with investors or simply a hiccup? Either way, quarterly results published by Amazon on Thursday, October 23, and the outlook for the holiday season are both questionable. Questioning that resulted in a 10% drop of the action in electronic trading after the close of the formal session on Wall Street. Since the beginning of the year, the stock has lost 20% of its value.
Until now, there was a sort of tacit contract between the Exchange and Jeff Bezos, founder of Amazon. His company could post losses, as the growth of turnover was making up for them. The company was supposed to be fueled by investments from all directions and to become a leader in e-commerce in more and more areas. A few weeks ago the boss of CBS, Leslie Moonve, ironized, saying that he believed the life of Mr Bezos was way easier in terms of revenues accrued on Wall Street. “I think Jeff Bezos’ is an easier life than mine,” he joked. But the life of Amazon boss is perhaps beginning to feel complicated.
Amazon strategy deficit seriously exasperates Wall Street
This is not a stock market plunge that is likely to disturb Jeff Bezos. Amazon boss does not care much about the effect of daily changes in the share price. He sees the long term profits, talks about growth, diversification and opportunities when investors would like to hear about profits, profitability and dividends.
Financial markets are therefore beginning to get seriously impatient. For even if the e-commerce giant has just blown out its twentieth candle on the birthday cake, it still accumulating losses. New artwork ended the second quarter of 2014 with a net loss of $126 million. And the company remained in the red in the third quarter.
“We do not try to optimize our short-term profits,” tried to justify Tom Szkutak. The speech, however, no longer goes to Wall Street, which is now waiting for concrete results. After hitting its highest level on January 21, the action of the Seattle group had already fallen by 12% before the publication of quarterly results. That dive now exceeds the 20% mark.
Whatever. Jeff Bezos will not change strategy. It is based on a simple principle: “sacrificing short-term profitability in order to promote its long-term growth,” said Michael Pachter, an analyst at Wedbush Securities. It is in this way that the company has established itself as the undisputed leader in online trading. This translates into significant investments to attract new customers and new markets.
This also requires the often free deliveries on Sundays in many US cities. And a logistics development with the opening of numerous distribution centers to reduce delivery times. New warehouses are being built. Another effect of the massive recruitment. Over the past two years, the number of employees has doubled. They are now over 132,000. More than that of Apple and Google combined.
From July to September, Amazon has made the biggest quarterly loss in its history: $437 million, or 95 cents per share, a reference to Wall Street, where analysts expected a loss of only 76 cents. In one year, the group has increased tenfold its losses. The problem is that this time, the distributor also disappoints in terms of turnover. It is certainly up 20% to $20.6 billion, but the figure is slightly lower than expected.
What is worrying is that the money comes out faster than it comes in. Between 2004 and today, operating expenses of Amazon rose 2488%, while turnover grew “only” 1,245%, according to Wall Street Journal calculations. Just over the last three months, the group has invested $21.1 billion, an increase of 23% in one year.
Multiplication of growth operations
In August, the group has acquired Twitch Interactive, an American site devoted to video games, to 970 million. The biggest external growth operation ever by Amazon. To this was added the launch of five new tablet models in September. The group also multiplies the food collection points purchased online. He also announced this summer that he would spend $1 billion to enter the Indian market of e-commerce. Finally, in order to feed its video-on-demand, Amazon should spend this year $2 billion to compete with Netflix. “We have many opportunities before us,” said Thomas Szkutak, Amazon CFO during a conference call, “but we certainly have to be selective when facing these opportunities,” he admitted.
Besides, not all of their beginnings have happy endings. Three months ago Amazon launched its own phone, which, for the moment, is struggling to take off. The group launched in the last quarter a marketing survey of 500 customers to find out how they perceived this device. None of them had one. The Fire Phone led the group to include $170 million of charges in the accounts of the third quarter. “Whenever you start something new, the results can be quite variable,” argues Mr Szkutak, who says it is still too early to take stock of the success of this device.
The group also spends a lot in cloud computing (cloud computing). He also announced on Thursday the opening of two data centers in Germany. This activity is even more capital intensive now that Amazon finds itself in this area face to face with its competitors with deep pockets like Google or Microsoft.
It did not take long for Amazon to endorse the failure of Fire Phone: less than two months after its launch in the United States, the first smartphone manufactured by the online retail giant is already cheap. It will now be sold for 99 cents, with a two-year contract, against a previous price of 199 dollars. Without a subscription, the cost will range between $649 and $449 dollars. The phone will be always delivered with a year subscription to Prime normally charged with $99.
This price reduction is not really a surprise as the Fire Phone sales appear to have been very low. According to research firm Chitika Insights, the smartphone accounted for only 0.02% of mobile web traffic in the US 20 days after its debut. Based on this data, the Guardian estimated that only 35,000 units were sold during this period. Performance well below analysts’ expectations, even though the latter had already been very skeptical about the likelihood of commercial success.
In fact, the Fire Phone had very few chances of being successful. Indeed, it accumulated disability, starting with the price, not aggressive enough to compete with Apple and Android smartphones, sold at the same price. This price positioning was all the more surprising that Amazon never tried to make money on the sale of terminals. Its tablet Kindle Fire has long been sold at a loss. It is now, at best, sold at cost price. The company makes up for the sale of digital content, on which it receives commissions.
Amazon now recognizes that its strategy was not good. To hope to find its place in the highly competitive smartphone market, the site cannot simply rely on its brand image. Or even on some innovative features introduced with the Fire Phone (3D interface, image recognition software and audio, etc). It should offer a better alternative value, even losing money for some time. Amazon sees long-term effect. It has the means and the will to invest in this market.
It will now be interesting to see the impact of this price drop on sales of Fire Phone. It had not saved the Facebook Phone, the smartphone designed by the social network with the help of Taiwanese manufacturer HTC. Introduced in April 2013, it had seen its price fall from 99 dollars to 99 cents a month later before being withdrawn from sale almost after a few weeks. For Amazon, the success could therefore be postponed for a while. Especially as its camera still has weaknesses.
Other future losses
This policy of heavy investment has prompted the group to open a credit line of $2 billion from Bank of America. Meanwhile, Amazon practices an aggressive commercial policy against its suppliers, which also has a cost. The group is well advanced in conflict with Hachette to force it to revise the price of its e-books down.
But what worries most investors are the expectations for the holiday season, a crucial time for a distributor. The group expects growth of between 7-18% year on year, while analysts expected a rate of 20%. A period during which Amazon could still lose a lot of money. “Looks like Jeff Bezos wants to continue to lead a kind of charity rather than a company that makes money with its millions of customers,” quips the analytical site 247wallst.com. It will surely have to find some better strategy to fulfil the investors’ Christmas wishes.
Amazon and “Gafanomics” – light in the end of the tunnel?
Every quarter sees its share of corporate results. Among them, the stars who combine higher revenues, customers, market share, becoming the entities that the press does not know other name than “giants” of the Net.
Amazon, alongside with Google, Facebook and Apple has a continent of its own, to which observers have come to ascribe an acronym which is as dull as it is effective: ‘GAFA’. If these four superstars are the winners of the digital economy, it is no coincidence, says the agency Fabernovel in a study published this fall, with free access, on November 25: they operate on common principles that is, explain the authors, replicable and adaptable by other companies.
If GAFA are the champions of the capture of value, it is because they are developed outside the traditional model, the study says. This model assumes that we must invest time and money to develop a product, put it on the market and defend against competition. GAFA chose to run in reverse. Noting that products and services are all potentially replaceable, they deduced that the only thing that really matters for their development is the customer. The old joke is to say that “if it’s free, it’s because you are the product” is not a fantasy, “all decisions taken by GAFA aim to win and retain customers,” explain the authors of the study.
To do this, simply save customers time and facilitate their daily actions. This approach, sometimes called, usually pejoratively, “solutionism” is to think that for each friction in everyday life, there is a solution, either a service or application. And above all, that it is virtually costless. As the product is generally a simple need, concrete and well identified, its adoption is strong and fast. According to calculations by Fabernovel, GAFA now occupy 55% of our “digital day” (e-mail, online shopping, listening to music, etc.).
Sacrificing revenue, gain market share
Free is not an issue, at least not at first: this economic model typically involves the sacrifice of income and short-term profits. Quite a snub to Wall Street, which regularly punishes low profits generated in particular by Amazon, which reinvests most of what it earns. If part of the industry experts, citing the young age of GAFA, believes the bet will pay off in the long run, others consider that this position is not tenable and that there will be a day when these companies report strong profits and pay dividends to investors. Will the conservatism of the markets win in the end?
If it is perplexing for both economists and users, free (91% of applications on iOS, and 85% on Android) is considered as a powerful lever for achieving a significant retention of customers, and accentuate the impression of a “positive brand experience” if part of the proposed services is free, consumers will be more willing to pay for the rest. Another advantage of free access is that it allows the multiplication of points of contact with the consumer, and thus the data collection, valuable for the analysis of consumer behavior.
Fabernovel cites the example of reading lamp manufactured and sold by Amazon, the Kindle. The object itself is sold at a loss, but calculations show that it becomes profitable after five months of average use: Amazon loses on the container, but – largely – wins over content. The “Gafanomics” show that the value of an object is not intrinsic, it changes with time and usage.
In addition, these companies do not intend to limit themselves to one activity. With iTunes and Apple Pay, Apple is making headway in the online payment, Amazon is developing a large selection cloud for businesses and Facebook embarked, with the purchase of Oculus Rift. on virtual reality. And some of these new activities – including cloud for Amazon – are much more profitable than the old ones. The movement is supported by high investment (80% of the Amazon cash is reinvested) and regular acquisitions (GAFA were involved in a third of mergers and acquisitions on the digital market between 2012 and 2014).
Even better, GAFA do not hesitate to invest in other community businesses: Google has shares in Uber, Amazon in Airbnb… Way to show they are not afraid of each other, even if the logic of “winner takes all” has never been so true.