Amazon is growing fast. But that growth is outpacing its ability to make money, if the company’s quarterly results are any indication.
Virtually every area of the company experienced double-digit growth over the same period a year earlier. Net sales were up 35% to $17.4 billion in total revenue. Sales by third parties on the site increased by 65% and now account for 36% of all the items sold on the site. Revenue from media — books, music and video — was up 14% worldwide. And in the nine weeks before New Year’s, Kindle sales were up a whopping 177% over the previous year.
Nevertheless, Amazon’s fourth-quarter net income was just $177 million, down from $416 million a year earlier.
“We’ve been investing heavily,” said Tom Szkutak, Amazon’s chief financial officer, during the company’s earnings call. “We’ve seized a lot of opportunity in front of us. There are some challenges with economic activity in Europe, and the Thailand floods, but we think those things will work themselves out over time.”
Besides world economic issues, what also may be shrinking Amazon’s profits is the Kindle Fire tablet, which the company reportedly sells at a loss in order to rope customers into using its digital services. Amazon sold millions of Kindle Fires over the holiday, and although those customers may ultimately prove to be a reliable source of continuous revenue, the cost of subsidizing their hardware is high.
However, the Fire is also heating up media sales, which the company says were particularly strong in North America. Amazon says it’s planning to invest even more in offering content through the Kindle and Amazon Prime memberships.
“We’re very pleased with the growth we’ve seen in our digital content that we’re offering as part of Prime,” said Szkutak. “What we can’t see yet is what’s happening with free trial conversion. It’s early, but we like what we see so far, so that’s why we’re continuing down the path of adding more content to Prime.”
Curiously, one more area of growth in media was physical books. Szkutak said said the category picked up by double digits in Q4, despite the record sales of Kindle ereaders.
Do you think Amazon’s strategy of winning loyal media customers with cheap harware will pay off in the long term? And why do you think it’s selling more physical books? Let us know your thoughts in the comments.
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