Amazon Toying with Vertical Integration

Amazon.com (AMZN) has been pursuing growth at all costs. Their recently announced Q1 2008 results are witness to that drive. They reported the quarter’s revenue at $4.13 billion, meeting analyst expectations and reporting a 37% increase over the previous year. Their earnings for the quarter at $0.34 were marginally higher than the market’s expectation of $0.32 and 30% higher than previous year earnings.

Media revenue increased by 28% over the previous year to $2.54 billion while Electronics and other General Merchandise (EGM) revenue increased by 56% over the period to $1.48 billion.

Region wise, North America contributed $2.13 billion recording a 31% growth. The rest of the world revenues grew by 44% to $2.01 billion.

Going forward, for Q2, they expect net sales of between $3.875-$4.075 billion, a growth of 34%-41% with GAAP operating income of $0.12-$0.16 billion. For the year 2008, they expect net sales between $19.1-$20 billion, a growth of 29%-35% with GAAP operating income of $0.74-$0.94 billion.

I have mentioned repeatedly, how Amazon needs to expand margins. The management however, continues to follow the low-price strategy to drive up sales. They attribute their sales growth for the quarter to “low prices and millions of in-stock items available for immediate shipment”. Their operating margin continues at 5.8% for the quarter, despite addition of new categories even in the international segment.

Amazon’s competitor eBay had announced their results recently and unlike Amazon, eBay continues to give higher margins.

The management does not give a more detailed breakdown of revenue contributors. So, Kindle revenues are still not available to analysts. They have increased the content to 115,000 titles from the 90,000 titles at launch, which is indicative of at least some commitment.

The most interesting move I saw this quarter from Amazon, however, is the news that they will only sell print-on-demand books printed by their own POD provider, Booksurge. In fact, the book publishing business is ready for a complete overhaul, and who is better positioned than Amazon to pull this off? With Booksurge, Amazon is offering 35% royalties to authors, promotion opportunities on Amazon (e.g. cobranding with best-sellers for $1000 a month), etc. Contrast this with the 10-15% royalty that major publishers offer their authors, and virtually no marketing (except in the case of a few titles), Amazon is starting to address the two most important issues in the book industry. I can’t wait to see what Amazon would do to turn this around. The vertical integration basically takes out all intermediaries except the Author (35%) and Amazon (65%), and can become a compelling option for 90% of the authors.

Amazon’s stock reported an increase of 1.8% during the day yesterday, but in the after hours session, it fell by 4.8% to close of $77.10. Today, it is trading the the $77-79 range, roughly

Read more on my comparison of Amazon with eBay:

eBay vs Amazon: Which is a Better Company?

eBay vs Amazon: My Take

And here’s the most recent comparison chart of the two: