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Acquisitions And A Site Revamp As Holiday Season Approaches For Amazon, eBay

Posted on Thursday, Nov 11th 2010

According to analysts, online sales in the U.S. for November and December will increase 16% over the year to $52 billion. In the same period, the National Retail Federation puts overall retail sales growth at a mere 2.3% to $447.1 billion, an indicator that e-commerce continues to steal brick-and-mortar store sale shares. This is obviously good news for e-tailers Amazon and eBay.

Amazon’s Financials
Amazon (NASDAQ: AMZN) reported Q3 revenues to have grown 39% over the year to $7.56 billion, beating the Street’s projected $7.35 billion. EPS of $0.51 was also higher than the market’s expected $0.48. During the quarter, sales in North America grew 45% over the year to $4.13 billion and international sales grew 32% over the year to $3.43 billion. By segment, media sales grew 14% to $3.35 billion and electronics sales grew 68% to $3.97 billion.

For the current quarter, the company projects revenues to be $12 billion to $13.3 billion compared with the market’s projections of $12.3 billion. However, Amazon is troubled by increasing costs related to setting up of 13 new fulfillment centers and warehouses, promotional shipping programs, and growing marketing expenses. Amazon projects margins to be 3%–4.2%, missing the Street’s projections of margins of 5% in the fourth quarter.

Amazon Focused on Kindle
Kindle continues to remain a focus area for Amazon’s growth. Analysts estimate Kindle to generate $2.8 billion revenues this year and to grow to $5.3 billion revenues by 2012. While Amazon maintained silence on Kindle volumes, they are pleased with the new Kindle sales, claiming them to be the fastest-selling Kindles of all time and the bestselling products on their U.S. and U.K. web sites.

However, Kindle’s growth is coming only with heavy marketing expenses. During the quarter, Amazon’s marketing expenses grew 62% to $241 million, the bulk of which is estimated to have been spent on Kindle’s marketing campaign to ward off competition from Nook and the iPad.

Kindle has reduced its price to beat competition, now offers more features, and has been forced to offer higher royalties to increase its digital library. The new Kindle sells for as low as $139 and recently, Amazon announced increased royalties for Kindle publishers. Amazon will increase the royalties it offers to magazine and newspaper publishers for titles sold in the Kindle Store to 70% in a move expected to motivate more electronic editions.

Amazon also announced plans to enable lending of books on Kindle, a feature which is already available on Barnes & Noble’s Nook. Through the new app, users will be able to lend their Kindle books to other users for a two-week period during which they will not be able to read it.

Amazon Acquires Quidsi
Meanwhile, Amazon continued to acquire companies to expand their e-commerce footprint. Earlier this month, they announced the acquisition of Quidsi, an e-commerce company that runs,, and for $545 million. Quidsi revenues are expected to grow 67% over the year to $300 million and analysts project their revenues to be $1.3 billion by 2012. sells baby care items, including food and maternity wear, sells health, beauty, and cleaning products and sells higher-end skin care, makeup, and other products online. The deal is expected to make Amazon the leader in the baby segment.

Quidsi’s is known for their customer service and ability to make profits on shipping bulky yet relatively lower-margin products like diapers by using innovative warehousing and supply chain technology which deploys customized systems for inventory management and fulfillment and has robots working on packing orders. Similar to Amazon, they offer free shipping on a minimum purchase, overnight shipping, and free shipping on return.

Amazon’s stock is trading at $170.27 with a market capitalization of $76 billion. It touched an all-time high of $173.20 earlier this month.

eBay’s Financials
Competitor eBay (NASDAQ:EBAY) reported revenue growth of 1% to $2.2 billion for the third quarter and managed to exceed the market’s projected $2.18 billion. EPS of $0.40 was higher than previous year’s $0.38 and the market’s expected $0.37. For the current quarter, they project revenues of $2.39 billion to $2.40 billion with EPS of $0.37 to $0.40.

eBay Benefits From PayPal
PayPal continued to be the big driver for eBay’s growth. They ended the quarter with 90 million active accounts worldwide, adding over a million new accounts each month during the quarter. Analysts estimate that PayPal holds nearly 10% of the online payment market. For the quarter, PayPal’s revenues grew 22% over the year to $838.2 million with total payment volume rising 26% to $22.4 billion. Currently, PayPal accounts for 37% of eBay’s revenues, but the management is certain that soon it will be bigger than eBay’s e-commerce site revenues.

PayPal is focusing on their mobile strategy. Mobile transactions still constitute a very small portion of PayPal transactions. For the year, PayPal is expected to process more than $500 million mobile transactions compared with $80 billion in overall transactions that PayPal will do. To help increase mobile volumes, they recently announced the release of Mobile Express Checkout, a platform that lets customers use their smart phones to pay for retail products in stores.

They also launched a new system to simplify the payment process for small online purchases of digital news articles, video clips, or games. The system will allow consumers to pay for digital goods without switching websites or re-entering credit-card or bank details. The company expects the digital goods industry to be worth $16 billion. They claim to have processed $1.3 billion in small digital-goods transactions in the first half of this year, compared with $2 billion in such transactions for the whole of last year.

eBay Redesigned
Besides PayPal, eBay is also revamping their website using advanced technology and search features. This is their first major revamp in four years, and some of the features that the new site offers have existed on competitors’ sites for some time. These features include personalized recommendations, featured items, and consolidation of listings by sellers and highlighting the best deal at the top. But besides adding features, the revamp will help eBay to clean up clutter. While the inventory will remain strong, it will be cataloged better to help customers find products sooner.

eBay also entered into an agreement with Groupon, the discount deal shopping website. The partnership will enable eBay users to find Groupon’s deals throughout the site. Members of eBay’s reward program who purchase the Groupon deal of the day will receive 5% of the purchase price in eBay Bucks.

The stock is trading at $30.82 with a market capitalization of $40 billion. It touched a 52-week high of $31.25 earlier last week.

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