Amazon’s Long Game (and Wall Street’s Woes)

 

Q3 earnings calls came out last week and they had Wall Street worried about Amazon’s prospects. The problem is that Amazon has been losing money even with its incredible, record-breaking sales volumes and income. But, this doesn’t mean that you should throw your Amazon shares out the window just yet. As much as analysts hate the idea, Amazon’s actually taking a loss now in order to gain more in the long run. Case in point, the new Kindles. The new Kindles with ads aren’t making strong returns on sales right away and the Kindle Fire is actually costing Amazon about $10 a piece, with pre-sales already in the millions. What’s harder to see in these numbers is the future return on the investment. With the Kindle readers, Amazon just has to sit back and watch the money roll in from ads throughout the device’s life span. But the Kindle Fire is a trickier beast. With the Fire, Amazon is deploying a number of tactics to make sure it gets returns on its investment: Operating system, Amazon’s Ecosystem and the Silk Browser.

 

Operating System:

 

The Fire isn’t running vanilla Android, far from it. The Operating system has been heavily coated and tied down with Amazon services. You can’t even access Google’s Android Market from the device. While this might sound like a negative, it’s actually almost necessary for Amazon to turn a profit on its tablet business. Android apps are notoriously easy to download and play for free from the device’s browser, and when the plan is to make a profit on the tail end… that can really be a problem. Instead, Amazon has its own Appstore on the device and the version of Android is different enough that you can’t just download pirated apps. The lack of an SD card also closes a lot of leaks such as side-loading illegally. And the ties to Amazon services aren’t exactly hurting the company either, which takes us to our next topic….

 

Amazon’s Ecosystem:

A major fact we shouldn’t forget about the Fire, it’s basically a glorified Amazon storefront. All the Amazon services are riding on board so you have access to the app store, kindle store, music/video stores and let’s not forget Amazon.com in its entirety. Everything you could ever want you can purchase straight from the device anywhere, any time. And just to get you hooked, Amazon has the one-click purchase so you can spend without realizing it and throws in a free month of Amazon Prime. After just a month of access to the thousands of videos on demand and free second day shipping, most people will probably find it in their hearts to pay the yearly fee. And because of the device’s ridiculously low price, people will definitely be coming back to buy. This factor alone will probably assure a tidy return.

 

Silk Browser:

 

To squeeze even more money out of the device, Amazon played a dirty little trick on us with Silk. The Silk browser (developed in-house by Amazon) actually runs most of the tasks on Amazon’s servers, making for a faster browsing experience… but that’s only a front. On the backend, the browser funnels user information straight to Amazon. Just imagine how powerful that information is. The device has your name and account information tied to it and added to that they also know what you’re interested in from your searches, what you watch, what you listen to, what you read and what you’ve bough. And they have access to the rest of your information through other web services you use… talk about a gold mine. That information could be used to make extremely targeted ads or sold to third party companies who’ve only seen such user information in their wet dreams. I’m not saying that there is no end-user benefit to Silk (in fact, first reactions have been quite positive) but I’m just saying that Amazon was looking pretty closely at its bottom line when it came out with the feature.

 

And, there is another reason for biting the bullet that isn’t so strictly monetary: customer relations. Amazon has always tried to get prices as low as possible for its customers and keep them coming back. The Kindle Fire is literally too good a deal to be true, and that sentiment will not be lost on customers. So, even though Amazon’s Q3 spread sheets aren’t glittering, they’re making wise investments on something that will definitely pay off in the long run (and they definitely have the capital to start investing). In fact, they’ve already started manufacturing millions more devices than they originally anticipated. So don’t go worrying about Amazon, they’re gonna be just fine.

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