iknowthe.net | Internet and Ecommerce Consultant

Amazon’s profits fail to impress

Shares in Amazon fell 13% in after-hours trading on Wednesday after the online retailer’s latest profits fell below market expectations.

Although posting a 250% rise in net fourth quarter profits, up to $346.7m (£184m) on a year earlier, this was boosted by a large one-off tax break.

Stripping out the $244m tax benefit, Amazon’s profit per share fell from 82 cents down to 24 cents.

Wall Street analysts were expecting the company to post a 40-cent figure.

Total revenues for the three months to 31 December were $2.54bn, up 30% from the $1.95bn for the same period last year, benefiting from record sales during the festive period.

Amazon shares fell to $36.34 in after-hours trading from their Nasdaq close of $41.88.

Martin Pyykkonen, an analyst at Janco Partners, said Amazon’s worsening profit margins “stuck out like a sore thumb”.

“They’re selling more stuff and making less profit margin on it,” he said.

Fellow analyst Chris Baggini, manager of the Gartmore Growth Fund, was even more critical.

“Margins are well below expectations – revenues were good, but margins are a disaster.”

Mr Baggini blamed the drop in profits on tough price competition from other online retailers.

In an effort to attract more customers, Amazon also announced on Wednesday that it would begin offering its US customers the option of paying a flat annual fee of $79 for unlimited free two-day delivery on orders.
In a letter to customers posted on the retailer’s US website, Amazon chief executive Jeff Bezos said he expected the new program to be expensive for Amazon in the short-term but hoped it would build greater long-term loyalty.

Yet Mr Pyykkonen said the offer would only further hit Amazon’s profits.

“It’s great for the consumer, not for great for margins,” he said.

For 2004 as a whole Amazon reported profits of $588.5m on revenues of $6.92bn. That compares with 2003 earnings of $35m on revenues of $5.26bn.

Google has become a registrar – a company allowed to sell Internet domain names – but said it has no current plans to sell any.
Last week, Internet overseeing organisation ICANN and technical arm IANA, quietly approved Google’s application and gave it ID number 895. It is now entitled to sell any .biz, .com, .info, .name, .net, .org and .pro domains (but not .aero, .coop, or .museum). Interestingly though, a Google spokeswoman told us it has no plans to sell any at the moment.

The reason it paid a $2,500 application fee and $6,500 to cover six top-level domains is that it “wants to get a better understanding of the domain name system [and so] increase the quality of our search results”. The email address it gives with relation to its new registrar status is dns-admin@google.com.

Google notes that Amazon did exactly the same thing nearly two years ago. At that time, a March 2003 article in the Wall Street Journal pointed out that the online giant had become a registrar and assumed that it was about to launch a domain name selling business. It set the industry off – but we are still waiting, 47 months later.

So why become a registrar if you’re not going to sell domains? Speculation is rife.
One idea is that it has to do with Google’s AdSense for Domains business, which aims at the domain name industry. Google’s technology “understands the meaning” of domain names, the company says, and then ties it in with search terms that people type in its search engines.

Watch this space.

Online advertising has come of age with major brands like American Express and Nike now firmly embracing the internet as an equal to more traditional promotional outlets.

Yahoo has said a boom in online advertising helped it to more than double fourth-quarter profits to $187m (£143.2m) in the last three months of 2004.

Newspaper groups, meanwhile, seeing a loss of revenue from print advertisements, are expanding their own internet operations as they bid to keep up with demand from marketers in a sector which is growing.

“We saw a complete change of philosophy last year,” says Jeff Lanctot, vice president of media at AvenueA/Razorfish, the largest independent online ad agency in the US.

Faced with a multi-channel media landscape and corporate belt tightening, marketing departments began to see online advertising as a cost-effective medium. With its mass reach, it can now rival other entertainment outlets for audience size, says Mr Lanctot.

“Brand advertisers once considered online an emerging technology they should test but in 2004 they considered it an essential part of their campaigns.”

Total online spend grew by about 27% last year but still only accounted for 3-4% of US and European company marketing budgets, according to JupiterResearch.

By 2009, JupiterResearch forecasts revenues will have more than doubled to about $16.1bn (£8.5bn) in the US and 4.7bn euros (£3.2bn) in Europe.

Although growth will slow and overall revenues will remain far below TV and newspapers, online advertising is the only area expected to significantly increase its market share over the next five years.

Financial and travel companies were among the first to start selling products and services on the internet and now spend up to 20% of their advertising budgets online.

Sponsored searches – where firms pay to have links to their websites displayed in response to internet searches – and the bright spot in the years after the dot.com crash for the likes of Google – continues to grow.

And sales of online display or banner advertisements – the largest earner in the sector – generated their first increase in revenue last year since 2000.

It was the major brands advertising on specialist sport sites and the portals like Yahoo, MSN and AOL – where the cost of space can cost $400,000 for a 24-hour placing in the US – that is behind the recent boost.

A survey carried out for the European Interactive Advertising Association, a trade organisation for sellers of interactive media, found 83% of online users felt that TV has too much advertising but less than half felt the same about the internet.

A third of those surveyed said that online advertising was relevant to them.

“There was a confidence as the industry re-established itself on a much more stable footing after the dot.com crash,” says Julian Smith, European online advertising analyst at JupiterResearch.

But Mr Smith envisages challenges ahead as faster internet connections see advertisers vying to create even more creative campaigns.

“As more [advertisers] come online in 2005 and competition intensifies to attract the attention of ever more experienced and wary online consumers, so the costs of online marketing will increase.”