Amazon com Trading Growth For Profits

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Amazon.com Trading Growth For Profits

By: David Utter
2006-07-26

Net income for the second quarter fell by $30 million compared to the online retailer's year-over-year figures as Amazon reported $22 million, or five cents earnings per diluted share.

Operating income at Amazon (AMZN) dropped by 55 percent year-over-year, from $104 million to $47 million. Amazon blamed $20 million of the drop on "a contract termination and related fee dispute."

The disputant would be Toys 'R' Us, which was freed from its contract with Amazon by a sympathetic court. The toy retailer claimed Amazon breached its contract by bringing in additional toy retailers to the site. Amazon countered by criticizing Toys for failing to maintain inventory in 2003 on hot toys, which caused Amazon to lose holiday sales.

Amazon does not seem to mind trading a dollar today for a dollar tomorrow. Membership in Amazon Prime, costing $79 per year, gives the customer membership in Amazon's free shipping program with no minimum order. Upgrading to next day delivery may be done by 6:30 pm ET for a charge of $3.99.

An Amazon customer will have to place a few orders in a year to recoup that investment. Judging by how the company has invested in technology, they likely plan to offset any declines in profit margin with fees related to technology services.

"We're investing in Amazon Prime and future technology initiatives," said Jeff Bezos, founder and CEO of Amazon.com. "Amazon Prime gets customers their products fast, and our investments in technology position us to innovate in seller platforms, web services, and digital. We're looking forward to the coming decrease in our year-over-year growth rates in technology spending in the second half of 2006."

The company has moved on from the Toys' fight, and launched a new Toy and Baby section to the website. That and other business components helped Amazon bring in net sales of $2.14 billion for the quarter, up $390 million year-over-year.

Amazon will invest heavily in the Toy and Baby area over the remainder of 2006. On the digital side, the company's S3 storage service has found favor with a variety of firms, all the way up to global technology power Microsoft.

Microsoft also figured in a change Amazon made to one part of its website functionality. Earlier this year, Amazon switched from Google to Microsoft for search services provided on Amazon.com and the A9 search engine Amazon owns.

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Tag: Amazon.com

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