Amazon.com, Inc. (NASDAQ:AMZN) is positioning itself for revenue growth, and is making various investments to achieve this. It continues to make acquisitions such as Goodreads, as well as invest in improving its core business. These investments often sacrifice margins for long-term growth, but this is a strategy that has worked for Amazon.com, Inc. (NASDAQ:AMZN) in the past and helped its stock outperform its large cap tech peers.
Amazon Prime customers account for around 15% of Amazon.com, Inc. (NASDAQ:AMZN)’s customer base, and their numbers are growing. They pay $79 a year for cheaper and faster delivery, access to lending library books, and other services. These customers spend 2-4x the amount of non-Prime customers annually. The percentage of customers who subscribe to Prime is expected to grow, as are the services offered. While Prime boosts revenue per customer, it carries a negative mix impact in the near-term.
Add Fulfillment Centers
Amazon has been building more and more order fulfillment centers every year since the downturn--20 in 2012 versus 13 in 2010. This will reduce shipping costs and improve customer service via reduced shipping times. Amazon’s value proposition has always included best in class customer service, and this investment helps it maintain the 2 day shipping policy for items sold to Prime customers. In the near-term, the investment and mix shift to higher cost Prime customers will negatively impact margins. That said, lower shipping costs through more ground vs. air shipments and an increased bundle rate will help to somewhat offset this.
The Kindle offerings have expanded over recent years, and Amazon now offers a range of e-readers and tablets. The Kindle has positioned Amazon to benefit from the transition from buying physical books, music, and other physical media into the consumption of digital media. Selling the device allows the customer to purchase more digital media from Amazon versus competitors like Apple Inc. (NASDAQ:AAPL)’s iTunes. Amazon will continue to invest in devices and sacrifice margin to gain customers for its digital services.
Amazon.com, Inc. (NASDAQ:AMZN) also is expanding its digital media footprint via acquisitions. It announced it is acquiring Goodreads on March 28, 2013. Goodreads is the largest book recommendation website and reading related social media site on the web. It has 16 million users, 530 million books, 68,000 authors, and 23 million reviews. The terms of the deal were not disclosed. Goodreads will fit well into Amazon’s Kindle business and expands its core capabilities into social media. It also should have synergies with the Audible and IVONA acquisitions. Depending on the integration, and ultimately the promotion of Amazon products through Goodreads, Apple Inc. (NASDAQ:AAPL)’s iTunes and Google Inc (NASDAQ:GOOG) Play could lose some of their digital books market share to Amazon. Amazon currently makes up 27% of the book sales in the US, while Apple and Google sell much less.
As of Feb. 6, 2013, Apple's iTunes had sold 25 billion songs--however, iBook sales have been considerably lower. Apple Inc. (NASDAQ:AAPL) announced in October 2012 that book sales had reached 400 million units. This would account for a very small portion of Apple's revenue.
Apple has also taken a shot at creating a social network with Ping. Ping wasn’t very successful and shut down in late 2012. Of course, Google has Google+, but it is currently not revolving around products such as books.