Amazon: Smaller, Faster, Cheaper

BooksSmaller, Faster, Cheaper. That has been the mantra of the computer business for decades and it continues on. As predicted here, Amazon has announced a smaller, faster, cheaper Kindle 3 and it also turns out to be clearer. The new no glare screen has increased gray-scale contrast and it loves the summer sun. The battery life is one month and the slightly smaller size and 8.7 once weight means you can hold it in your hand for a long time with no fatigue. At a price of $139 this new Kindle will likely become something that every member of the family will have. I think Jeff Bezos has the right idea with his “single purpose” device combined with a strategy to make all Amazon books readable on all the devices no matter who makes them. I love my iPad but when it comes to reading  books the Kindle is hands down better and with the Kindle 3 that advantage will be multiplied.
The new Kindle comes in two flavors: one with WiFi for $139 and one with WiFi and 3G for $189. For most of us the WiFi model is more than adequate. If you are going on a trip you can download your favorite newspaper plus a book or two or more using your home WiFi and you are set. You don’t really need 3G for other applications because the Kindle doesn’t have other applications! That is what your iPad is for.
I have a small investment in Amazon and plan to hold on to it for a long time. I think their visiion and execution are outstanding as I have written many times here in the blog. The Wall Street pundits are not as bullish, however. In fact the latest stories on the company’s performance talk about “costs soar”, “investors spooked”, “expectations not met” and other negative phrases. Amazon was criticized for spending to expand it’s infrastructure. Apparently Wall Street would prefer that the company wait until they start dissatisfying customers and then apply bandaids. Amazon is adding 13 fulfillment centers this year and has hired an additional 2,200 employees over the last quarter.  As an investor I like the long term view that Jeff Bezos has taken consistently from day one. He ignores the pundits and listens to the customers.
What was the bad news that caused the stock to take a big hit this week? Amazon’s earnings rose 45% on a 41% increase in sales. Sales of electronics and other general goods rose 69% to $3.49 billion. Operating expenses such as marketing and distribution costs jumped 40%, almost as much as sales. They didn’t rise — they jumped. Rising less than sales was a very good thing when I was a CFO.  Another “negative” is that Amazon’s sales of traditional media, such as books and DVDs, continued to decelerate. That will be true for everyone as we all know. That is why Amazon is pushing the Kindle.
In spite of the “negatives” Amazon’s profit for the quarter grew from $142 million to $207 million while revenue rose from $4.65 billion to $6.57 billion. But analysts were critical that return on invested capital fell to 34% from 42% a year ago. Most companies would die to get 10%. The bottom line is that expectations get out of hand. An analyst puts a number in a spreadsheet for what they expect revenue or profit to be and those numbers become set in concrete. Somehow the analysts know more than Jeff Bezos about what his numbers should be. In the long run things adjust properly but in a quarter by quarter game the strategy and reality of performance are less important than what the expectations were.
Meanwhile Amazon reported it sold more e-books than paper books over the past three months. The company also disclosed an agreement with literary agent Andrew Wylie giving it exclusive rights to sell digital editions of certain older titles by authors such as Philip Roth and John Updike. The deal bypasses publishers completely. This is profound. The publishers are furious about the deal but for the rest of us it means fairly priced access to a large number of classics. The Kindle library now exceeds 600,000 and is growing rapidly. That should take care of a lot of summers.