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Friday, April 27, 2012

Wall Street Backs Amazon While Amazon Turns Its Back On Book Industry



Before the onset of World War II, several nations tried to appease Germany, hoping to remain out of their firing lines.  For instance, Russian signed a non-aggression agreement with their European neighbor.  You see how that worked out.

Now you have Wall Street gushing over a company that uses a scorched Earth policy to scrape out a few bucks profit while increasing its share of the marketplace.  You’d think Amazon was making billions.  They’re not.

They took in billions—13.18—in the first quarter—but they only netted a profit of 130 million, which is less than 1% of what they take in.  Imagine if you had a company, and in order to make 10 bucks you had to spend $9.91?  Now, some companies have thin profit margins and they make money based on volume.  The problem here is that Amazon is raking in a disproportionate amount of volume and is forcing others to compete at a level that is not profitable to them.

It’s sucking the book industry into its black hole along the way.  What allows a company to operate the way it does?  Wall Street.

For whatever reason, Wall Street loves Amazon.  When earnings were announced yesterday, its stock jumped 15% to $225 a share.  This is what permits Amazon to operate at a near loss.  It makes money by boosting its share price, not by actually being highly profitable.  Amazon is also happy making 130 million every quarter, not caring that they had to spend nearly 13 billion just to make it. 

But things don’t add up.

Last year, first quarter, Amazon netted $201 million on lower gross income.  Now they net less on a bigger gross—and the stock jumps?  Further, operating income dropped from $322 million a year ago to $192 million now.  But Wall Street says “buy this stock”.

If Amazon keeps taking sales away from its competitors but continues making small profits, how does this help businesses survive or industries thrive?  Amazon acts like a cap, dictating to a degree, what others will choose to sell and at what price.  How is that good for the country?  I know it poses a grave danger to the book industry. 

Amazon, with the help of its new bff, the Dept. of Justice, appears unstoppable, unless, of course, action is taken.  Consumers are unlikely to reject Amazon’s low prices unless they were educated about how Amazon costs jobs and threatens the greater economy.  Wall Street could put a stop to this but will only do so once Amazon slips up, once the stock becomes overpriced in the eyes of greedy investors.  Or book publishers can change things by rejecting Amazon.

Maybe they will lead the way and encourage other industries to boycott dealing with this bully.
Or, we can just drift along, hoping like Russia, the book industry won’t get swallowed up by its natural predator.

Good luck with that.


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Brian Feinblum’s views, opinions, and ideas expressed in this blog are his alone and not that of his employer. You can follow him on Twitter @theprexpert and email him at brianfeinblum@gmail.com. He feels more important when discussed in the third-person.

1 comment:

  1. Regarding Amazon's profitablity: The supermarket industry (of which you could consider Amazon the electronic version of, minus the milk and eggs) routinely operates on a 1% margin.So if Wall Street is valuing Amazon as a mega-retailer, as I believe they should be, then those profits are healthy.

    Also Amazon does not necessarily make money on a stock price increase (unless they plan to sell additional shares in to the market),only the stockholders do.

    Across the retail industry, whether it is WalMart, Amazon, or the new HomeDepot in a neighborhood, small retailers have had to re-think and re-tool. This is not a phenomena unique to Amazon.

    Disclosure: I do not work for Amazon or own stock in Amazon. I do however, plan to sell my novels through them.

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