Amazons Disastrous Q3 Results Mean Stormy Waters Ahead. What You Wont Read On The Amazon Affiliate Blogs. As expected, Amazon has just reported close to a half-billion dollar loss for a single quarter. The news saw Amazon shares plunge, wiping $15 billion off its market capitalization. In some weasel-words during the conference report Amazon tried to blame the Fire phone for part of that loss. Which is credible, given the Fire phone spectacularly failed, leaving the company sitting on $83m worth of unsold phones. Credible except that Amazon made guidance for the current half billion dollar loss BEFORE the Fire phone had flopped. Not because it knew it would fail, but because those losses were already set in stone. The Fire phone just became a convenient peg to pin the losses on, so lazy journalists wouldn’t dig further. Had they bothered to do so they would see that much of the losses were due to Amazon handing hundreds of millions to its Boardroom members in the form of “stock compensation”. Given three top execs jumped ship just prior to the Q3 results it’s no surprise Amazon needed to do something to keep the others in line. So while investors get shafted (as I write this, shares are down over $130 on their high earlier this year), employees get shafted and content suppliers get shafted, the Board soaks up the gravy. I’ve been saying a long while that this cannot continue, and will not continue. We’ve just seen the first reluctant admissions from Amazon that this is the case. Amazon’s CFO said, “Weve certainly been in several years now what I would call an investment mode. There is still lots of opportunity in front of us, but we know we have to be very selective about the opportunities we pursue. That’s putting it mildly. Big changes are ahead as Amazon starts to change direction towards a new business model where investors, at least, are not shafted. The rest of us get to pick up the bill. Hidden away in the detail of Q3 are some disturbing numbers. Not least guidance for Q4. Or more accurately, *especially* guidance for Q4. It’s a given most retailers and most e-retailers – including Amazon - make most of their money in Q4, Quite often companies make more money in Q4 – over “the Holidays”, or the Christmas season as we Brits prefer - than over the rest of the year put together. Amazon’s predictions for Q4 are that they will make an even bigger loss than they have just announced in Q3. That is beyond believable. Nor are they able to offer any realistic guidance about when they can turn this ship. If this were B&N or a trad publisher reporting this level of business incompetence the indie movement would be dancing in the streets, pointing to Amazon as the only company that knows how to turn a profit and why we should all steer clear of these failing businesses and ride the Bezos bandwagon.. Except, Amazon hasn’t turned a meaningful profit in the twenty years it has been going. And it isn’t about to start now. Ah, but Amazon has growth, they all cry. Who needs profit when they can have growth? Look at all that cash rolling in! But as I’ve said before, if you wheel out a barrow full of dollar bills and sell ten thousand of them as 90c you’ve just created revenue of $9,000. Yes, cash flow! But you’ve also just LOST a thousand bucks. But no matter, say the Amazon supporters. Just sell another ten thousand dollar bills at 90c each and you’ll have doubled your cash flow and had growth of 100%. What a fantastic business model. Except… Except you’ve just doubled your losses. Never mind, say’s the Amazon supporter. “We can just pop along to the bank, show them our growth and cashflow and borrow some more money.” Which brings us neatly to another item notably missing from the Amazon Q3 report. The $2bn Amazon borrowed from Bank of America last month, which took Amazon’s total debts to well over $5bn. There is so much in this report being ignored by the indie movement right now that it beggars belief. Amazon is the single most important retailer for probably 99% of indies, yet we choose to look the other way rather than look too closely, for fear of coming face to face with reality. Which is why we see the indie commentators pointing to Amazons undeniably impressive 20% growth as proof that all is well and our ebooks are in safe hands. Never mind that that 20% growth has sweet FA to do with ebooks. In fact Amazon’s North American media sector grew just 4.8% last quarter, way down on last year. North American media means books, music and video. North America is always by far the strongest of the global Amazon media arms, so safe to assume Europe, Japan, China, etc all performed far, far worse. To put things fully into context, in Q2 North America media saw growth, also very low, of 13.3%, meaning North America media growth FELL by two thirds in Q3. Is it coincidence that media growth in Q3 fell off a cliff just as there was this new Amazon media outlet in play? You may have heard of it. Kindle Unlimited. Needless to say Amazon were putting none of the blame on KU, which curiously went unmentioned. Instead Amazon’s CFO, with alarming disingenuity, explained that the massive fall in North America media growth in Q3 was due to a shift in text books being rented instead of bought. You couldn’t make it up. The reality is media sales and revenue are down across the board and ebooks – where Amazon makes most of its money – are suffering particularly badly because Amazon is having to subsidize KU to avoid admitting to yet another major initiative flop on its hand. Subsidizing KU means exactly that. Losing money to keep it going in the absence of any Big 5 players on board. Fortunately for Amazon there are a ton of indies who have fallen for the new shiny, with a little help and encouragement from Amazon shillers like Konrath and Howey. Tons of indies who are happily handing over their books to readers for a pittance instead of the standard 70% “royalty”, helping Amazon subsidize the FULL payments to trad publishers in KU, and helping subsidize the All-Cash payout for the chosen few to compensate THEM for THEIR losses. Of course, the royalty cuts through KU are just one of many ways in which Amazon will turn the screws in us indies, while always making sure the chosen few get big rewards to keep them on board and shilling loudly. Great work if you can get it. For the rest of us, Q3 and the imminent Q4 results mean more hard times ahead. Forget growth. Forget profits. Look at operating costs. Operating costs are soaring ahead of even the most fanciful growth projections, and operating costs are where cuts must, and will, be made. Indies will be among the first to feel the pinch. On top of the pinch we are already feeling. No, none of these doom-and-gloom figures from Amazon mean the company will be going to the wall any time soon. Amazon is not on life support and it has plenty of years ahead of it doing business. Hard business. Don’t be fooled by the oh-so convenient settlement with Simon & Schuster days before the Q3 announcement. Amazon could not afford to have two running battles with two Big 5 publishers, so it gave S&S an easy deal. Note carefully how Amazon dropped its demands for all ebooks to be under $9.99 that was sooooo important with Hachette. Note carefully how all the Amazon cheerleaders totally ignored this point and shone a torch on how Amazon was the good guy by settling so quickly, pretending S&S had signed the exact same deal Hachette was rejecting, when of course it was nothing of the sort. Note equally careful how those same Amazon cheerleaders gleefully look the other way as Amazon screws indie authors through KU and through Kindle Scout. Indie authors, with our non-existent collective strength, represented by a handful of spokesmen most of whom are in Amazon’s back pocket, can expect nothing but headwinds and stormy waters ahead as Amazon begins to turn its own ship.
Posted on: Sat, 25 Oct 2014 10:41:39 +0000
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