Amazon's wafer-thin margins are cause for concern

Posted on by Mike Evans

After I posted my piece on Amazon’s depleted profits and the loss-leader Kindle Fire, I came across this complementary article, Think Profit, by MG Siegler at TechCrunch. He ponders Amazon’s philosophy of living in the low-margin space and wonders whether this is going to be effective as the company moves more into the selling of own-brand hardware.

He agrees that the Fire is a loss-leader to encourage content sales. It adds to turnover but profit margins are now getting very thin as we saw from this week’s results.

MG points out that as Amazon moves into hardware, Apple is moving in the opposite direction by carving out a bigger market in content sales. But Apple, unlike Amazon, makes a hefty profit on everything it sells.

In the last quarter of 2011 Amazon posted $17.4 billion in revenue but a miserable $177 million in profit. In stark contrast, Apple returned $13.06 billion profit on a turnover of $46.33 billion. This is a massive margin by any standards. Amazon’s current margins are even worse than the classic retail example of Walmart. Last quarter Walmart earned $3.3 billion profit on $109.5 billion turnover.

Of course, Amazon could see big returns on this investment if all those below-cost Kindles encourage monster downloading habits. We shall have to see.

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