Most publishing folks I know always figured that light at the tunnel was probably a train. Now I believe we know it. Not just by their actions but by what they’ll probably be forced to do in the future.
A recent piece by Fortune’s Apple-watcher Philip Elmer-Dewitt caught my eye, at first for its wonderful — and wonderfully apt — title: “Apple vs. Amazon: Bizarro Valuations Revisited.” I read it and it sparked some thoughts. Most importantly, that Amazon, along with most of the companies on which publishers now depend for most digital consumer transactions, are publicly traded and, as such, subject to the forces of the markets, investors, analysts, et. al. This is a fact that is always somewhere in the back of my mind, and I suspect the minds of most everyone working in trade publishing. However, it is rarely in the fore. At least for me. So, let’s take a look as Amazon the stock. It’s an odd but familiar duck. It always has been. I suspect, though, that it can’t remain too odd for too much longer. And that may have serious implications for publishers.
Couple caveats. I am not an MBA, a finance guru, nor a direct owner of AAPL or AMZN shares, though they likely reside in some aggregated investments I own. Basically, I’m using the numbers directionally, to show a trend that I believe is important and will become increasingly so. I have no vested interest in seeing the stocks go up or down. Also, based on my devoted but less-than-massive readership, nothing I say is likely to have any material effect on anyone’s market performance so the last caveat is that the above caveats are probably gratuitous.
To get a sense of Amazon as a stock, I would highly recommend checking out the graphic that appears alongside the Fortune piece. It compares Apple’s stock performance to that of Amazon, which is an interesting comp but I found just the Amazon performance most interesting. As the graphic was supplied by a Fortune reader, I don’t wish to commandeer it and use it inline in this post. Respecter of rights, me. But it lives here. Some AMZN lowlights from the chart that caught my eye:
- Earnings per share prior to Q4 2012 results: $.08 (AAPL returned $44.10 per share during the same period)
- AMZN’s price to earnings ratio is 3,100. Yes, 3,100
- AMZN’s estimated EPS growth for the next 3 -5 years: -4%
- AMZN’s earnings per share “miss” compared with analyst estimates: -28%
- For the four quarters ending in Q4 2012, Amazon lost $40MM
- Sales rose 22% compared to Q4 2011
- Profits dropped from $177MM in Q4 2011 to $97MM
Both of those numbers fell short of analysts’ projections. And…Amazon’s shares went up by $18.95 to a near high for the year.
All of this is a sign of a market that believes in Amazon’s future — and Amazon’s strategy of investing in that future at all costs — so strongly that it is willing to disregard fundamentals and, basically, suspend disbelief. Amazon has essentially continued to convince the market that it has a bright future based on customer acquisition and sales growth and that its underlying profitability is unimportant. Their margins are terrible to non-existent but they are entering every growth area possible — from tablets, to digital content sales and subscriptions, to cloud services, etc. — and winning market share in most if not all. For now monkeys can fly! Or at least they will fly very soon…
So, is this a bubble story? Pets.com redux? Hardly. But…
In my understanding of the market, at some point potential must be turned into concrete performance, preferably of the bottom line/EPS/PE Ratio varieties or the market will prove fickle and perhaps even cruel, as it has to other precocious companies over the years. Basically, at some point Amazon will need to seek profits or their share price will fall to earth. Where will it look for those profits? I think the answer is right in the company’s mission statement:
To be Earth’s most customer-centric company where people can find and discover anything they want to buy online.
For Amazon, who despite B2B revenue streams such as AWS and others, “customers” are, at core, end consumers. I find it highly unlikely that they will seek margin by raising consumer prices. It would entail the risk of stifling growth and alienating their primary constituency. So, they’ll look to suppliers. It makes me shudder to think of publishers as “suppliers” but they are. And, in this case, they are suppliers who are far more dependent on their buyer (Amazon) than is the buyer on them. In other words, publishers are ripe for bullying.
Publishers probably won’t be the first suppliers Amazon approaches for a variety of reasons, not the least of which the fact that the “media” category still represents a minority of Amazon’s overall earnings. For now.
But eBook sales have increased 70% year over year and Amazon actually realizes most of the savings of selling digital product (unlike publishers who still have most of the costs associated with producing content in any form). Also, reading between the lines I am guessing that those booming eBooks must make up a greater percentage of Amazon’s media category profits than ever. Add to that the fact that eBooks are now intrinsically tied to other growth areas such as tablets and other digital media. And, while Amazon has always aggressively pursued favorable terms because they wanted to grow as efficiently a possible, they will now be forced to seek profits because the market will demand it. Very different ballgame, that.
Look out publishers.
Mergers and noncommittal D2C plays are unlikely to help much with this particular problem — witness Universal Music’s massive market share and how Apple still bullied them. Witness MusicNet’s failure to circumvent iTunes. You simply cannot kill the golden goose. Stockholm Syndrome is real.
Share price zaniness and great expectations aside, Amazon is not Pets.com. It’s Walmart. Again I shudder. We in publishing have always suspected this and often pointed it out. Unfortunately, now it really matters.