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Amazon Sales Swell, But Losses Do, Too

Amazon Sales Swell, But Losses Do, Too

By David Streitfeld, The New York Times | Updated: 26 July 2014 11:51 IST

Writers are peeved at Amazon. On Thursday, investors became disgruntled too.

The company, which is embroiled in a very public conflict with the publisher Hachette, announced second-quarter losses nearly double what Wall Street predicted. It also warned that the third quarter would be worse. Much worse.

That was enough to make the stock plummet in after-hours trading. Shares quickly fell 10 percent, shaving more than $15 billion in value from the highflying retailer.

Amazon long ago proved that it could sell vast quantities of goods to tens of millions of people, and that it could simultaneously develop new businesses while innovating with old ones.

What is a more debatable question is when - or even if - all those investments will truly pay off.

"Skepticism is increasing," said Colin Gillis of BGC Partners. "It's hard to have $20 billion in revenue and not make any money. It's a real feat."

Amazon officials exude a serene if vague confidence. "We're not trying to optimize for short-term profits," Thomas J. Szkutak, the chief financial officer, said in a conference call. "We're investing on behalf of customers and share owners," he said. "We're fortunate to have these opportunities."

But even the analysts, who are generally enthusiastic about the company and its global ambitions, are asking slightly more pointed questions these days. For all these investments, one analyst asked Szkutak, why are sales not increasing even faster?

His answer: Just wait. The Prime shipping club, for example, picked up more members in the second quarter than it did in the second quarter of 2013, and Prime members buy more than non-Prime members.

"That has some short-term impact but great long-term impact," Szkutak said.

Sales are rising at Amazon at a pace that retailers of its heft could never dream of achieving. The company said its revenue in the second quarter was $19.34 billion, up 23 percent from $15.7 billion in the period a year earlier. That matched analysts' expectations.

But losses mushroomed. Amazon had a net loss of $126 million, or 27 cents a share. A year ago, it lost $7 million, or 2 cents a share. Analysts had forecast a loss of 15 cents a share.

Amazon, which is based in Seattle, long ago transcended its roots as a simple retailer. In recent weeks it introduced Zocalo, a document storage and sharing service that grew out of its fast-growing Web services division. It began a program to allow readers to consume as many e-books as they want for a set monthly fee. And it is starting to ship its long-awaited entry in the smartphone sweepstakes.

The phone, the result of years of development by thousands of Amazon programmers and designers, is meeting some resistance from reviewers. They expected a device modeled after the Kindle tablet - functional and cheap, meant for the masses rather than trendsetters. Instead, the Fire phone is expensive and loaded with innovative features that, some reviewers said, do not work particularly well.

Szkutak declined to say whether Amazon would ever tell investors how many phones it sold. "I can't comment on what we might or might not do here," he said.

For the current quarter, Amazon forecast that the losses would only grow. It expects a healthy rise in revenue but an operating loss of as much as $810 million, compared with a loss of $25 million in the third quarter of 2013.

Szkutak listed some of the reasons: Amazon Web Services is in a price-cutting war with Google and others. Six new warehouses have opened. And the company will spend $100 million on new content to put on those phones and Kindles.

"Analysts are going to have to cut their forward outlook for profitability once again," Gillis of BGC Partners said. Now that Amazon is in the content creation business, he added, the investments will be continuous. "You always need more episodes."

Amazon shares have been under pressure for much of this year, and at one point were down about 25 percent. Investors apparently were a little weary of an endless cycle of investment with little to show for it. Recently, however, the stock has rebounded somewhat, to the point where it was only about 10 percent off its high.

The quarterly results are likely to reinforce claims that Amazon is squeezing book publishers to make up for all those investments - not, as the company claims, simply to benefit customers.

During the quarter, a conflict with a major publisher, Hachette, went public. Amazon wants terms that Hachette feels are ruinous, and each side is accusing the other of bad faith.

Amazon has come under pressure from many prominent authors, who accuse it of holding their books hostage. Other authors, who use Amazon's self-publishing platform, have rallied to the retailer's side.

Whatever deal is ultimately struck, Amazon has been the loser in the public relations war.

It is trying to get the dispute out of the news by making a deal with Hachette writers to give them the income they are losing now. The writers, however, are resisting being drawn further into the conflict.

"Amazon has to change the way it thinks about its problem of trying to become profitable," said Douglas Preston, a best-selling Hachette writer who has drawn up a petition that has nearly a thousand signatures, some of them from well-known writers. They include Michael Chabon, Ron Chernow and Stephen King.

"Amazon has enormous negotiating tools at its disposal, so why does it need to hurt authors, block the sale of books and inconvenience its own customers every time it runs into a rough patch negotiating with a publisher?" Preston asked.

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