Amazon Bets New Kindles Plus Content Can Beat Apple

Amazon (AMZN) is laying down a direct challenge to Apple and its dominance of the tablet market.

At a press conference on Thursday—at the unusual location of a private airport in Santa Monica—the rapidly growing online retailer put a fleet of new devices on the runway, including a new 7-inch and nearly iPad-size 8.9-inch Kindle Fire, plus new e-ink Kindles. It also made a bevy of content and technology announcements and tried to position itself as the most inventive of the high-tech companies that are unveiling new hardware this fall in a race to dominate the next wave of mobile computing.

With the announcements, Amazon is doubling down on the hypercompetitive hardware business, which it entered five years ago with the first Kindle. In a reversal of strategy that characterized the launch of the original Kindle Fire last year, which was bare-bones in its functionality, the company is packing high-end features such as dual-band Wi-Fi into what it calls the Kindle Fire HD. The new tablet will have 16 gigabytes of memory and access to 100,000 audio books from Amazon’s Audible subsidiary. A new WhisperSync for Voice feature will allow readers to listen to an audio book and then pick up that book in the exact same place to start reading.

The new 7-inch Kindle Fire HD will cost $199 and be available next week. The slightly larger version will cost $299 and ship on Nov. 20, and yet another version, with 4G LTE wireless, will cost $499 with a $49.99-per-year data plan. “A year ago we were content to have the best tablet at this price,” Bezos said. “This year we want to have the best tablet at any price.”

Amazon is updating its Kindle Fire at a moment of furious competition in the tablet market. Over the summer, Google (GOOG) started selling the Nexus 7, with some of the same features and functionality as the new Fire, and Barnes & Noble (BKS) is reportedly set to update its Nook Tablet this fall. Apple (AAPL) will soon update its iPad and may be preparing to sell a miniature version of the device. It’s holding an event next Wednesday in San Francisco.

Bezos’s pitch is that Amazon’s devices offer the best services—a gateway to its e-book lending library, its catalog of free videos for Prime users, its audiobooks, and the collection of games in its app store. “Last year there were more than two dozen Android tablets, and nobody bought them. Why? Because they are gadgets,” Bezos said. “People want services.”

Bezos also updated the company’s selection of e-ink black-and-white reading devices. The New Kindle Paperwhite introduces a new type of display with an onboard light source, to make it easier to read in bed at night or outdoors. The device will match the Nook Simple Touch with Glowlight, which Barnes & Noble has been selling since the spring. Bezos highlighted a patented system he said directs light toward the text and called it “the opposite of LCD. Its exactly like ambient light.” The Paperwhite Kindle with Wi-Fi access costs $119. A version with free 3G costs $179, and Amazon dropped the price of the bare-bones Kindle, without a touch screen or the light source, to $69.

Bezos also highlighted his big bet on content: Kindle Direct Publishing, which allows individual authors to upload their books to the Kindle catalog—sans publisher—and keep 70 percent of the revenue, and Kindle Singles, a format for individually published mega-magazine articles. A new program, Kindle Serials, allows consumers to buy installments of books for $199 that authors can spool out in the manner of old Charles Dickens serials. “I’m thinking it’s a whole new genre,” Bezos said.

Wrapping up the event, which spanned nearly 90 minutes, Bezos juxtaposed Amazon to Apple. “We want to make money when people use our devices, not when they buy our devices,” he said.

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Amazon vs. Publishers: The Book Battle Continues

There’s a glaring anachronism at the center of most Amazon.com (AMZN) fulfillment centers: aisle after aisle of old-fashioned books. Amazon stocks these volumes for the many customers who still favor the tangible pleasures of reading on paper. Yet the company is relentless about increasing efficiency and has at the ready an easy way to remove some of those bookshelves: on-demand printing. With an industrial-strength printer and a digital book file from the publisher, Amazon could easily wait to print a book until after a customer clicks the yellow “place your order” button. The technology is championed by those who want to streamline the book business—and it might turn out to be a flash point in the hypertense world of publishing.

The book industry isn’t eager to embrace any more wrenching changes. The introduction of the Kindle in 2007, and Amazon’s insistence on a customer-friendly $9.99 price for new releases, has set off a multifront fracas. Efforts by the largest publishers to sidestep Amazon’s pricing strategy attracted the attention of the U.S. Department of Justice, which recently filed an antitrust lawsuit against Apple (AAPL) and five book publishers over their alleged collusion to raise e-book prices. (Three publishers have settled the lawsuit.) The issue of print on demand has taken a backseat as this e-book drama plays out.

Yet executives at major New York-based book publishers, who requested anonymity because of the legal scrutiny of their business, say Amazon regularly asks them to allow print on demand for their slower-selling backlist titles. So far they’ve declined, suspecting that Amazon will use its print-on-demand ability to further tilt the economics of book publishing in its favor. Asking publishers to move to print on demand “is largely about taking control of the business,” says Mike Shatzkin, founder of Idea Logical, a consultant to book publishers on digital issues. “It adds some profit margin, but it also weakens the rest of the publishing universe.”

Print on demand has been around for more than a decade. In 1997, the largest book wholesaler in the U.S., now known as Ingram Content Group, started a division called Lightning Source to serve publishers who wanted to print limited copies of certain books. In 2005, Amazon acquired a rival print-on-demand provider, BookSurge, and began offering publishers the option of supplementing inventory with print-on-demand copies when physical volumes of a title sell out. Now called CreateSpace, the Amazon subsidiary mostly caters to small publishers and self-published authors. The technology has gotten better over time, and print-on-demand books are now indistinguishable from most paperbacks.

Publishers worry that a widespread shift to print on demand could, like the advent of e-books, disrupt their century-old business model. Companies such as Random House and Simon & Schuster have spent decades investing in their own supply chains, storing books in giant warehouses and developing the transportation infrastructure to ship those volumes to stores within days. If print on demand became widespread, publishers could cut their fixed costs and solve the perennial problem of stores returning unsold books. But that would throw into doubt almost everything else about the way big publishers conduct business, since they’re compensated based on the range of services they provide, from editorial guidance to storage and distribution. Print-on-demand technology would make it harder for the publishers to justify keeping a large majority of a book’s wholesale price.

One of the New York publishing chiefs says that even allowing titles to be printed on demand by Amazon when shortages occur is a bad idea, since it might encourage the company to order fewer printed books. And having a limitless inventory would give Amazon yet another edge over retailers such as Barnes & Noble (BKS), which publishers want to keep in business as a counterweight to the e-commerce juggernaut. Another top executive of a major New York publisher says there’s too little trust in Amazon to consider its print-on-demand services.

Amazon is not the only company trying to usher reluctant big publishers into a print-on-demand future. In the late 1990s veteran Random House editor Jason Epstein had a vision of an ATM-like machine that could produce hard-to-find books, and in 2003 created the company On Demand Books to develop the idea. Today its Espresso Book Machine, manufactured by Xerox (XRX) and costing about $100,000, sits in a few dozen bookstores around the country. It takes about four to five minutes to download and print a high-quality paperback. Last fall, HarperCollins Publishers, a division of News Corp. (NWSA), became the first major publisher to make part of its catalog available to On Demand Books, offering about 5,000 older volumes. Yet the machines still offer an extremely narrow selection of popular titles, which has limited their appeal. “The catalog is huge, but it’s overwhelmingly public domain,” says On Demand Books Chief Executive Officer Dane Neller, referring to older books no longer under copyright. “That’s a function of publishers’ reluctance to upset their existing supply chain, though we hope and believe that will change.”

As the digital transition upends the industry, resistance to on-demand printing may fade. Smaller publishers that have already made the switch away from printing and storing their own books say it’s well worth it. “Instead of putting all those books in a warehouse, you free up cash flow to invest in R&D,” says Laura Baldwin, president of O’Reilly Media, a publisher of technical books that moved to print on demand last year and shed $1.6 million in inventory cost. “You can invest in the technical future of publishing as opposed to printed books that are sitting in the warehouse.”

The bottom line: Publishers are reluctant to allow on-demand printing for fear of empowering Amazon, though smaller publishers enjoy the cost savings.

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Why the Amazon Naysayers Should Be Scared

Another quarter, another blowout earnings report for Amazon.com (AMZN). The online retailer and technology juggernaut blew away analysts’ expectations on Thursday, posting $13.18 billion in revenue for the first three months of the year. The stock is up 13 percent. At this rate, the company will easily become the fastest retailer in history to cross $50 billion in sales for the year (it just missed in 2011). “The March quarterly results showed just enough upside in both revenues and margins to make the naysayers run for cover,” Stifel Nicolaus analyst Jordan Rohan wrote in a research note, sticking the shiv into the vociferous Amazon short-sellers.

The earnings report was yet another rousing movement in the entrepreneurial symphony being conducted in Seattle by Chief Executive Officer Jeffrey Bezos. Everything seems to be going right just now: His company is attracting new customers and third-party sellers, getting existing customers to spend more, and increasing profitability on new ventures such as Amazon Web Services and the Kindle. In the context of those improved margins, its expensive investment in its own operations, normally so disconcerting to Wall Street, now looks much less foreboding. Amazon added almost 10,000 employees in the past three months and now employs 65,600 people, up from 37,900 a year ago. It is building at least 13 new fulfillment centers in the U.S. this year, which will allow it to accelerate delivery and perhaps even expand its nascent grocery-delivery business beyond Seattle.

I say “at least” 13 new centers because there’s new news on that front almost every day. This morning, Amazon and Texas officials announced the company will begin collecting sales tax in Texas by this July and that Amazon will invest at least $200 million in new distribution centers in the state. It’s one more example (California was another) where Amazon essentially blinked in its standoff with a state that wanted it to begin collecting sales tax. Yet Amazon still wins, because it builds the new distribution centers it needs to expand its operations. Bezos has perfected the art of architecting the win-win situation.

Amazon’s founder himself was a no-show in yesterday’s earnings ritual. (Tom Szkutak, Amazon’s chief financial officer, runs the earnings call with an amazingly soporific drone. He could have a bright future narrating Audible audiobooks about medieval history.) One of the most interesting aspects to veteran watchers of Amazon’s earnings report is the quote from the CEO that Amazon includes in its earnings release, because it typically shows what the company wants to draw attention to. Amazon’s two-day Prime shipping club used to get most of the attention. Yesterday, Bezos used the opportunity to flog the thousands of e-books that are exclusive to the Kindle.

“You won’t find them anywhere else,” he wrote. “They include many of our top bestsellers—in fact 16 of our top 100 bestselling titles are exclusive to our store.” Amazon is desperate to put a Kindle in people’s hands, not only to dig a competitive moat around its book business, but to bring customers into the Kindle ecosystem at a time when they might consider entering the digital realms of such rivals as Apple (AAPL) or Google (GOOG) instead. That possibility—not profit margin, investment in operations, and expensive new innovation—is what the short-sellers should be worried about.

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EBay Poised to Gain 30% Chasing Amazon Without PayPal: Real M&A

January 08, 2012, 6:04 PM EST By Danielle Kucera

Jan. 9 (Bloomberg) -- Instead of running auctions for artillery shells, harpoons and zen gardening kits, a faster way for EBay Inc. to enrich its owners would be to split off PayPal.

Since John Donahoe succeeded Meg Whitman as EBay’s chief executive officer in March 2008, the world’s biggest online marketplace has returned less than 2 percent to shareholders. In the same span, its rival Amazon.com Inc. overtook EBay in equity value after more than doubling to $83 billion.

While EBay is worth $40 billion, separating PayPal, its online payments unit that is increasing sales twice as fast, would boost the combined value of the entities by as much as 30 percent, according to data compiled by Huntington Asset Advisors and Bloomberg. A spinoff would also let EBay finance its transformation into an online retailer more like Amazon without raising PayPal’s borrowing costs, Morgan Keegan & Co. said.

“It may simply be better for PayPal to not be buried inside EBay,” Peter Sorrentino, who helps oversee $14.5 billion at Huntington, including shares of EBay, said in a telephone interview. “That’s something I would hope they’ve looked at as an exit strategy. Then that would allow you to jack up EBay.”

Alan Marks, a spokesman at San Jose, California-based EBay, said it has no plans to spin off the unit. He referred to a letter Donahoe sent to PayPal employees after the division’s former President Scott Thompson announced last week that he will become Yahoo! Inc.’s CEO.

“PayPal’s vision is clear,” Donahoe said in the letter. “PayPal had an outstanding 2011. Our strategies are set and we have a strong, focused leadership team in place.”

Relative Value

Founded in 1995 by Pierre Omidyar as AuctionWeb, EBay sold its first item -- a broken laser pointer owned by Omidyar -- for $14.83. Under Whitman, who became EBay’s CEO in 1998, the auction site grew into a $78 billion company by December 2004 before losing almost half its market value as more consumers turned to online retailers such as Amazon and its acquisition of Skype Technologies SA failed.

While Donahoe, 51, was hired to replace Whitman in March 2008 after revenue growth at EBay slowed for four straight years, the stock has appreciated just 1.4 percent to $30.63 since, according to data compiled by Bloomberg.

In the same period, shareholders of Seattle-based Amazon were rewarded with a 162 percent increase, the data show.

While analysts say the underlying value of EBay’s separate businesses are worth almost $39 a share, investors are discounting PayPal’s faster growth potential because sales from its marketplace business haven’t kept pace, according to Justin Patterson, a Nashville-based analyst at Morgan Keegan.

Lack of Credit

Revenue at PayPal, which EBay bought for about $1.18 billion in October 2002, has increased more than 75 percent in the past 12 months versus three years ago, according to data compiled by Bloomberg. Sales at EBay’s marketplace division have risen less than 10 percent. The online payments unit now accounts for about 40 percent of EBay’s revenue, the data show.

“The growth is in PayPal,” Patterson said in a telephone interview. “It’s not getting as much credit. There is an inherent conglomerate discount that investors put on it, that is not necessarily in sell-side analysts’ price targets. Spinning out PayPal is one way to get that valuation more quickly.”

By spinning off PayPal, EBay’s shareholders could own two businesses with a combined value of as much as $40 a share, based on an estimate from Huntington’s Sorrentino.

“That’s a way of monetizing it for shareholders because it’s clear the market isn’t giving them that,” he said.

More Like Amazon

Separating the two would also enable EBay to borrow money to boost the long-term growth of its merchant-based business and compete with Amazon without jeopardizing PayPal’s profitability.

PayPal, which relies on the short-term debt markets to finance its operations, would have to pay a higher interest rate if EBay’s credit rating was lowered.

EBay has already increased spending on branding and technology in the past year, and started an advertising campaign in the last three months of 2011 after marketing expenses rose 29 percent in the third quarter.

To gain more retailers, EBay also unveiled its X.commerce platform in October that lets developers create products and connect with merchants without requiring them to use EBay.

With PayPal, “you have a need for a high credit rating to access short-term funding,” Jason Paraschac, a New York-based analyst at Fitch Ratings, who has an A rating on EBay’s debt, said in a telephone interview. “The EBay marketplaces business does not have those financing needs. As the business matures and growth slows down, from the capital standpoint, it makes sense to add leverage. That would negatively impact PayPal.”

Big Enough

Colin Gillis, an analyst at BGC Partners LP in New York, says keeping EBay and PayPal as an integrated business makes more sense as more consumers use mobile devices to shop and pay for goods and services. Much of PayPal’s growth also comes from EBay itself, because retailers that sell on the online marketplace are required to offer PayPal as a payment option.

“You don’t want to have different accounts, different processes -- you want to link these things together as much as possible,” Gillis said in a telephone interview. “It also gives you that end-to-end data on the entire transaction. If you’re a merchant you have to take PayPal.”

With more than 100 million active accounts and the value of processed payments approaching $30 billion in the third quarter, Keith Wirtz, who oversees $14.6 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, says that PayPal is now big enough so it doesn’t need to rely on EBay.

‘Muddied Up’

PayPal said last week that it will start a partnership with Home Depot Inc. this year to let shoppers use the payment system at checkout in the home improvement chain -- its first agreement to move away from EBay’s Internet business and allow purchases to be processed on in-store terminals.

A plan to separate PayPal would also help attract qualified CEO candidates after the departure of its president, Wirtz said.

As an independently run financial-services company, PayPal could gain a valuation that exceeds the earnings multiples investors pay to own the world’s largest payments networks -- San Francisco-based Visa Inc. and Mastercard Inc. of Purchase, New York -- by as much as 20 percent, he said.

Applying that premium to Visa’s multiple on its projected earnings this year would value PayPal at more than 20 times as a separate company, data compiled by Bloomberg show.

That’s 50 percent higher than EBay’s valuation of 13.3 times estimated profit for 2012, the data show.

“PayPal’s growth rates would warrant that kind of a premium,” Wirtz said in a telephone interview. Using PayPal “goes well beyond the EBay act itself. If it were a public company, you would see a valuation that’s centered on them and not be muddied up by being within EBay. Their relationship may be in a stage where it’s in a shareholder’s interest for the two to separate,” he said.

--With assistance from Charles Mead in New York. Editors: Michael Tsang, Daniel Hauck.

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Tom Giles at tgiles5@bloomberg.net.

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Senator Snowe Asks Amazon to Halt Price-Checking Promotion

December 09, 2011, 12:33 PM EST By Danielle Kucera

Dec. 9 (Bloomberg) -- Amazon.com Inc. should end its price- checking promotion because it gives consumers an incentive to gather price data from small retailers and leave stores without spending money, said Senator Olympia Snowe.

The world’s largest online retailer is offering a 5 percent discount to entice users to try a new mobile application that compares prices with brick-and-mortar retailers. The app, called Price Check, allows shoppers to look up Amazon’s prices by scanning physical products at a store using their phones.

“Amazon’s promotion -- paying consumers to visit small businesses and leave empty-handed -- is an attack on Main Street businesses that employ workers in our communities,” Snowe, a Maine Republican, said in a statement yesterday. “Small businesses are fighting everyday to compete with giant retailers, such as Amazon, and incentivizing consumers to spy on local shops is a bridge too far.”

Amazon is aiming to draw more online purchases from the more than 95 percent of U.S. consumers who still shop in stores, ratcheting up rivalry with traditional retailers. The Seattle- based company estimates revenue to rise to $16.5 billion to $18.7 billion in the fourth quarter -- growth of 27 percent to 44 percent, respectively, compared with a year earlier.

Mary Osako, a spokeswoman for Amazon, didn’t have an immediate comment.

Customers who download the app and enable the location feature will see the 5 percent discount, or as much as $5 off, on as many as three qualifying products, including electronics, toys, music, sporting goods and DVDs, the company said in a statement Dec. 6.

Amazon rose 0.9 percent to $192.23 at 11:44 a.m. in New York. The shares had gained 5.8 percent this year before today.

--Editors: James Callan, Niamh Ring

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Amazon May Soon Need to Collect Sales Tax

Illustration by Topos Graphics

By Brad Stone

California visitors to Wal-Mart Stores' (WMT) website must pay $214 to buy a Philips Electronics (PHG) 22-inch LCD HDTV, one of the hottest-selling flat-panel televisions on the Web. Customers of Amazon.com (AMZN) in that state see a price of $194 for the same product. The discrepancy stems largely from something that dates back to Julius Caesar: sales tax. Wal-Mart, with about 100 stores in California, has to collect it. Amazon, with no stores in California—or anywhere else, for that matter—does not.

There's a growing sense among state and federal lawmakers that the online sales-tax reprieve, once meant to support and nurture a fledgling industry, constitutes an advantage that Amazon, with 90 million customers and $34 billion in annual sales, no longer needs. Over the past year an escalating war over online sales taxes has spread to Texas, Connecticut, California, and dozens of other states. Later this month the battle will reach Capitol Hill. Senate Majority Whip Dick Durbin (D-Ill.) says he plans to introduce a bill, called the Main Street Fairness Act, mandating that all businesses collect the sales tax in the state where the consumer resides.

Such measures have been proposed and disregarded by Congress for years, but Durbin believes the winds are shifting. "This idea is overdue," he says. "Online retail sales are now very fulsome and are growing at the expense of local units of government." Many state budgets are bleeding red, despite some recent revenue upswings around the country, and Internet sales-tax revenue has the gleam of found money. In many states, customers are supposed to declare their online purchases on their income tax forms but rarely do. A University of Tennessee study recently estimated that states will collectively lose $10.1 billion in uncollected online sales-tax revenue this year and $11.3 billion next year.

Amazon executives have long argued that state laws requiring it to collect sales tax violate Supreme Court rulings from 1967 and 1992, which stipulate that only retailers with a physical presence, or "nexus," in a state need do so. Surprisingly, Jeffrey P. Bezos, Amazon's founder and chief executive officer, recently told Consumer Reports that he supports federal legislation that rationalizes the patchwork of 30,000 state and local sales-tax jurisdictions around the country, each with its own rules and administrative quirks. Amazon declined to comment on Durbin's proposed bill.

Amazon's actions on the state level have spoken much louder than its words in support of a national solution. The company has fought state-by-state collection efforts, deploying both carrot and stick to hit politicians where they feel it most—jobs. In Texas, when the legislature passed a bill that would force online retailers with distribution facilities in the state to collect sales tax, Amazon announced it would close its shipping center outside Dallas, fire hundreds of local workers, and scrap plans to build other facilities in the state. On May 30, Texas Governor Rick Perry vetoed the bill.

In South Carolina, Amazon won an exemption on a new sales-tax law after threatening to pull its distribution center from the state and agreeing to send customers e-mails reminding them to pay the tax on their own— messages that are likely to be cheerfully ignored. On May 18 in Tennessee, legislators said they would delay considering until next year a bill that would tax online purchases. They were either spooked by Amazon's threat to move its two state distribution centers to Indiana or enticed by its new promise to evaluate locations for up to three additional centers.

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