Amazon’s torrid growth in electronics and general merchandise has prompted a major expansion in infrastructure to support its operations. The company now has 69 fulfillment centers around the world, having added 17 this year. Amazon plans to add 17 more in 2012. Amazon.com’s headcount now exceeds 50,000 people, having grown over 60 percent over the prior year, and it has begun to feel the strain of its warehouse and fulfillment operations.
Amazon also continues to invest heavily in cap ex related to its data center expansion, which is required to support the growing number of companies that tap into its web services. Starting with packages that offer five gigabytes of storage for free on a monthly basis, companies ranging from venture-backed start-ups to global corporations and government agencies can purchase computer and storage power on a per use basis, rather than make large capital outlays for computer servers, storage racks, and networking gear. AWS already has several hundred thousand customers across the globe in more than 180 countries. We expect the business to grow in excess of 50 percent compounded annually, though like its other businesses, Amazon does not report on its margin contribution.
Amazon recently launched a frontal assault on Apple in order to lay claim to its unfair share of the emerging computer tablet category. The Kindle Fire, a $199 color Amazon branded tablet, may have sold more than five million units in the most recent quarter, and we think that Amazon.com will confidently lay claim to the number two position in computer tablets within the next few months. The Kindle Fire enables Amazon to sell more of everything digital that it already sells, including video on demand, online game and music services, ebooks, audio books, pictures, and data and backup storage.
Amazon’s video on demand service, for example, allows access to over 100,000 movies and television show episodes s on a pay-per-view basis. Most can be rented for a price which ranges from $1.99 per television episode, to $2.99 per movie. Amazon also offers 13,000 movie and TV shows free for members of Amazon Prime, the company’s $79 per year service which provides unlimited two-day free shipping services. The Kindle Fire also fits well into Amazon’s Cloud Drive strategy, as it already offers 5 gigabytes of free storage for videos, games, music and other data.
It may be hard to believe that electronics and general merchandise now comprises more than 60 percent of Amazon.com’s quarterly sales, up from about 40 percent three years ago. From its humble roots as an online bookstore, Amazon.com now serves over 160 million active customers around the world. Traditionalists will be happy to note that despite rapid growth in electronic books, physical books, that is, hardcover and paperbacks grew by double digits in the most recent quarter.
Investors long accustomed to thinking of Google as the leader in online search and Amazon.com as the king of commerce may be surprised to learn of the growing rivalry–some might say hostility— between the two companies. Only last week The Wall Street Journal suggested that Google may be speaking with brick and mortar retailers about a one day shipping service that would up the ante on Amazon’s two day free shipping service, which it provides to its most elite customers. If the report is true, one would surmise that Google could only have had the intent of taking Amazon off guard, in advance of the critical holiday shopping season.
Given the vast no man’s land which defines the border between ecommerce and online search, one may ask where the seeds of this now bitter rivalry were sewn.
We would speculate that it began with Google’s bold online book initiative, in which it sought to scan the world’s out of copyright book collection ensconced in the bowels of the nation’s great universities, including the University of Michigan. With the intent of making hard to find texts available online for the first time, Google’s ostensibly altruistic effort, lauded by researchers, became the object of scorn among the world’s publishers and authors who resented Google’s efforts to corner the market on out-of-print, and out-of-copyright books, without due consideration to paying author royalties.
Amazon.com, no doubt looking to fend off a challenge to its position as the world’s dominant online book reseller—which, by the way includes used, out of print, and out of copyright books—saw it as an obvious threat to its franchise. Thus, it joined forces with Microsoft and others to fend off the Google challenge.
To make a long story short, a period of détente began to emerge between Google and Amazon.com when Google sensibly abandoned or at least temporarily suspended its book initiative. Amazon.com, in keeping with its sophisticated yet sphinx-like approach to ecommerce (see Amazon.com: ecommerce Sphinx), began to sell Google’s internet PC on its website. Amazon.com, in a gesture of rapprochement, selected Android as the operating system for its new tablet, the Kindle Fire.
Dissatisfied with the pace at which the rest of the world was adopting Android, Google suddenly, in our opinion, lost patience with the pack of Android licensees, and purchased, out of left field, Motorola’s Mobility unit, whose Xoom tablet places it in direct competition with not only Apple, but Amazon.com.
Thus, the ante has been upped in the tablet wars, with Amazon.com’s Kindle Fire an increasingly sure bet to become the number two tablet in the next 12-18 months. This probability may have been realized only recently by the Googlers, and serves to explain—or at least better understand—its controversial decision to acquire Motorola’s phone and tablet group.