Amazon’s Spending Spree Won’t Stop Soon

by Anthony John Agnello | April 27, 2011 1:26 pm

As the old cliché goes, you’ve got to spend money to make money. This well-used maxim is one that Amazon (NASDAQ:AMZN[1]) is all too familiar with. Just look at the company’s first-quarter earnings report: Revenue was up 38%, totaling $9.86 billion but profit plunged 33%.

That’s what happens, of course, when you aggressively expand you business. And the expansions won’t stop any time soon.

Amazon has branched out even further in 2011. The company opened its own digital storefront for software applications on Google’s (NASDAQ:GOOG[2]) Android operating system, looking to take on Apple’s (NASDAQ:AAPL[3]) ubiquitous outlet. It expanded its streaming-video service beyond video-on-demand rentals by giving subscribers to its premium membership service Amazon Prime access to thousands of advertising-free movies and television shows a la Netflix (NASDAQ:NFLX[4]).

The company also beat both Google and Apple to the punch this year by opening Amazon Cloud Player, a service that stores a customer’s music, both already owned and that purchased through Amazon, on the company’s own servers. A new, cheaper version of its Kindle e-reader that features advertisements in its screensaver began shipping to customers on Wednesday. And the company plans to open 9 new warehouses this year after opening 13 in 2010.

That’s a whole lot of action in just a few months.

What’s next? Does Amazon hole up for a bit and wait for its new initiatives to bear succulent profits in the next quarter before getting back to spending?

Shareholders can be guaranteed that Amazon will continue evolving the Amazon Prime subscription service over the next six months. Its transformation from a subscription that offers deals on shipping into a streaming video service was a fascinating first step that will likely be followed by improved Kindle services.

There also was speculation earlier this year that Amazon would begin offering the Kindle for free to Amazon Prime subscribers[5]. While this is still an eventual possibility, it’s more likely that Amazon will continue to expand the free content available to Prime subscribers to include Kindle books. By the end of the year, it wouldn’t be surprising to see access to both books and magazines on Kindle as part of a higher-priced Prime package.

Nor would it be surprising to see Cloud Player access extended to Amazon customers. The company also will likely expand and integrate its digital media services. Cloud Player music can already be accessed on Android smartphones, as the service that sits right alongside software sold in the Amazon Appstore. Though Amazon’s consumer cloud services are currently restricted only to music, a likely next step is to begin allowing users to store software purchased in the Appstore, movies purchased from Amazon.com, and even Kindle books on Amazon’s servers to give them universal access.

This, of course, means that Amazon will also likely continue to pour significant resources into expanding its data center operations — an expansion that will put the greatest strain on Amazon’s spending over the next year as it works to expand the consumer services as well as its web-hosting business.

The need for expansion was well-demonstrated earlier this month when a glitch in its hosting service took down the websites of a number of prominent businesses, including Foursquare. As Jeffries analyst Youssef H. Squali told The New York Times, “[This] is the right strategy longer term, but it makes for a stressful stock to own.”

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello[6] and become a fan of InvestorPlace on Facebook.[7]

Endnotes:
  1. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  3. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  4. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  5. Amazon would begin offering the Kindle for free to Amazon Prime subscribers: http://investorplace.com/36840/amazon-kindle-ads-ipad-advertising-apple-aapl/
  6. @ajohnagnello: http://twitter.com/#%21/ajohnagnello
  7. InvestorPlace on Facebook.: http://www.facebook.com/pages/InvestorPlace/178906405484848

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