RealTime IT News

Q4 Looms Large for Amazon.com

It's become a familiar scenario: Amazon.com announces record quarterly revenues but warns of heavier future losses.

And once again the market reacted with dismay, as (AMZN) shares fell in after-hours trading Wednesday to 72-3/4 from the 75 15/16 closing price. The stock was trading Thursday afternoon at 70 7/8, and had traded as low as 65 7/8 in the morning.

After Wednesday's trading ended, Amazon.com reported Q3 revenues of $356 million, up 131% from the $154 million in last year's third quarter. The net loss grew even faster than revenues, however, rising to $197 million from $45 million in Q3 '98, an increase of 338%.

The company was quick to point out that the net loss included $111 in one-time charges for acquisitions, investments and stock-related compensation. (This, of course, is a somewhat specious argument in that Amazon.com undoubtedly will incur similar costs in future quarters; only the names will change.)

But the real sticking point for Wall Street was Amazon.com CEO Jeff Bezos' warning that the company would spend heavily on advertising and promotion in the fourth quarter - in excess of $100 million, some analysts estimate -- pushing back yet further the time when losses will begin shrinking and profitability in sight.

Bezos positioned the decision to triple marketing spending in Q4 as an aggressive bid to capture mindshare as the holiday selling season begins.

No doubt many investors wonder if Amazon.com truly needs to shell out $100 million to promote its site, and you can't blame them. Along with America Online Inc. (AOL), Amazon is one of the two most recognizable brands on the Internet. If it doesn't have mindshare now, what good is $100 million in ads going to do?

Well, the truth is they could do plenty of good. The first objective in e-commerce is to gain mindshare; the next is to keep it. Amazon.com is facing increased competition as the holiday season approaches. Other large Internet players and bricks-and-mortar giants are battling to get a piece of the e-tail market currently dominated by the online seller of books, videos and an ever-growing list of other products. Advertising makes sense, especially in the non-Internet media (print, radio and television; remember them?), where the future e-commerce customers are and where Amazon.com is likely to spend its money.

But it's fair to ask if there are diminishing returns to such an costly ad blitz, and Amazon.com will be under pressure to show in its Q4 report if there was a return on that investment.

The company will be under even more pressure to back up Bezos' comment during a conference call Wednesday that the Amazon.com expects its U.S. book business to show a profit in Q4. Since books comprise more than half of the company's revenues, this rightly would boost confidence in Amazon.com's business model.

News reports about Amazon.com's Q3 earnings have characterized shareholders as "frustrated" and "impatient" over the company's growing losses. If the company misses its numbers for Q4, it risks a shareholder backlash.

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