Amazon results spotlight digital books

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A slowdown in Amazon’s content sales in North America cast a spotlight on how digital books are altering the online retailer’s revenue model as weak quarterly sales figures soured sentiment on its stock.

Amazon said on Tuesday that its North America media sales – which include books, music, movies and video games – grew by just 8 per cent in the fourth quarter, signalling a slowdown the causes for which the company did little to illuminate.

Analysts said the explanation most probably lay in digital books. The Seattle-based retailer has stimulated the spread of ebooks via its Kindle devices but the shift from print is altering the fundamentals of its business as well as the publishing industry.

Digital books made up 19 per cent of the US publishing market in the first 11 months of 2011, up from 8 per cent for the same period of 2010, according to the Association of American Publishers.

But some publishers said growth in ebook sales slowed in October and November as consumers waited to buy or be given new Amazon devices – including the Kindle Fire tablet released in November – before loading new titles.

Digital books also generate less recorded revenue for Amazon per unit sold than physical books, according to Consumer Edge Research, although they are generally more profitable because Amazon does not have to pay shipping or warehouse storage costs for them.

Before the 8 per cent growth in the fourth quarter, Amazon’s media content sales in North America had expanded by between 18 and 21 per cent from a year ago in the previous three quarters. Content was 30 per cent of its $26bn sales in North America last year.

Amazon is renowned for being opaque and on a call with analysts, Tom Szkutak, its chief financial officer, offered no explanation for the slowdown beyond the disclosure that sales of video games and video game consoles had declined in the quarter.

Brian Nowak, analyst at Nomura, said in a client note that lower video game sales accounted for only 2 percentage points of the slowdown. That left an unexplained gap of 6 percentage points between the latest sales figures and recent growth trends.

Amazon shares fell 7.7 per cent to $179.46 on Wednesday, a drop 1 percentage point short of that presaged in after market trading on Tuesday.

The company did not say how many ebooks it had sold in the quarter but data from the Association of American Publishers showed ebook sales growth decelerated to 66 per cent in November, roughly half the 123 per cent growth rate for the year until the end of that month.

Ebooks are often sold at a lower price than physical books but Faye Landes, of Consumer Edge Research, said a key reason why they generated less revenue was that while Amazon reported the full price of every physical book it sold, it reported only its 30 per cent cut of the price of an ebook.

That was a result of the so-called “agency” model, which since 2010 has allowed publishers – rather than Amazon – to set the price of their ebook titles in the Kindle store.

“As the sales of ebooks have continued to ramp sharply, this has begun to compress reported North American media revenues,” Ms Landes wrote in a report.

Another factor is third-party sales by retailers that use Amazon’s website to sell their own inventory. They are becoming increasingly important to Amazon but for those sales it records only the fees it earns rather than the full price paid.

Jeff Bezos, Amazon’s founder and chief executive, said third-party sellers now represented 36 per cent of total units sold, after the company recorded year-on-year unit growth of 65 per cent in the fourth quarter.

In spite of the broader drift towards ebooks, Amazon said its physical book sales grew by double digits in the quarter. Analysts attributed that to consumers’ preference for giving physical books rather than digital books as Christmas gifts and to the liquidation of the Borders chain in July, which has enabled Amazon to capture some of its former customers.

Amazon provided no information on its sales of digital music and digital video – categories where it lags behind Apple and Netflix respectively – and Ms Landes said she took that to mean that growth was not accelerating.

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