Amazon Slips

Fresh off the heels of Netflix's earnings report last night, Amazon (AMZN) posted their earnings today. Needless to say, they were very disappointing:

Amazon.com Inc. is still growing at a fast pace, but Wall Street's concerns about the online retailer's margins are likely to grow after the company posted a 73% drop in quarterly profit Tuesday.

Their margins are starting to kill them:

Sales during the third quarter ended in September rose 44% compared to the same period last year, Amazon said. That's roughly in line with expectations and consistent with growth seen in recent periods. But as Amazon has roped in more sales, it has spent heavily on the expansion of shipping centers and data infrastructure, undercutting margins.

Operating margin as a percentage of world-wide sales slipped to 0.7% in the third quarter, from 3.5% in the period last year, Amazon said.

This was one of the main concerns of investors when Amazon introduced the Kindle Fire. The stock tumbled 12.39% in after hours trading. Much of this due to the gloomy fourth quarter outlook:

"They're basically calling for a break-even fourth quarter," said Ken Sena, an analyst who covers Amazon for Evercore Partners, "which is definitely disconcerting for investors."

The culprit of the margin cut looks like it's the Kindle Fire:

Szkutak danced around the culprit a bit, but the Kindle Fire, priced at $199, is definitely deterring higher earnings estimates. Szkutak also touted the long-term plan for the Kindle Fire, describing it as a “premium device,” and that Amazon takes all of the economics of the Kindle business into account, ranging from the lifetime value to the content available on the tablets and e-readers.

Because the Kindle Fire is sold at a loss, it might be the case that it won't pay off for a while. The real money will be generated in apps, Amazon Prime, and the e-books. For the time being, it's concerning because Amazon is still a strong company. In addition, it compounds the fact that in a week, we've seen Apple, Netflix, and Amazon all miss targets.

The current tech climate is alarming.

Netflix Tumbles

I like this guy, so:

Remember when Netflix raised their subscriber fees and split off their DVD mail-order services, and customers said they would boycott the company? Yeah, it seems they followed through on their words:

Shares in the once-hot but recently troubled subscription video company plummeted 27% in after-hours trading Monday after it reported a loss of 800,000 U.S. customers in the third quarter, more than the 600,000 it told investors to expect.

The stock had found some support after the price hike and the splitting of its streaming and DVD businesses:

For a while, Netflix seemed like the hot name, but it's taken an absolute beating. Reed Hastings, the CEO and graduate of my high school, is still optimistic:

“Pausing is a good thing from an investor standpoint,” Chief Executive Officer Reed Hasting said in an interview. “We are going to pause and restore our global profitability.”

Analysts don't believe it's the end of the world for the company, even though it has lost 2/3rds of its shareholder value:

"If they stop making mistakes, this is fixable," said Dan Rayburn, a principal analyst at consulting firm Frost & Sullivan. "The saving grace is that unlike a lot of other companies that get into this kind of situation, there isn't a competitor eating Netflix's lunch."

I tend to agree. They really don't have much competition and while this is a setback, they will continue to grow their business as they increase their content. They expect to have double the content and as long as it is relevant to subscriber interests, they should be fine. I'm not saying that it's time to buy NFLX. I'm not sure it has felt the entire wrath of the market yet. I do think there is potential for the company to bounce back once it gets back on solid footing.

Netflix: Flirting With Disaster?

A couple months ago, Netflix took flack for raising their prices for their subscription services. While they took heat, the company raised prices to deal with the growing cost of increasing the content available for their customers. It was a necessary move to grow the business.

Yesterday, Netflix announced that it was separating its DVD-by-mail services and its Internet movie-streaming service:

In his overnight email to the company's 23 million domestic subscribers, Mr. Hastings said the DVD business will be renamed Qwikster, hived off into a separate subsidiary that will have its own billing system, website and list of movies.

Now, I think that the DVD business is becoming somewhat archaic as we move towards a more digital world with cloud computing becoming more prevalent. With that said, there is still a demand for it, and I don't see that separating the businesses is a smart idea. It would be, if the customers were mutually exclusive in terms of online streamers versus DVD renters. This does not appear to be the case.

The outrage was immediate, as more than 16,000 users responded on Netflix's blog:

"You are making things significantly worse for us," one customer wrote, in a screed that echoed many of the others. "Now not only will we have to pay a LOT more for your services, but we will also have to access two separate websites."

Netflix is taking a long-term view, and as a result, they are taking a short-term drubbing. This is taking place both from their customers and their investors. Let's look at their customers first:

But what sealed the deal was Sunday night's so-called apology -- your mea culpa for the price hike. But you don't rescind the price hike?! Even worse, you announce proudly that you're creating an entirely new service to handle the DVD mail business, Qwikster?

So now, I have to go to one site to see if a movie is streaming, and if not, go to another site to put it in my by-mail queue to wait for a hard disc.

It's clear you don't care about keeping me happy, like you once did. I don't feel so proud being caught with that little red envelope anymore.

Clearly, these decisions were driven by what the company sees for the business. While it does make long-term sense, I think they're underestimating the good will they had generated for the brand by being the people's DVD and online streaming company. Now they're in hot water. The investors are getting out:

After a tremendous rally, that even my dad took note of and lamented not getting in on, the company has taken a huge hit over the last month. Even though the market as a whole has taken a hit, it certainly has not taken as big a hit as Netflix. The company has lost more than half of its shareholder equity in the last two months.

For me, the number one thing about business is knowing how customers are going to react to your business decisions. It is this understanding that shows that a company will succeed. You look at Apple and you see how a company with a strong understanding of its consumer has succeeded. Netflix has demonstrated an increasingly poor understanding of its consumer's needs and stands to suffer as a result.

While I strongly agree that the streaming business is the future, I think neglecting or complicating the DVD business is a poor decision. One of the main influences of technology has been to consolidate business activity. This is doing the exact opposite. While it may help Netflix tackle the content gap in the streaming business by separating the two businesses, this could have been executed much better. Additionally, I would have to question the timing, given the bad publicity that the price hikes garnered.

Time will tell whether Netflix will remain a strong company, but at the moment, you cannot like the direction it is going as a consumer and/or an investor.