Most investors were left unmoved when Amazon.com (NASDAQ:AMZN) announced its Amazon Pages and Amazon Upgrade programs last week. Silly market. It is kind enough to let the nimble market watchers -- like you -- in on an industry-altering secret before the rest of the marketplace catches on to its significance.
How many iPods -- and digital music downloads -- had to sell before Apple Computer (NASDAQ:AAPL) was dusted off to regain its luster as a great growth stock story? Now it may be Amazon's turn.
Let's see what we're talking about here. Amazon Pages will allow shoppers the ability to buy digital downloads of pages, chapters, and complete published works without purchasing the physical version. Amazon Upgrade will allow shoppers buying traditional books to pay a little more to receive access to the digital version immediately. Both offerings are expected to launch in a few months.
It sounds simple on the surface. At that level, it's even easier to blast holes at the notion of digital delivery. Who wants to read a book online? Why will folks pay for something that Google (NASDAQ:GOOG) is trying to put out for free? Pass me the Visine; I've got a hankering for War and Peace about now.
But dig deeper, and like some onion that emotes tears of joy, you will begin to appreciate how brilliant this will play out for Amazon with every layer that you peel through.
For starters, let's vanquish the Google threat. Google is perhaps the greatest company of our generation -- perhaps -- but it's not going to win this battle. Whereas Amazon's plan is being achieved with the cooperation of leading publishers, Google Print has been a runaway renegade. Too many publishers will opt out of giving away their livelihood, and those that feel cheated by Google are already getting itchy litigiously.
There are free alternatives out there, especially for public domain works. Wikipedia's Wikibooks is excellent. However, in terms of breadth and access to current top-selling written content, Amazon seems to be way ahead of the competition. Just as Apple allowed the music labels to monetize digital distribution, Amazon is giving publishers a way to make more money. That's because Amazon will let the publishers dictate their digital pricing policy. How much Amazon will be skimming off these digital sales for itself remains to be seen, but it should be a substantially more margin-friendly offering than discounting books and other bulky items. That will certainly come in handy, because in the process of marking down wares and providing dirt cheap shipping, Amazon has been a historically weak producer when it comes to operating margins.
| Operating Margins | |
|---|---|
| 2002 | 1.6% |
| 2003 | 5.1% |
| 2004 | 6.4% |
| 2005* | 4.8% |
So let's see here. Amazon will be rolling out a pair of services that will be incremental and also beneficial to widening its Kate Moss-like margins. That alone might be reason enough to take a closer look at Amazon as a dot-com stock success come 2006 and beyond. Thankfully, it gets even better.
If you're like me, you buy more than a few books from Amazon, but you also shop around for a better deal in other online storefronts from time to time. You also find yourself trekking out to the local Borders (NYSE:BGP), Barnes & Noble (NYSE:BKS), or endearing mom-and-pop bookstore when your brain is angling to be fed.
Now, what will Amazon Pages and Amazon Upgrade mean for me -- err, you? If you found yourself driving out to some suburban mall because you needed a book right away, Amazon becomes a legitimate outlet. For a little more -- say, $2 more on a $20 book purchase -- you'll have access to the book in digital form right away. In many cases, the Amazon Upgrade program may be cheaper -- and now delivered quicker -- than the bricks-and-mortar alternative.
Researching a term paper and need the appropriate reference material? Sprung a leak in your bathroom and need to get your hands on Plumbing for Dummies pronto? Amazon is there for you.
How can Amazon's share of the retail book market not grow as a result of digital delivery? Higher sales on fatter margins! Can it get any better?
Sure it can. See, rival online booksellers will take some time to broker the publisher deals and ramp up the technology they need to catch up. Publishers always have had to respect the available outlets, but Amazon will now be the one place for authors and their publishers to monetize the digital distribution of the written word, the same way that Apple has clocked in with more 500 million digital downloads sold on behalf of the prerecorded music industry.
What will Amazon do with that power? Will it broker exclusive content deals? Will it sell paid search ads on the digitized pages -- perfectly targeted, of course -- and share the booty with its authors and their publishers? Won't that make Amazon even stronger?
If the publishing-house model is weaned off the physical product and begins to embrace everything from digital delivery to paid search on those pages, how powerful -- and profitable -- will Amazon be in a few years?
I think you know the answer. Yes, a lot has to go right for my scenario to play itself out. However, keep in mind that Amazon is at the forefront. It's been letting folks search through the pages of the books it sells for years now. It's no stranger here. Folks associate Amazon with its e-commerce efficiency, but there's a technological heart beating inside the same company that has spawned the A9.com search engine.
In fact, Amazon's photographic mapping of two dozen major cities puts it in even more direct competition with what Google, Microsoft (NASDAQ:MSFT), and Yahoo! (NASDAQ:YHOO) are focusing on these days in local search.
No, Amazon will never approach the market multiples or profit margins of pure dot-com powerhouses. The fulfillment process chews up too much out of that top line to justify lofty valuations. However, with digital accessibility forcing Amazon patrons to visit and revisit its site even more in the future, how can one sell short the company's prospects at becoming an even greater hub in the future?
But will folks take to digital media delivery when it comes to books? That's the big question. However, I can see plenty of folks signing up for the cheap upgrade anyway as an impulse item. Just as extended warranties or some fringe insurance policies may be purchased without the immediate intent of being used, Amazon Pages and Upgrade will be one up on those purchases, because the benefit is instantaneous.
Amazon shares have risen by 168% since being singled out in the Motley Fool Stock Advisor newsletter service three years ago, but I think this is only the beginning. Amazon is going to matter so much more in 2006 than Wall Street thinks at the moment. Lucky you. I'm spilling the beans, and it's barely November.
Longtime Fool contributor Rick Munarriz has been a satisfied Amazon.com customer since the 1990s. However, he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
