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Copying Apple: Amazon Sells Media So It Can Better Market Hardware

Amazon (AMZN) may have started in business selling books and other media, but the company always planned to move into other product lines. Now the transformation is basically complete. For the first time in an Amazon quarterly earnings announcement, the company sold more "electronics and other general merchandise" than media globally. Now, just like at its competitor Apple (AAPL), media sales serve a supporting role to the consumer electronics and other goods that increasingly drive the company's business.

Amazon has been a long time coming to this point. Even last quarter during the holiday season, when you might expect Kindle e-reader sales to go through the roof, media just edged out electronics and other products, at least in non-North American markets. A number of factors are likely responsible for the change in product balance:

  • Electronic media have shifted prices downward, particularly as self-publishing authors and musicians found they could reduce prices to attract audiences and still make more money than they could through a publisher or label. But even greater volume can't keep up with the price drops.
  • There has been no new killer media offering like the Harry Potter series. That shows how much publishing depends on a few blockbusters.
  • Amazon's top selling product is the Kindle, and the company will push sales over products on which it gets only a portion of the sales price.
  • Amazon's presence as a retailer in the music, book, and video industries has matured. It's natural that growth would fall off.
  • Amazon has, over time, worked to grow its sales in non-media products.
Amazon still managed an impressive 16 percent global year-over-year growth in the media category. However, that's nothing compared to the 59 percent jump in electronics and other general merchandise.

Next act: What happens to Amazon's business model
The interesting question is what this will do to Amazon's business model. Even though it hasn't been solely a media retailer for years, such a result underscores the reduced importance of the product category to the company. As media isn't the primary driver of growth, it takes a more supportive role in corporate strategy.

Given the success of the Kindle and the trend to make e-reader more tablet-like, Amazon, like Apple, will reconsider how its product strategies work together. Media becomes a way to drive more hardware sales, and Amazon will try to extend its ecosystem to further tie consumers to it and prevent them from moving to another platform.

As far as Amazon's quarterly profit being down, chalk it up to investment. For the first quarter of 2011 and 2010, cost of sales as a percentage of net sales was flat. But marketing costs were up by 62.7 percent, while technology and content costs were up by 58.2 percent. Amazon is investing heavily to push the Kindle forward, which is a result of the shift in product mix and strategy.


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