Our SSS data suggests that Q3 for 3P EGM (non-media -electronics/general merchandise) came in about 72% across the quarter.
Financially, Wall St is looking for:
- Revenue: $10.9b
- EPS: $.19
- Y/Y US Revenue growth: 43%
- Y/Y Intl Revenue growth: 33%
Other areas we'll be watching closely that are more forward looking and relevent to sellers/retailers:
- Overall GMV trends - Amazon reports on four segments (Domestic/non-domestic/Media/EGM) and we always look for trends there
- User growth - Amazon in Q3 reported 144m active users, and that metric has been growing nicely.
- Seller unit % - The percentage of units that are 3P vs. 1P (Amazon sold directly)
- Paid unit growth - Q2 grew 56% in Q2, it will be interesting to see if Q3 was up or down here y/y.
We'll also be listening very carefully for any news around Kindle Fire, how many FCs are online and any other tidbits around how Amazon feels about Q4.
In true 'what have you done for me lately' fashion, the most important part of the Q3 release is the Q4 guidance. Specifically, folks on Wall St. are very concerned about the margin pressure that may come from the Amazon Fire (which doesn't ship till Nov 15, but we forecast 5m units will sell). Our rationale on this:
- Let's say worst case, Amazon loses $50 / Kindle Fire (most break-downs show $10)
- Amazon sells 5m units-> $250m in Q4 extra losses due to Fire.
So $250m is the worst case 'margin hit' that Amazon faces in Q4.
On the revenue side, let's look at what I think is a conservative scenario. Let's put the 5m fire units into some buckets:
- Existing prime users (I'm in this bucket) - We are part of the Amazon ecosystem (Kindle, video, music, Prime) and the Fire is a must have as it gives us more+better access to our content.
- Non-prime users, that will become prime users - You are a light part of the Amazon ecosystem - you have some Kindle books, you have the $2 GaGa album and some free cloud storage.
- Non-prime users, that won't become prime users - You are new/light to Amazon and just want to use Fire as a low-end Tablet. You'll browse, email and maybe shop, maybe read some Kindle books, but don't join Prime because you hate free 2-day shipping and access to thousands of streaming videos.
If you agree with me on these three use-cases, then here's what I think the economic impact of each of these is:
- Existing prime users - The cream of the Amazon customer crop and Amazon is already making a killing on these folks. Their spend is 4X non-prime. To be conservative let's say that economically from a Fire perspective, we actually get the least amount from these guys - let's even say their spending habits increase 0. In reality, I could see them maybe going from 4X to 5X, or decreasing any Prime churn, but let's say 0. Think of this as a customer loyalty program.
- Non-prime users, that will become prime - This is the lucrative group. The Fire will bump them over the hump and get them into Prime. They'll spend $80 for the video and 2-day shipping, then their average Amazon spend will go up 4X. Let's say they spend $100/yr on Amazon and that becomes $400 @ 10% margin - that's $30+80 in incremental margin or $110.
- Non-prime users that don't become prime - Getting the Fire will naturally cause this group to consume more Amazon digital content - kindle ebooks, VOD, and even physical products. Let's say these guys spend $0 today, and they bump to $200 - $200*30% = $60 incremental margin (digital goods have higher margins).
Finally, if you generally buy into those economics, the real key to this whole thing is the mix of each bucket. Rest assured that Amazon completely 'gets' this and it's the clear reason why they are packing so much new content and benefits into Prime and will continue to do so. I believe they will make Prime so compelling you will see this mix:
- 33% - Existing prime users - 1.65m units - $82.5m in cost, no offsetting margin.
- 45% - Non-prime that become prime - 2.25m units - $110m in cost, and $247m in margin for a net positive contribution of $135m
- 22% - non-prime users that become prime - 1.1m units - $55m in cost, and offsetting margin of $66m for a net positive of $11m
Bottom line, you have $250m in costs and $313.5m in revenue bump for a net positive of $63.5m. Think of this as a first year analysis. For year two, you have NO COST (because they already have the fire) and in year two you make $313.5m (which has upside as some of the third group move up to group 2). Now you may argue, ok I get what you are saying, but all the cost will be incurred in Q4 and the revenue will come over the following 12 months - into 2012. Perhaps, but I actually think the most high margin events (prime sign-up and digital goods) will actually come right after the device is opened and that component alone ($66m+180m = 250m) will offset my $50 unit costs and if the unit costs are actually $10: $250m (revenue bump) - (5m*10=50m) = $200m incremental profit that is actually upside on Q4.
Now, Amazon is notoriously a) tight lipped on these kinds of things and b) conservative on guidance, so I think what we'll hear in Q3 is that they are conservative here and then in Q1 when they announce, we'll hear -surprise, surprise, the amount of content consumed was amazing and we not only filled the margin dip from the device, but created a handy surplus.
What do you think?
Do you think Amazon will be conservative on guidance? Do you think my numbers are totally off? Sound off in comments.
Disclosure: I am long Amazon and Google and eBay is an investor in ChannelAdvisor.