Amazon Declares War On Profit Margins, Takes On Disney

| About:, Inc. (AMZN)
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Amazon halts pre-orders on Disney movies, making the Walt Disney Company the most recent to experience Amazon’s strong arm tactics.

The Seattle-based company has used this technique successfully in the past but never against a company as large as Disney.

If Disney calls Amazon’s bluff, and Hachette joins in, the company could be in trouble.

Amazon (AMZN) is battling for profit margins, even going so far as to limit its involvement with companies who refuse to give the Seattle-based company a larger piece of the pie. Most recently, battled with Hachette Book Group over ebook pricing and before that it was Time Warner.

Now, it seems Amazon has another company in its sights - the Walt Disney Co (NYSE:DIS).

On Sunday, Amazon froze pre-orders for several DVDs and Blu-ray discs from Disney, including "Captain America: The Winter Solider," "Maleficent," and "Muppets Most Wanted." The Wall Street Journal reports that there is "apparent contract dispute."

Amazon has employed these tactics before, and won. But taking on Disney could be a different story. Disney has enough clout and is popular enough that the company could forego Amazon without making too much of a dent. Amazon, on the other hand, may not be able to weather the storm if Disney ignored its demands.

The company has been operating spherically - in many directions at once - but with varying success. Amazon has spent so much on its Alphabet Projects and a range of other ventures that have not delivered the profitability the company had hoped. Should Disney call the company's bluff, Amazon could take a real hit - the sort that sends a company in a tail spin.


The tactic is the same one Amazon has employed in the past, such as in its notorious dispute with Hachette. "To press its point, Amazon suspended pre-orders for physical copies of many Hachette titles and lengthened shipping times or pared discounts for others," writes the Wall Street Journal. Amazon explained, "Hachette spent three months stonewalling and only grudgingly began to even acknowledge our concerns when we took action to reduce sales of their titles in our store."

And books are not the only source of precedence. "Amazon briefly cut off pre-orders of physical versions of movies from Time Warner Inc. (NYSE:TWX)'s Warner Bros. studio earlier this year before reaching an accord. That dispute had involved not just pricing, but cooperative marketing, search placement and other issues."


Amazon built its business by offering a range of media products at barely over cost - building profits by quantity. But, that only works while the numbers are there. Amazon has to keep its prices low to retain its customer base, but keep them high enough that investors are happy. It is a fine balancing act. Amazon has been working hard to limit prices while retaining or growing its profit margins lately, but the question has to be asked - why now?

Perhaps Amazon is clutching at straws. If a company does as Amazon has done - and funnels its profits to projects that do not result in a strong return on that investment - the result is a losing proposition.


Amazon is keeping its focus on media because its media customers generate more sales. Consumer Intelligence Research Partners (CIRP) reports that "Amazon Kindle device owners spend approximately $1,233 per year, compared to $790 per year for other customers. They do so because Kindle device owners buy over 50% more frequently than other customers." In addition, "28% of customers own a Kindle Fire, while 21% own a Kindle e-Reader. Interestingly, 9% of customers own both devices, suggesting how well Amazon has done to drive sales of what amounts to a portal to"

Amazon's Fire smartphone adds to this mix - the device is geared towards making people buy into Prime membership (which is offered free for the first year to buyers of the Fire phone) and buy more stuff. The phone has a range of features that makes buying even easier, such as the feature Firefly which recognizes and links to music, movies, and products - all conveniently available for sale on Amazon as a 1-click purchase. The Fire phone also backups up everything to Amazon Cloud Drive - yet another aspect that Amazon is introducing to create an Apple (NASDAQ:AAPL)-like ecosystem.

But that doesn't mean all these things are adding to Amazon's bottom line - in fact, they aren't.


In late July, the company reported its 2Q14 earnings. "Amazon fell more than 11 percent after posting its widest loss since 2012, as its cloud-computing business showed signs of cooling and investments in new distribution warehouses and gadgets hold back profitability," reports Bloomberg. "The world's largest online retailer had a second-quarter loss of $126 million, wider than analysts' $66.7 million average estimate and a $7 million loss a year earlier. Sales climbed 23 percent to $19.3 billion, while operating expenses increased 24 percent to $19.4 billion"

That's right - Amazon's operating expenses increased by a greater percentage than its sales last quarter. And that circumstance was not confined to that quarter. According to Bloomberg, "Amazon earned $274 million for all of 2013 on sales of $74.5 billion."

Then, there are the writers. Authors United, which includes such big names as Stephen King, Douglas Preston, and John Grisham, took out an ad in the Sunday New York Times, asking readers to write to Amazon CEO Jeff Bezos directly (they published his email) and ask that book sales not be limited while Amazon works out its disagreements with publishers. News that Authors United would run such an ad broke earlier in the week, prompting Amazon to appeal to its content creators directly. On Friday, Amazon sent an email to the writers in its publishing program asking that they keep ebook prices low and inviting them to send emails to Michael Pietsch, chief executive of Hachette.


Amazon is certainly a phenomenon. No other company has come close to what this company does - but times change.

Amazon needs to address the changing market rather than try to bully its suppliers into a position that is profitable for Amazon although not necessarily the supplier.

The war between Amazon and Hatchette is far from over. If Disney calls Amazon's bluff and Hachette follows suit, there could be a snowball effect - and Amazon could be at risk of having to seriously change its business model to remain afloat.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.