Amazon Earnings Takeaways: Services, International, Sellers and Advertising $AMZN

Although the Amazon streak of new highs did end, they are back to starting new highs on the back of their Q1 earnings. A couple of points stuck out in the client letter I distributed a few weeks back:

1. Product sales slow, SERVICES SERVICES SERVICES - Product sales grew 7% versus service sales growing 17% and now accounting for nearly 58% (vs. 55% in Q1 2023) of total net sales.

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2. International back to growth - US remained flat with last year’s growth rate but International is back with several consecutive of quarters of positive growth. Interestingly, AWS now nearly half the size of Online Stores, the business was only a 1/4 the size 3 short years ago.

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3. Amazon reliant on 3rd party sellers and advertising - Continued strong growth from both 3rd party seller services (aka Seller Central) and advertising. Those two businesses now account for 33% of total sales vs 26% a few short years ago. Recent fee changes likely will mainly be seen in the next quarterly earnings report.

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None of these trends are new. Amazon continues to become the “toll booth” of eCommerce and now own nearly 40% of eCommerce. Nothing here to suggest they aren’t continue to build the moat.

Groupon Turnaround Remains Intact $GRPN

I have been quite vocal on the belief that Groupon is returning to glory. Latest results were posted this evening and I believe the return is intact. First consolidated growth since 2016. Yes, 2016.

Management tends to beat their high end guidance that is clearly achievable. Last quarter the high end was $118 in revenue and $12 in EBITDA. Results were $123 in revenue and $20 in EBITDA. Cash flow also feeling that positive trend.

This one is not for the faint of heart given the declining customer base (see below) but one might take a bet this turn will result in a bottoming that then allows the marketing engine to turn back on. Disclosure: I continue to own a long position in Groupon $GRPN.

OpenAI Search Engine

One can’t help but be excited to see what comes of this:

“OpenAI may make one of the biggest tech announcements of the year in less than a week. Recent rumors suggest that the AI giant could announce a search engine to compete with Google on May 9, 2024.”

““Google shows you 10 blue links, well, 13 ads and then 10 blue links, and that’s one way to find information. But the thing that’s exciting to me is not that we can go build a better copy of Google search, but that maybe there’s just some much better way to help people find and act on and synthesize information,” said Altman”

What should be even more interesting is the Google response. They must be preparing for this announcement.

Alternative App Stores Vs Apple/Google Duopoly

The first alternative app store has launched in the EU. The appropriately named altstore is focused on iOS only.

“AltStore is an app store designed for sideloading. Every app in AltStore gets a beautifully generated store page with detailed information to make sideloading fun and easy. Browse apps from trusted developers, or add additional “sources” to further increase your options.

Anyone can distribute their apps with AltStore. All you need is to make a “source”, which you can do by hosting a text file with basic information about your apps. Users can then enter your source URL in AltStore and your apps will automatically appear.”

Words like “anyone” can distribute their apps conflicts with everything Apple states they stand for with terms like protection. Interestingly, the store is charging 1.5 Euros per year to cover “Apple's Core Technology Fee, payment processing, and server costs.”

Will we see uptake in the near future? Unlikely until the alt stores have enough apps and the user is given an option when they initially setup their phone or asked periodically. We have seen some uptake on the browser choices but we are years from traction here.

Another Amazon Book

Seems Dana Mattioli’s book that covers Amazon has some juicy stories:

“After stumbling upon the secret Trader Joe’s room at Amazon’s Seattle headquarters, things only became more stressful for the former Trader Joe’s employee. For six months, her manager hounded her for information about the grocer’s bestselling products. She tried to deflect, but the pressure kept ratcheting up. Finally, the manager demanded that the employee email any documents she had kept from her time at Trader Joe’s to another colleague on the team. She emailed over an Excel spreadsheet that detailed Trader Joe’s top-​selling items nationally over the course of a week. It contained the number of units sold per item over that time period.

Her manager didn’t stop with the sales data. He also demanded that she share Trader Joe’s margins for each product. When she refused, her manager angrily screamed at her, “You just have to give us the data!” a person who witnessed the exchange recalled. The employee, who had been pressured for months, burst into tears. But she declined to share the margins data.”

eBay Turnaround? $EBAY

We are 3rd party sellers on the eBay platform for a number of our client’s brands but I personally haven’t been a shareholder of eBay in quite some time. With that said, I believe eBay is making some crafty moves to solidify their niche and potentially see stronger margins. In the latest quarter, the growth was anemic with GMV essentially down to flat year over year as you can see below.

However, the eBay advertising revenue should accelerate as eBay has launched greater functionality for bidding. As long as the active user count doesn’t drop dramatically, there should be an acceleration in the adoption of advertising which flows right to the bottom line.

Additionally, eBay continues to exploit their drive to be the choice for authentic merchandise with further partnerships and acquisitions in collectibles space. These programs clearly differentiate eBay from larger competitors like Amazon.

Could this be a turnaround? Quite a bit of work to do but can’t say I have seen eBay positioned this well in quite some time.

Amazon Streak Ends

From Bespokeinvest.com on Amazon’s stock price:

“The new all-time closing high today ended a streak of 693 trading days without a new all-time high for AMZN shares. As shown below, that was actually the 2nd longest streak of days without a new high for AMZN in its history. And now it’s over...”

Mass Content Creation

Now up to thousands of songs and $200,000 in royalties per year. Incredible hack.

“Largely, though not entirely, on the strength of such songs, Farley has managed to achieve that most elusive of goals: a decent living creating music. In 2008, his search-engine optimization project took in $3,000; four years later, it had grown to $24,000.”

Creator Payments: YouTube Shorts vs YouTube

Difference in compensation between Shorts and YouTube is incredible if this is consistent across all creators from The Information:

“One business that operates multiple YouTube channels generated only $41,000 in YouTube revenue share from a billion views on YouTube Shorts last month. That compares to roughly $1.1 million off two billion views on its regular YouTube videos, my colleague Sahil and I found out.

One creator told us they earned just 12 cents from YouTube per thousand views on Shorts vs. $4.30 in revenue per thousand views on their longer views. ”

TikTok Shop: Heavy Discounts For $10mm Daily GMV

We have experimented with TikTok Shops but have often found it underwhelming. Anecdotally, I typically see branded product sold under various seller names and ALWAYS has a TikTok heavily discounted price. Just take a look at the below for Bombas socks. Considerable volume yet not sold by the formal brand always with an attached coupon.

Per The Information, major brands are on the platform but the site is only handling $10 million in sales per day. To put that into perspective, that’s 11 minutes of sales on Amazon.

“Despite the complaints, TikTok Shop in the U.S. was handling more than $10 million in sales a day by February this year, according to a current employee.

Employees have privately debated how to balance pursuing high-end brands and optimizing for order volume through TikTok’s stand-alone Shop tab, which includes more cheap, cross-border sellers, The Information has reported.

On Tuesday, Levine pointed to Estée Lauder and Mattel as major brands TikTok has brought on board for e-commerce. TikTok is also in talks to bring on major book publishers who are hoping to capitalize on the popularity of BookTok, Levine said.”

YouTube TV > Legacy Cable/Satellite

Disclaimer: Our household uses YouTube TV and we also use it in our offices. The reason for that is because it works well whether on mobile a smart TV or an iPad. Google has clearly provided a better experience and service (unlimited DVR, mutiview, etc.) when compared to the satellite and cable providers. The numbers clearly show that and it seems they believe they can broach 30mm subscriptions.

“While according to Nielsen the main YouTube app alone accounted for 9.3% of U.S. TV watch time in February, YouTube TV added another 1.7 percentage points of watch time on top of that, said a current Google executive. The latter figure is a key part of YouTube’s pitch to advertisers heading into this spring’s upfront TV ad negotiations, when TV ad sellers and buyers negotiate billions of dollars in spending commitments.

And while YouTube TV has more than 8 million subscribers, YouTube sales executives are also telling advertisers the service has 13 million viewers when accounting for households with multiple people on the same YouTube TV subscription, according to a person with knowledge of YouTube’s upfront ad conversations.”

— Quote Source

Legacy providers have been beat for now. This household has our subscription.

TikTok Shop Has Limited Overlap with Amazon

Found the overlap of TikTok Shop with other retailers and marketplaces interesting…surprised to see the low figure on Amazon given the breadth and household penetration of shoppers on Amazon

NY Times is now a gaming platform...

NY Times has become a success story in the publishing world as they have invested over the years in their digital offering…and games like Wordle. h/t: @matthewball

WhatsApp = The World $META

Zuck’s $16 billion acquisition doesn’t look so expensive 10 years later. Keep in mind, Facebook has yet to fire up the monetization tricks.

“In 2020, WhatsApp announced it had more than two billion users around the world. It’s bigger than iMessage (1.3 billion users), TikTok (1 billion), Telegram (800 million), Snap (400 million) and Signal (40 million.) It stands head and shoulders above fellow Meta platform Instagram, which captures around 1.4 billion users. The only thing bigger than WhatsApp is Facebook itself, with more than three billion users .”

DSP Remains a Duopoly

Digiday recently ran a poll with ad executives on whether Amazon’s Demand Side Platform (DSP) offering is gaining on the major incumbents. It seems as though it hasn’t:

“Just 5% of the 44 respondents in a survey by Digiday chose Amazon as their preferred DSP if they could only select one. In contrast, nearly four in 10 (39%) opted for Google’s DV360. The same goes for The Trade Desk.”

I do agree that Amazon trails the duopoly of Google and Trade Desk, However, I believe Amazon is taking a bit different direction. As Google and Trade Desk are focused on the large cap advertisers, Amazon has sought to sprinkle “DSP-lite” on the merchants, sellers and brands using their Amazon Vendor Central and Seller Central platforms to sell product. Offerings like Sponsored Display and Sponsored TV are some of those offerings. These offerings are simple versions of DSP allowing for marketers to “set it and forget it.” Amazon surely covets the large cap advertisers but this alternate route surely helps their advertising revenue continue to grow aggressively.

ChatGPT vs Google

Had a chance to listen and read the Lex Fridman pod with Sam Altman of OpenAI. Transcript found here. Found a few quotes particularly interesting. On challenging Google:

“I find that boring. I mean, if the question is if we can build a better search engine than Google or whatever, then sure, we should go, people should use the better product, but I think that would so understate what this can be. Google shows you 10 blue links, well, 13 ads and then 10 blue links, and that’s one way to find information. But the thing that’s exciting to me is not that we can go build a better copy of Google search, but that maybe there’s just some much better way to help people find and act on and synthesize information. Actually, I think ChatGPT is that for some use cases, and hopefully we’ll make it be like that for a lot more use cases.”

“But I don’t think it’s that interesting to say, “How do we go do a better job of giving you 10 ranked webpages to look at than what Google does?” Maybe it’s really interesting to go say, “How do we help you get the answer or the information you need? How do we help create that in some cases, synthesize that in others, or point you to it in yet others?” But a lot of people have tried to just make a better search engine than Google and it is a hard technical problem, it is a hard branding problem, it is a hard ecosystem problem. I don’t think the world needs another copy of Google.”

On the ChatGPT business model and use of ads for monetization:

“I kind of hate ads just as an aesthetic choice. I think ads needed to happen on the internet for a bunch of reasons, to get it going, but it’s a momentary industry. The world is richer now. I like that people pay for ChatGPT and know that the answers they’re getting are not influenced by advertisers. I’m sure there’s an ad unit that makes sense for LLMs, and I’m sure there’s a way to participate in the transaction stream in an unbiased way that is okay to do, but it’s also easy to think about the dystopic visions of the future where you ask ChatGPT something and it says, “Oh, you should think about buying this product,” or, “You should think about going here for your vacation,” or whatever.”

“And I don’t know, we have a very simple business model and I like it, and I know that I’m not the product. I know I’m paying and that’s how the business model works. And when I go use Twitter or Facebook or Google or any other great product but ad-supported great product, I don’t love that, and I think it gets worse, not better, in a world with AI.”

Google Follows Apple’s Privacy Lead

Google will no longer build user-level profiles within its ad systems nor will the company use such data to enable targeting on non-Google sites. That means Google’s AdX ad exchange and other services that target ads to web inventory outside Google properties will no longer support any cookie replacement identifiers (think the Trade Desk’s Unified ID or identity tech built by LiveRamp)

Wow. I know we were seeing cookies being phased out in a few years but this is considerably more. Apple made the first move and Google had to follow. No one trusts cookies and the privacy trend continues to gain steam. Who benefits? Consumers who value privacy and a less bloated, more efficient web.

The other major winners will be those with all the first party data. Those retailers that have actual sales taking place on their sites and offer ads on their sites. These moves by Apple and Google will only further shift ad dollars to Amazon, Walmart, Instacart and other retailers.

Will Postal Service parcel rate hikes cause a shipper rethink?

First-class and marketing mail, the traditional cores of the Postal Service, continued their secular declines in 2020, a downward trajectory accelerated by the pandemic. The shipping and package business is currently the lone bright spot, and to capitalize on its growth and offset the costs of processing and delivering parcels, the Postal Service implemented a series of rate increases on shipper-centric products. The increases, which took effect Jan. 24, will reduce, through not eliminate, the Postal Service’s low-price proposition that e-merchants depend on to offer low- or no-cost shipping to end customers.

Will shippers rethink? Most won’t. The difference in price on some of the classes of service is still too high even with the price hikes. Secondly, FedEx and UPS use the USPS for their final mile delivery on their Smartpost and Surepost offerings.

No carrier can profitably deliver to EVERY household in America and these rate hikes only soften the blow. USPS isn’t structured to ever make a profit or have the freedom to do so. With other carriers so reliant on their final mile service and eCommerce booming, we won’t see a mass exodus from USPS volumes anytime soon.

Online Advertising Taxes: There Is No Free Lunch

Maryland is the first to push an online ad tax onto the major online advertisers like Facebook, Amazon, Google, Microsoft, etc. Maryland will not be the first and it sounds as though they will not be the last.

MultiState, a government relations firm that tracks local legislatures, says it is eyeing at least 17 bills in 10 states that aim to impose taxes on tech giants, their profits, the data they collect and the services they offer.

Although these funds may provide some short term relief to budget shortfalls or in this case to a good cause like education…I fear the cost will ultimately be paid by the end consumer through higher overall pricing of products and services. We all know there is no such thing as free shipping. So called “free shipping” is built into the cost of the product you buy and a large portion of these new taxes will too.