Amazon's Q2: Eyes on tablets, ads, content, new revenue streams

Amazon reports its second quarter results on Tuesday and Wall Street analysts will have one eye on the actual financials and another one on new revenue streams expected to emerge in the back half of 2011.
Written by Larry Dignan, Contributor

Amazon reports its second quarter results on Tuesday and Wall Street analysts will have one eye on the actual financials and another one on new revenue streams expected to emerge in the back half of 2011.

For the quarter ending June 30, Wall Street is expecting earnings of 35 cents a share on revenue of $9.38 billion. Keep in mind that the second quarter is usually Amazon's slowest of the year. According to Thomson Reuters, Amazon is expected to deliver revenue of $10.35 billion in the third quarter and $17.4 billion in the fourth quarter.

In other words, Amazon is your typical retailer that lives for the final three months of the year. The difference is that Amazon has a lot of interesting side businesses that can turn out to be big revenue streams in the future. Here's a look at some future items that will be the focus of analyst questions. Unfortunately, it's highly unlikely that Amazon will provide much comment or detail.

Amazon's tablet. It has been clear for months that Amazon is prepping the contract equipment supply chain for a tablet. And given Amazon's biggest quarter is the fourth, it's also likely that this tablet---perhaps with new Kindles---will appear in the next few weeks. Big projects just don't happen in the fourth quarter at a retailer---there's too much at stake. As noted previously, Amazon's tablet would transition the company even more toward digital delivery and boost margins. In fact, Amazon isn't likely to make any money from its tablet. Why? The device will be subsidized by e-commerce sales and ads.

Analysts are betting that Amazon's tablet may break the $299 mark. That price would undercut other Android rivals. Amazon would the move its streaming video, music and e-books to the tablet. BGC analyst Colin Gillis said in a research note:

We do not estimate that Amazon is selling the Kindle currently for a profit, and do not see the company changing this in the near future. We also point out that the declining margins the company experienced in 2010 and 2011(from 5.5% in March quarter, to 4.1% in June quarter, 3.5% in September quarter, and 3.7% in December quarter of 2010 and 3.3% in the March quarter of 2011) could be a derivative impact from increasing adoption of its eReader. It is also very reasonable that the company produces a tablet product to complement its recent music locker service and movie streaming service – and we expect that the company maintains aggressive pricing that could result in the hardware being sold for no profit. We maintain that an Amazon tablet could be priced as low as $299 in order to crack into the market, similar to past pricing strategies.

Amazon's advertising business. You can't subsidize a tablet if you don't have a little advertising. There may be some color Amazon's Kindle with Special Offers. Amazon doesn't talk about anything in that "other" revenue line, but there may be a stat or two to ponder. "We believe online advertising has the potential to be a strong incremental growth opportunity for Amazon. The company already has an advertising business, enabling retailers to drive traffic to either their Amazon listings or external websites," said Atlantic Equities analyst James Cordwell.

Streaming movies. Netflix upped its prices and drove customers crazy. Amazon happens to offer streaming movies as a bundle for its Prime customers. If Prime subscriptions spike that may be a good indicator that bundled movie access is paying off for Amazon.

Content costs. Also of note is Amazon's recent deal with CBS, which owns ZDNet. Amazon's move to procure content from the CBS library indicates that it's serious about combating Netflix. Content costs are likely to be yet another thing for analysts to fret about.

Amazon Web Services. The company is one of the leading cloud infrastructure players, but doesn't divulge much of anything when it comes to metrics. Watch the "other" revenue line closely and listen for any mention of customer wins and sales on Amazon's conference call.

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