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Amazon blames grinch that stole Christmas

With profits falling, analysts question e-tailing myth

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Amazon.com became the fourth of the internet giants to report lower than expected profits this week. Despite gaining revenue over the previous Christmas, Q4 profits were down, and the company predicted lower profits still for the current quarter.

More ominously, Amazon says it expects to have lower profits for the third successive year, prompting analysts to pose some awkward questions. One even wondered if the supposed efficiencies of internet-only commerce are mythical.

But first, the numbers.

The retailer reported $2.98bn in sales for Q4, with net income at $199m, compared to $347m in Q4 2004. Sales for the year rose 23 per cent to $8.49 billion with net income of $359m, down from $588m for 2004.

US and Canada accounted for $1.68 billion, although oversees sales didn't grow as fast as Amazon would have liked - accounting for 45 per cent of revenue, barely up from 2004. Twenty-eight per cent of sales came from third party merchants.

The company predicted a profit of between $70m and $105m for the current quarter, with sales growing between 16 per cent and 23 per cent for the full year, compared to 2005.

CEO Jeff Bezos said the company was using its increased cash flow to invest, particularly in its A9 search engine, and he admitted the company's $79 Prime subscription package, which gives subscribers free shipping for a year, was proving expensive.

Analysts even queried Amazon's growth, with JP Morgan's Imran Khan (no, not that Imran Khan) suggesting Amazon may be losing market share.

Prudential's Mark Rowen wondered what was more efficient about an e-tailer, compared to a bricks and morter retailer with real estate burdens, when expenses were so much higher than Wal-Mart.

"Why is it that we are not seeing efficiency if, in fact, the model is more efficient?"

Ouch.

Bezos again stressed Amazon.com needed to invest for the future, in particularly digital services, adding that "if we were totally optimizing our cost structure for a kind of a steady-state business, you would see a different cost structure."

This prompted a withering piece of sarcasm from one analyst, Safa Rashtchy of Piper Jaffray. who told the WSJ: "It seems like Amazon is a company which will perpetually be in investment mode."®

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