By Josh Quittner
October 24, 2007

Don’t these people know the economy is in the tank? Amazon (AMZN) today reported one of its best quarters ever, with revenue growing 41% and profit quadrupling from a year ago.

Nonetheless, Wall Street punished the online retail giant after hours, partly because Amazon reported diminished gross margins. (One good reason to think that was a blip, not a trend: Amazon sold 2.5 million copies of Harry Potter VII, which had wafer-thin margins. What the boy wizard giveth, he take awayeth.) The news out of Seattle was pretty good today, and Amazon is predicting, in the words of CFO Tom Szkutak, “our best holiday season ever.” With consumers in a dither about the housing meltdown in general and Chinese toys in particular, how is this possible?

Company executives yesterday say that Amazon is firing on all cylinders. Szkutak said that Amazon has more stock in stock, and lower prices, than at any time in the company’s history. He also added one more factor, which ought to confound the critics: Amazon Prime, the company’s membership program that, for a $79 annually, guarantees free two-day delivery on anything you buy. The critics had said it would never work. But it is working—Szkutak said that enrollment doubled year over year. It was recently rolled out in Japan where the uptake is just as healthy. And it will only become more efficient.

As founder and CEO Jeff Bezos claimed during an analysts’ call today, for Prime, “the opportunity on the cost side is a very large one when we have sufficient scale.” The bigger it gets, the cheaper it is. Huh? Bezos: “The opportunity is to modify the fulfillment center network so its optimized for faster delivery. As you can imagine, a fulfillment center optimized for two-day delivery looks very different from one optimized for standard delivery.”

I can’t imagine that, exactly (OK, I can: A giant warehouse filled with speed freaks zipping around on rocketpacks, perhaps.) But I believe him.

The other day, my wife was fiddling around with a new bit of software that scrapes all our credit card data and shows us the appalling ways we spend money. Our number 3 expense? Amazon. Thanks to Prime, we made 15 purchases over the past several months. Why not? Shipping is free. For the record, number one was groceries, and number 2 was the vet. My dog, Otto, has a slipped disk. No, I didn’t believe it either. If only Amazon provided medical care for over-weight dogs.

Quick bit: Asked whether Amazon’s new, MP3 store, which sells music at 99-cents a download, was eating into sales of CDs, Bezos said: “We haven’t seen any evidence of that. (But) I think it’s way to early to know if you would see evidence of that.”

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