Skip to main content

A big issue (

here and elsewhere) when

(AMZN) - Get Free Report

reported its first-quarter rev last month was the legitimacy of so-called advertising revenue from a series of recent marketing deals with upstart companies like


that aren't making a dime. But Wall Street cheered the creation of the so-called Amazon Commerce Network as (in the words of one analyst at the time) a "high-margin revenue stream." Others credited the "advertising" revenue, as it was also called, from these deals as an important factor in the surprising strength of Amazon's gross margin.

And some of it was. But not most of it.

At least $13 million of the $19.9 million of so-called unearned revenue in the latest 10-Q was merely the difference between the discounted price Amazon paid for its Ashford stake ($8 per share) and the fair market value of Ashford (mid-teens) on the day the deal was signed. In other words, 65% of what showed up as revenue from these deals in last quarter's earnings press release was really little more than an accounting differential. A bookkeeping entry. Air. Call it whatever you like: it wasn't the real McCoy. It was nonincome income.

What's more, you won't find mention of this in any company document. I had heard it through the Wall Street grapevine, and it was confirmed to me Tuesday by Amazon (which I should point out was very accommodating and very willing to talk about it).

The number will be included in Amazon's revenue through the duration of the Ashford alliance, which runs through December. While just a speck in the last quarter's $574 million in revenue, it represented almost a full two percentage points -- almost all the improvement in gross margin above what analysts had expected.

A spokesman, however, says that just because the Ashford deal wasn't cash doesn't mean it isn't income. "The cash comes in when we sell the stock," he says.

That's the point: Amazon bought the stock for 8; it's now around 4. Even Jethro Bodine knew that knot minus knot equals knot. And that's why there's concern for


of these marketing deals, especially in a market that doesn't like e-commerce (and where many stocks are headed for knot!).

One other thing: One analyst who is an unabashed Amazon fan was not happy to learn of the Ashford air. "When they don't tell you things like that," wondered this analyst, "you can only wonder what else they're not telling you." Indeed, if Amazon had simply mentioned the nuances of the Ashford agreement when it announced earnings (by highlighting it in neon lights), it would've pre-empted a column like this!

The best defense, even in corporate America (and as trite as this sounds), is still a great offense.

As originally published, this story contained an error. Please see

Corrections and Clarifications.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.