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Trickling Down at Amazon

Analysts aren't optimistic about the e-tail giant's competitive position.


, which helped blaze the trail for Internet retailers when it started in 1995, should expand in the digital media market to boost growth, some Wall Street analysts say.

Demand for digital media is soaring, fueled by



iTunes service and the growth of Internet video. Sales of music over the Web and mobile phones tripled last year to $1.1 billion, according to data from the IFPI, an international trade group. In addition, more than 8 million videos have been downloaded from the site since Apple began offering that service late last year.

Compare that with the demand for some of Amazon's core products. Book sales rose 9% to 709.8 million units, according to data from Nielsen BookScan.

Video Business

magazine estimates that DVD sales rose 4.5% to $15.73 billion, the smallest growth since the format's launch.

So far, Amazon has made some baby steps into digital media. Investors will be charting its progress, such as it is, when Amazon posts earnings after the bell Thursday.

Last year, the company unveiled plans to sell digital access to some books. The company said yesterday that it will let authors post blogs on its site. Amazon also is developing a service to sell digital downloads of movies, according to

Daily Variety

. Amazon has declined to comment on the report.

"We believe Amazon would have the same capacity to cut deals with the TV and movie content owners as does any of its competitors receiving the associated hype for the opportunity," writes Stifel Nicolaus analyst Scott Devitt, who rates the shares hold, in a note to clients. "In our view, Amazon has an amazingly loyal customer base and the company offers several incentives for using its network, which could provide value along the next phase of monetization of the Internet."

Moving into digital isn't going to be enough to impress some investors, who remain concerned about Amazon's cost growth for promotions such as Amazon Prime, which allows people to get free two-day shipping for paying an annual fee of $79. The company has already indicated that it plans to boost spending this year to add more people and improve its technology.

"Amazon Prime helps drive revenue at high costs," says Guzman & Co. analyst Phillip Remek, who rates the stock underperform. "In the late 1990s, Amazon made money on shipping."

Amazon, which reported its best holiday season ever, remains unpopular with Wall Street analysts concerned about its cost growth and lackluster margins. Only three analysts consider it a buy, while 10 consider it a hold and eight a sell, according to data on


. Their average target price is $36.33.

Net income has dropped for three straight quarters and sales are expected to show their smallest gain since 2002 when it reports earnings tomorrow. The company is expected to report earnings of 21 cents a share on sales of $3.08 billion, according to Thomson Financial.

Amazon is benefiting from the growing popularity of online shopping, but so are rivals including



, analysts say.



also will launch a new site called eBay Express later this year that will offer items for new and used items for sale at a fixed price.