Could Movies, Books and Music Be Amazon’s Achilles’ Heel?
Even as the rest of the retail world stumbled in the past year, Amazon kept cruising and increasing market share. So if a cratering economy can’t hurt the e-commerce giant, what could? Citigroup (C) analyst Mark Mahaney throws out a suggestion: Movies, books and music–the same stuff that helped Amazon get the lead it enjoys today.
Mahaney’s argument is simple: 1) Media sales represent half of Amazon’s North American business and 2) They have been slowing consistently for a while. Here’s what the numbers look like (click to enlarge):
Why are media sales slowing down? Mahaney, an Amazon (AMZN) bull, throws out some ideas:
This may well be the most discretionary/recession-sensitive segment of Amazon. That surely explains part of the slowdown. But three other factors may be material. First, this segment includes Books, Music, and Videos (in addition to Video Game Software)–products that have had inherently slow overall retail growth over the last few years. Second, this segment includes products that are over-indexed in terms of Internet penetration. And third, this segment contains products that are being rapidly digitized–even the plain old book, thanks in part to the Kindle.
The last point is the most interesting one to chew on because Amazon bulls usually argue that the company is the best-positioned player to adapt to the digitization of media. And they’re probably right. But it sure does increase the pressure on the company to get it right, which will probably involve charging more for the digital music and books than it does now.