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Amazon faces tough battles on all sides as sales growth slows

Amazon CEO Jeff Bezos demonstrates the Kindle Paperwhite during Amazon's Kindle Fire event in Santa Monica, California September 6, 2012. REUTERS/Gus Ruelas

Amazon.com (AMZN) has had some rough times in 2014. Its shares jumped from $50 to $400 over the past five years, but so far this year, they've slumped 21%. The decline started after the company reported disappointing sales for the 2013 holiday season, and first-quarter results that came in pretty much as expected Thursday did little to break the pattern, with the shares down 7% in early trading on Friday.

The company slightly exceeded Wall Street's expectations, but those expectations had been slashed after January's weak fourth quarter report. Sales of $19.7 billion, a 23% gain from the first quarter of last year,  managed to beat the Street consensus of $19.4 billion. Earnings of 23 cents per share, up from 18 cents a year ago, beat by 2 cents, according to Factset.

Revenue growth was about even with the 22% rate seen in last year’s first quarter, and well below the 34% increase in 2012 and 38% the year before. Amazon forecast revenue growth for the second quarter could be as little as 15%, which would be the smallest quarterly gain for the company since 2009.

The mediocre report took the spotlight away from Amazon's big announcement on Wednesday when it snagged rights to stream many of HBO’s popular shows, including "The Sopranos" and "The Wire." That sent shares of the online video leader, Netflix (NFLX), down more than 5%, but it didn’t help Amazon’s stock price, which fell 1%.

And so it goes for Amazon, the undisputed leader in global ecommerce. As growth in its basic online marketplace has slowed, CEO Jeff Bezos is looking for new opportunities. But whether it's online video, tablets and phones, or cloud computing services, nothing is coming easy. And a couple of major challenges may hit its core business later this year, too. It could be the end of an era for Amazon shares, after the five year climb to $400, as well.


Online TV

Bezos offers video to customers who sign up for Amazon’s free-shipping Prime service, which he says has “tens of millions” of subscribers. Netflix has almost 50 million members worldwide.

Competition for programming is driving up costs for both services. In addition to paying a reported $1 billion for a three-year deal with HBO, Amazon has paid for shows from networks including the BBC and CBS (CBS) while also spending to create exclusive, original offerings, such as its comedy series "Alpha House" starring John Goodman. Both Amazon and Netflix have raised prices as a result of higher costs; Amazon increased the price of Prime to $99 a year from $79, while Netflix said it will raise its $8 a month price by $1 to $2, though only for new customers initially.

Still, Prime has yet to make much of a dent in Netflix video dominance. Neither company releases ratings-like viewership numbers, but Netflix customers watching videos consumed 32% of all Internet traffic in the second half of last year compared to just 2% used by Amazon customers, according to Sandvine.

Amazon says it has tripled its video streaming traffic over the past year and cites a report from market tracker Qwilt that it has surpassed Apple (AAPL) and Hulu in online video usage, trailing only Netflix and Google’s (GOOGL) YouTube.

Cloud success

Amazon’s efforts to sell spare computing capacity, so-called cloud services, have been far more successful, bringing in an estimated $3 billion of revenue last year, according to analysts, and capturing top market share. But competitors led by Google  and Microsoft (MSFT) have been slashing prices this year to gain share. Although price is hardly the only concern of corporations looking to buy cloud services, Google is now an average of 10% cheaper for storage than Amazon or Microsoft, according to an April 1 analysis by Cloudberry Lab.

And Amazon’s hardware efforts face even tougher competition. Sales of its Kindle tablets grew just 21% last year, and were especially weak in the holiday season, even as overall tablet sales jumped 68%, according to Gartner. And a new phone expected later this year will have to go up against flagship models from Samsung, HTC and Sony, not to mention upgraded iPhones.

All the while, growth is slowing in Amazon’s huge ecommerce business, which is facing challenges of its own. Walmart (WMT), the global leader in retailing, said it's making a renewed ecommerce push this year, and could increase its spending to promote online sales up to 36%.

Walmart had total online sales of $10 billion last year, a 30% increase, but still only 2% of its total and way behind Amazon’s $74 billion. While 19% of shoppers in Walmart’s stores also shop at its website, 53% of its bricks and mortar shoppers use Amazon.com, according to research from UBS analyst Jason DeRise. Walmart could make gains online, however, as it has lower prices than Amazon on many items and allows customers to pick up orders at any of its stores, DeRise notes.

A taxing issue

Amazon shoppers have long benefited from a quirk of U.S. tax law. Walmart has to charge buyers sales tax for online purchases because it operates physical locations in every state. Amazon has largely avoided charging sales tax, though a growing number of states, including Texas and Virginia, now require it.

A study released this week found that adding sales tax significantly reduced spending by Amazon customers. Researchers at Ohio State University looked at transaction data for hundreds of thousands of consumers in five states that recently imposed sales taxes; consumers reduced spending by about 10% overall and by 24% on purchases over $300, the study found.

Congress is looking at legislation to allow all states to impose sales tax on online purchases from any retailer. That could dampen the pain for Amazon, since the researchers found that most of the lost sales went to online sellers that didn’t charge tax, including third-party sellers on Amazon's own site.

But until then, there's more pressure than ever on Amazon's original line of business to make up for the spending on its many new efforts.