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Amazon Shares Tumble After Disappointing Forecast

Thursday, October 27, 2005

SEATTLE — Amazon.com Inc.'s (AMZN) shares tumbled more than 12 percent Wednesday after the Internet retailer startled Wall Street with a soft sales outlook for the holiday shopping season.

In a report after the markets closed Tuesday, the Seattle-based company said its net income fell to $30 million, or 7 cents a share, for the three months ended Sept. 30, from $54 million, or 13 cents a share, a year earlier.

The income slump came despite a rise in revenue. The company said net sales increased to $1.86 billion in the third quarter, up 27 percent from $1.46 billion last year.

But Amazon also said it is projecting sales of $2.86 billion to $3.16 billion for the quarter ending Dec. 31. The mean estimate, $3.01 billion, falls below the average Wall Street estimate of $3.08 billion in revenue at a time when Americans traditionally flood stores for Christmas gift buying. Of 13 analysts polled by Thomson Financial, the lowest estimate was for fourth-quarter sales of $2.91 billion.

Its shares fell $5.59, or 12.1 percent, to $40.58 on the Nasdaq Stock Market (search).

Excluding an unanticipated one-time $40 million legal charge in the third quarter, Amazon said its net income would have been $50 million, or 12 cents per share. Analysts polled by Thomson had expected 10 cents per share on revenue of $1.84 billion.

In August, Amazon announced it would pay $40 million to Soverain Software LLC to settle a patent-infringement lawsuit. Chicago-based Soverain had alleged that Amazon's Web site infringed several Soverain patents on network sales systems and Internet server access control and monitoring systems.

Sales in the United States and Canada jumped to $1.04 billion, up 28 percent from $816 million in the same period last year. International sales rose to $817 million, up 26 percent from third quarter 2004 sales of $647 million.

Electronics and general merchandise sales were brisk, growing 43 percent worldwide to $491 million, up from $344 million last year.

Books, music and other products in the media category still make up the bulk of the company's revenue. Media sales rose 20 percent to $1.31 billion, up from $1.09 billion last year.

Amazon said it sold more than 1.6 million copies of the latest Harry Potter edition, making it the company's biggest new product release.

For the full year, Amazon is predicting sales of $8.37 billion to $8.67 billion.

The company did not offer any guidance for fiscal 2006, but said it plans to spend more money hiring software engineers and on other technology development costs.

"This is something that keeps increasing," Piper Jaffray analyst Safa Rashtchy said, noting that the company's technology and content expenses are approaching 6 percent of total revenue — nearly three times what it spent a few years ago.

In a conference call with analysts, Jeff Bezos (search), Amazon's founder and CEO, and Tom Szkutak, chief financial officer, said the company believes its growing investment in technology will ultimately improve shareholder returns — even though it will likely take time for it to pay off.

Bezos and Szkutak said they remain pleased with Amazon Prime (search), a $79-a-year service that gives people unlimited two-day shipping. "Customers like it. The prime members that are subscribers are buying more, they're doing more cross-shopping," Szkutak said, especially in electronics, tools, kitchen supplies and health and personal care products.

The company did not disclose how many customers have signed up for it or how much money Amazon Prime has brought in since it debuted in February.

Amazon.com started out as a virtual book store 10 years ago, and is now the world's largest online retailer, selling everything from brake repair tools to belly rings.

 

Circuit City COO Quits; Amazon.com Ties Cut

Monday, February 28, 2005

NEW YORK  — Circuit City Stores Inc. (CC), the No. 2 U.S. electronics chain, Monday said its chief operating officer, John Froman, is resigning, effective March 1, and it has not yet named a successor.

The Richmond, Va.-based retailer also announced that it severed ties with online retailer Amazon.com Inc. (AMZN) because of the growth of its recently redesigned online store, www.circuitcity.com.

An analyst at RBC Capital Markets, Scot Ciccarelli, said Froman's departure could mark a start of a shake-up aimed at putting the retailer back on a growth path.

The departure of Froman, who is also executive vice president, comes as Circuit City weighs a $3.25 billion takeover bid from Highfields Capital Management LP (search). When it unveiled its bid earlier this month, the private investment firm -- which already owns 6.7 percent of Circuit City stock -- had criticized the company for failing to take decisive steps to Froman, 51, was appointed COO in November 2001 and was responsible for all store operations, real estate, construction, service and distribution, accordingto Circuit City.

The board, Ciccarelli said, has probably made a decision to accelerate any organizational changes it may have been contemplating stem a market shareslide.

"I'd be surprised if there weren't more changes to occur," he said. He rates Circuit City shares "neutral."

Circuit City, with more than 600 stores, is grappling with stiff competitionfrom top rival Best Buy Co. Inc. (BB), and others, who now include giant discounters like Wal-Mart Stores Inc..

Analysts have often cited factors including poor locations as causes for more than four years of poor sales and inconsistent earnings growth at Circuit City.

Its spokesman, Bill Cimino, said the company expected to announce Froman's successor shortly "but it won't be today."

Stacey Widlitz, an analyst at Fulcrum Global Partners said Froman's resignation was no surprise. She said Circuit City had a few internal candidateswho could succeed Froman, who probably felt sidelined after being passed over inseveral executive promotions at the retailer recently.

Froman could not immediately be reached for comment.

Earlier this month Circuit City promoted former Best Buy executive Philip Schoonover to president, from a prior role of executive vice president and chiefmerchandising officer.

Schoonover, 44, joined Circuit City in October 2004. Before his promotion hewas responsible for the merchandising buying group, supply chain, business development and strategy groups.

"I really don't know if he'll succeed Froman, but it's a possibility," said Widlitz.

Commenting on the scrapping of Amazon.com pact, she said Circuit City probably felt it now had the technology and the brand to sell on the Internet byitself.

Circuit City and Amazon signed an agreement in August 2001 that enabled Circuit City to sell music stereos, DVD players and offer services, including in-store product pickup, to Amazon.com customers.

Before noon, Circuit City shares slipped by 15 cents, to $15.57, on the New York Stock Exchange. Shares of Best Buy, meanwhile, jumped more than 4 percent, or $2.50, to $54.20, after JP Morgan upgraded the stock to "overweight."

Apple iPod's Amazing Video Feat

Wednesday, October 26, 2005

By Lance Ulanoff

 

Take Steve Jobs (please!). Even when he comes late to market with a product, he claims he invented it.

The other day I was listening to Jobs spout on CNBC about how, unlike case with the portable music market (which he's willing to admit he didn't create but merely "revolutionized" with the iPod), there is no portable-video-player market.

So Apple, he said, with its new video-capable iPod 30GB is, more or less, inventing the market, and now he's going to see what happens.

Golly, I guess Jobs missed the memo about portable media centers (search).

Roughly a year ago, Microsoft and its partners rolled out a new operating system and series of handheld devices that could play music and display photos and video (TV and full-length movies).

The products were billed as the ultimate portable media devices — go-anywhere, do-anything consumer electronics wonders. The Creative Zen, easily the best of the bunch, was a slick-looking black unit that offered a brilliant and fairly large (for a handheld device) screen.

Despite the efforts by Creative, Microsoft, and Samsung, not to mention Sony with its portable PlayStation (PSP) and a slew of no-brand Taiwan-made devices, Jobs may be right.

There is no portable-video market. All the initial hoopla and the subsequent release of players from Archos, Yepp, and others was followed by general consumer disinterest. Almost a year later, virtually no one is carrying the gadgets — a far different scenario than with MP3 players (search).

What went wrong? And how are Jobs and the new iPod 30GB with video and iTunes 6.0 about to resurrect this stagnant market?

People did buy the first round of portable media players. Around 150,000 units shipped in 2004, according to the market research firm IDC, which expects that number to more than double for this year. But that amount,

IDC's Joshua Martin told me, is roughly one-tenth the number of MP3 players shipped in the same time frame.

I have many theories about what's wrong — as does Martin.

First of all, people understand portable music (search). As Jobs noted correctly, consumers had been carrying portable players years before Apple introduced the iPod. The only behaviors to learn were downloading and ripping songs.

People do not necessarily understand portable video. Also, you may watch your favorite episode of "The Odd Couple" more than once, but only as it appears in rotation (as the network plays the entire series over and over again and eventually arrives back at episode 99).

You don't want to see one TV episode over and over, but you do listen to a popular song more than once a week and even multiple times a day — big difference.

And the ability to watch video and movies on the go is not really new. We all have laptops capable of this, yet I could count on one hand how many people I see on the train in a given month watching movies on their laptops. They prefer Solitaire (search).

Portable media centers also had the unfortunate luck of coming out within weeks of the Sony PSP.

PMCs and PSPs share more than just a letter: They have similar consumer-electronics styling, and you can view video on both (although Sony uses proprietary UMD discs (search)).

But consumers have taken to the PSP because of its core functionality — gaming. The screen is big and clear enough to make it the first portable and immersive game experience. And the ergonomics work.

At least one reason the PSP trumps the PMC is that people love to play games and are especially happy to play them on the road. The games provide distractions while waiting for trains or sitting on long flights, for example. Solitaire again comes to mind.

For some reason, watching a video on such a small screen is not as compelling. There's a big difference between passive viewing and active play.

Interestingly, Sony and the new entrant into the portable-media market, Apple, have something important in common.

Both are marketing mavericks. Everyone knows what an iPod is, and in the PSP's relatively short lifespan, Sony has managed to shove the game machine into the cultural zeitgeist; it's showing up in TV, movies, and articles that aren't even about the PSP.

PMCs have not yet had their 15 minutes of fame, and I'm not sure they ever will.

The other issue is, of course, content.

IDC's Martin admitted that he bought an early portable media center, but has had little use for it. There are no short clips to download, so he leaves the device behind.

I tend to agree with IDC that studio-created or long-form content won't be what help insure the PMC's success. If people are to start watching video on the train, the content will have to be in short bite-size pieces.

Who really wants to get through "Star Wars: Episode III: Revenge of the Sith" in 20-minute increments during commutes? But a 10-minute news or weather brief? That's different.

According to Martin, that kind of content — and even video blogs — could help transform the PMC market.

I have to say, though, I don't get audio blogs (podcasting's precursor). And while everyone calls podcasting a big success, I wonder if the interest in it is purely a by-product of the vast number of iPods in the field.

Interestingly, IDC is remarkably bullish on the future of PMCs. The firm predicts 9 million units will ship in 2009, and Martin told me that the second generation of PMC products (like the new Creative Zen Vision) and content announcements will transform the industry.

I disagreed with virtually everything he said. I thought the market would die a quiet death and lead to a stinging embarrassment for Microsoft (though not as bad as the Microsoft Bob fiasco). Then Steve Jobs made his recent announcement.

Darned if he hasn't positioned the new iPod to be the first truly successful, broadly adopted portable media player.

It has nearly all the right features: photo, music and video capabilities, and the ability to output video to TV. And though Jobs insists it's still a music-first device, the new unit is thinner with a wider screen, indirectly answering complaints about the overly large first-generation PMCs while making sure that the screen is big enough to make the video-watching experience passable.

In addition, Jobs made two other announcements that virtually seal the deal.

During our PMC discussion, Martin returned repeatedly to the video-content issue and then made a very interesting observation: "There is no aggregator of this content. Apple integrated podcasts into iTunes so you can find it; video needs that, too. [I'm] not sure how — maybe a Yahoo! — but someone has to do it to serve as that directory."

Steve Jobs might as well have been eavesdropping on our conversation. As part of the iPod announcement, he unveiled iTunes 6, which will offer video content, including music videos and full network shows from Disney ("Lost" and "Desperate Housewives").

This makes content providers and media companies happy: iTunes has a huge installed base, so it's an amazingly effective distribution channel.

Assuming that iTunes will soon aggregate downloadable video from other sources is no big leap; the company did so with podcasts and instantly legitimized the business.

As I said, Jobs insists that the new Apple iPod is first and foremost a music player, yet he promises it'll be the world's best portable video player, and he has done everything to ensure that it can play video well and will have a strong content pipeline. What's more, he has the legions of current iPod owners penciling the new iPod with video onto their holiday buying lists.

Say what you will about Jobs' ego. I think he just saved the portable-media-center market.

Copyright © 2005 Ziff Davis Media Inc. All Rights Reserved. Reproduction in whole or in part in any form or medium without express written permission of Ziff Davis Media Inc. is prohibited.

Microsoft to Start Scanning Books Too

Wednesday, October 26, 2005

SEATTLE  — Microsoft Corp. is diving into the business of offering online searches of books and other writings, and says its approach aims to avoid the legal tussles met by rival Google Inc.

The Redmond-based software giant said Tuesday that it will sidestep hot-button copyright issues (search) for now by initially focusing mainly on books, academic materials and other publications that are in the public domain (search).

Microsoft plans to initially work with an industry organization called the Open Content Alliance (search) to let users search about 150,000 pieces of published material. A test version of the product is promised for next year.

The alliance, whose participants also include top Internet portal Yahoo Inc., is working to make books and other offline content available online without raising the ire of publishers and authors.

Danielle Tiedt, a general manager of search content acquisition with Microsoft's MSN online unit, said the company also is working with publishers and libraries on ways to eventually make more copyright material available for online searches.

She said Microsoft is looking at several options, including models where users would be charged to access the content.

Microsoft said it has no plans right now to have targeted ads located in the search results, but the company cautioned that it was still working out the details of its business model.

"I think about the 150,000 books as a test," Tiedt said.

Rival Google has taken a markedly different approach, with plans to index millions of copyright books from three major university libraries — Harvard, Stanford and Michigan — unless the copyright holder notifies the company which volumes should be excluded.

The Association of American Publishers (search), representing five publishers, and The Authors Guild (search), which includes about 8,000 writers, have both sued the search engine giant over the plans.

Google has defended the effort as necessary to its goal of helping people find information — and insists that its scanning effort is protected under fair use law because of restrictions placed on how much of any single book could be read.

Responding to Microsoft's plans to offer its own book search, Google said in a statement that it "welcomes efforts to make information accessible to the world."

Tiedt said Microsoft is coming at book search from a different angle in part because the software maker itself is so often the target of copyright infringement. Pirated versions of Microsoft's Windows operating system are widely available in developing countries for only a few dollars.

Microsoft's approach has the potential to backfire, however, if Google ends up having more content available or begins offering ways to search content for free while Microsoft pursues a model that requires people to pay for it.

Microsoft acknowledges it is far behind Google.

Tiedt said she expects it will take years — and require a substantial investment — to solidify the MSN product, working out all the complex issues around searching through books and other materials online.

"This is not a money-maker for the company," Tiedt said. "This is very much a strategic bet for search overall."

The effort marks Microsoft's latest effort to play catch-up with Google on various search technologies ranging from basic Internet search to localized queries.

But Google remains by the search leader by far, accounting for 45.1 percent of all U.S. Internet searches in September, according to Nielsen/Net Ratings. Microsoft's MSN Search ranked third, accounting for 11.7 percent of U.S. searches during the same period.

 

Publishers Sue Google Over Book-Scanning Scheme

Wednesday, October 19, 2005

NEW YORK — Just weeks after a leading authors' organization sued Google for copyright infringement, the Association of American Publishers (search) has also filed suit against the search engine giant's plans to scan and index books for the Internet.

Under the Google Print Library Project (search), millions of copyrighted books from three major university libraries — Harvard, Stanford and Michigan — will be indexed on the Internet unless the copyright holder notifies the company by Nov. 1 about which volumes should be excluded.

Google has called the project an invaluable chance for books to receive increased exposure.

But in papers filed Wednesday in the U.S. District Court in Manhattan, the publishers association sought a permanent injunction and cited the "continuing, irreparable and imminent harm publishers are suffering ... due to Google's willful [copyright] infringement to further its own commercial purposes."

The suit was filed on behalf of five publishers: McGraw-Hill (search), Pearson Education (search), Penguin Group USA (search), Simon & Schuster (search) and John Wiley & Sons (search). The suit seeks recovery of legal costs, but no additional damages.

Google, in a statement issued Wednesday, called the legal action "short-sighted" and said the project was a "historic effort to make millions of books easier for people to find and buy."

David Drummond, Google's general counsel and vice president of corporate development, said in the statement that "creating an easy to use index of books is fair use under copyright law and supports the purpose of copyright: to increase the awareness and sales of books directly benefiting copyright holders."

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