You don't really need that $12 package of Kleenex tissues to arrive in 48 hours, yet you insist on ordering it through Amazon Prime. You have no idea how much it's costing.
All right, fine, let's not feel bad for the world's biggest online retailer. After all, Amazon lets its Prime membership customers buy a few cheap items at a time and that's helped it build up its business. But Amazon, having to shoulder the cost of getting those items to you so quickly, is now paying for that liberal approach.
As the Seattle company's shipping and fulfillment costs keep soaring, a big question for Amazon is: Will it be able to keep sending you small orders of soap or trash bags with free, two-day shipping or will something have to change?
The answer, it seems, is yes and yes.
"They will continue to experiment to make that very rapid delivery possible," said Yory Wurmser, a retail analyst for researcher eMarketer. "They're trying to get as many people to buy as much as they can online."
Amazon has been able to hook you with Prime, its $99-a-year membership service that offers two-day deliveries at no additional fees. While Prime has been a success, helping the company grow faster than the broader e-commerce market, it's also resulted in big shipping costs that the annual fees don't fully cover. And while Amazon tends to think in the long term, happily giving up a buck today to keep you satisfied through tomorrow, it has a handful of projects that could help ensure those speedy deliveries get to you without losing so much money in the process.
On Thursday, Amazon posted weaker-than-expected earnings for its all-important holiday quarter, which drove down its stock by more than 13 percent after hours. Shipping and fulfillment costs didn't help the situation, with both growing at a faster rate than revenue. Overall shipping costs shot up 37 percent from a year earlier to $1.8 billion, outpacing a 22 percent rise in revenue to $35.7 billion.
"This is all tied in with the increase in [Fulfillment by Amazon] growth and the demand from Prime members," Amazon finance chief Brian Olsavsky said on a call with analysts Thursday when asked about the higher shipping costs. "We're shipping more units -- more of our units, so this ripples through our ship cost per unit."
He added that the company's new Prime Now service, which offers free two-hour deliveries to Prime members in 25 markets, "is difficult and expensive, but customers love it."
So far, Amazon hasn't pushed customers all that much to change their behavior, but it's included a few tools to coax people to bundle purchases or request a slower shipping option. For instance, the company offers Prime members a $1 credit for future e-book or digital video purchases when they opt for five-day shipping instead of two. Also, under its "add-on" program, Amazon ships thousands of lower-priced items only when they're bundled in a $25 order.
That push has paid off in some ways. Despite missing Wall Street's expectations, Amazon posted sales of $107 billion for 2015, the first time it's crossed the $100 billion mark.
Amazon will probably keep moving into physical locations to help it cut down on shipping costs, Wurmser said. The company has created pickup and return locations in office buildings and retail stores through its Amazon Locker program. It's also been expanding its staffed pickup centers at universities, coming to two more schools this year. It even opened its first brick-and-mortar bookstore late last year in Seattle.
Behind the scenes, Amazon has been building up its delivery infrastructure in hopes of cutting expenses. Last month, it unveiled a fleet of thousands of Amazon-branded truck trailers, which it will use to move its inventory among its warehouses. Beyond that, Amazon has reportedly been testing plans to lease 20 Boeing cargo jets, which could help it avoid storing the same inventory in multiple locations around the US to guarantee its two-day deliveries. Amazon also opted to purchase the portion of French package-delivery company Colis Prive it didn't already own and now offers an Uber-like service called Flex, which hires regular folks to deliver packages in 14 US markets.
"Amazon is effectively making its own carrier in the US," said Jarrett Streebin, CEO of EasyPost, which offers e-commerce shipping services.
Whether this means Amazon will eventually compete with delivery specialists FedEx and UPS is a question hotly debated in the shipping industry.
"I don't know how far they're going to take it. I don't know that they know," Wurmser said about Amazon's expansion in deliveries. "If it does save them money, I think they'll go far with it."
For now, Amazon's work to restrain its shipping and fulfillment costs hasn't made a significant dent in its earnings reports, with those big cost centers contributing to the company consistently posting a meager profit at best.
For the quarter, Amazon posted a profit of $482 million, more than double the year before, but still a sliver of its overall revenue.
DISCUSS: YOUR IMPULSE BUYS ARE COSTING AMAZON A FORTUNE
Commentary: A proposal by Federal Communications Commission Chairman Tom Wheeler calls for cable companies like Comcast to "unlock the set-top box." Unlocking isn't enough. The box should die, once and for all, and be replaced by apps.
When he introduced the latest version of Apple TV, CEO Tim Cook said "The future of TV is apps."
I think the cable box of tomorrow should be an app, too.
If you want the breadth of programming, ease of use and access, especially to live sports, that a cable subscription provides, your only choice is to use a cable box or TiVo that has a "Cable Card." Amazingly, in these days of software authentication and fingerprint scanning, this archaic device is an actual, physical card that lives inside the box you typically rent from the company.
"Today, 99 percent of pay-TV customers lease set-top boxes from their cable, satellite or telco providers," says Federal Communications Commission Chairman Tom Wheeler. "It doesn't have to be this way."
His recent proposal calls for cable companies like Comcast to unlock the cable box, paving the way for competitors to develop third-party devices and software that can provide the same live and on-demand TV programming as the company cable box.
He cites the staggering fact that "over the past 20 years, the cost of cable set-top boxes has risen 185 percent while the cost of computers, televisions and mobile phones has dropped by 90 percent." The average pay TV subscriber spends an average of $231 per year renting set-top boxes and related devices (like remote controls) from their TV provider.
There's no technological reason that Comcast, or Time Warner Cable, or Charter or any other cable TV provider needs to provide physical hardware at all. There's no need for warehouses full of cable boxes or arduous "service windows" where the technician supposedly shows up "sometime between 11 a.m. and 3 p.m."-- or not--to fix (or more likely just replace) your device.
Full-fledged pay TV service should just be an app, like Sling TV, that runs on your phone, your Roku or even the TV itself.
Of course, cable companies already have apps. The best example I know about is available to Time Warner Cable subscribers. The TWC TV app can be downloaded to Roku, Xbox and older Samsung TVs, for example, as well as iOS and Android phones and tablets. It offers pretty much every live channel you get from TWC's box, all of its on-demand content, and the ability to start over on certain live channels that offer that function. You don't even need a cable box in the house; just a TWC modem.
It's still not enough, though. DVR functionality is limited to scheduling only, not playback. Most live TV channels are only available to watch inside your home, not on the road. And the app isn't available on every TV device -- notable exceptions include Apple TV, Amazon Fire TV and Chromecast.
Comcast offers similar apps, Xfinity TV and Xfinity TV Go, but they're available only on mobile platforms, so you still need to use the set-top box to watch on the big screen at home. Even so they're wildly popular; Comcast says its apps have been downloaded more than 20 million times.
Mobile vs. your living room
The problem isn't mobile access to TV programming -- it's access on the TV itself, in your house. Just about every cable and satellite service has a mobile app, but almost all require you to have the box in your house when you watch TV in the living room, especially if you want to record anything.
Wheeler's proposal opens the door for other companies to develop apps that use a Pay TV provider's programming, packaged and delivered in a much less restrictive way, with no need for a dedicated cable box.
Imagine the big-screen TV app designed by a company that knows user interfaces -- Apple or Google, or even Netflix. It would provide all of your local cable company's live or recorded channels (and on-demand content) to the Smart TV, streaming device or mobile device of your choice. Imagine having a choice of such apps, an actual choice in the interface and functionality and features of your pay TV subscription.
The app could offer voice search, smart recommendations, profiles for different family members, robust parental controls, cloud or local DVR storage, mobile downloads for offline access and more.
If the app acted up or became unreliable or annoying, you could simply download an alternate one and re-authenticate it with your Comcast or Time Warner or Charter credentials. No need to swap in a new cable box, or put up with just one (terrible) option. In the face of competition in the living room, cable companies might even be pushed to innovate and offer better apps themselves.
Someday the cable box will finally go the way of the horse and buggy, the rotary phone, the typewriter. Apps on phones have already begun to replace plenty of handheld devices -- think MP3 players, GPS units and even compact cameras. Apps on TVs and TV-connected boxes should do the same thing to cable boxes: kill them. The day can't come soon enough.
DISCUSS: IT'S TIME TO KILL THE CABLE BOX WITH APPS