Amazons first quarter earnings report last week presented analysts and investors with a financial mystery. Big bait. Here on the bottom line, we're seeing E. P S in the first quarter from Amazon of $7.9 $4.72 was expected. The company's profits were much higher than expected and operating margin of 7.4% which was almost double what it was the previous year. But Amazon's guidance for the next quarter's results was lower and operating margin in the range of four or 5% and that suggested that the company would be spending a lot more on something. But what exactly are you convinced that spending is gonna be in check? Or do you think they're gonna drop a bomb on this conference call? They're gonna drop a bomb. But it was not long until the bomb was dropped and the mystery was solved. Here is Brian Osofsky, Amazon's chief financial officer, answering a question on the company's earnings conference call. We're currently working on evolving our prime free two day shipping program to be a free one day shipping program. For cue to guidance, we've included approximately $800 million of incremental spend related to this investment.

Coming up on this special episode of The Geek Wire podcast, we take a closer look at a fundamental change in Amazon's prime membership program. It's a move that promises to significantly alter Amazons financial picture and accelerate the pace of global online commerce. Stick around for a deep dive on the implications of Amazon prime one day shipping. If you speak to any disruptive force and technology, they'll tell you that inspiration from outside of their industry spark some of their groundbreaking at innovative ideas. That's what the Thinktank podcast is all about. Every episode pairs entrepreneurial minds from a variety of industries with an executive from the digital Innovation Group at Providence, which is a health system in Digital Leader, based in Seattle, Washington. Together, they take part in a supercharged brainstorm session that illuminates areas where digital technology can create meaningful disruption in healthcare, from simplifying the way you make appointments to better serving underserved customers to building personalization of the healthcare think tank explores how digital can change the way health care operates today. Check out the latest episodes of the think tank on any podcasting platform the search for D I g think tank in tune in each month for new episodes on the impact of digital transformation on health care consumers. Everybody, it's cake wire Editor Todd Bishop and I'm here with Matt Levy. Require reporter who covered this story. Great to see you,

Nat. Thanks for having me. Still recovering?

Still recovering from the story? Yeah, because it was a shock even to the analysts were covering it, which we're gonna get into later. But first, what is Amazon doing? Because I can see a lot of people looking at this and saying, Hey, wait a second. I can already get same day or two, our shipping from Amazon if you get prime now or you're a prime member. So what are they doing here? And what is this announcement

mean? It's true that in some places, on some items, you can get speedier shipping one day, a couple hours, anything like that. But what they're doing here is taking the core two day shipping offering that comes with Prime and phasing that out and basically replacing it with one day shipping. So the idea is anyone who is eligible for prime anywhere will someday be getting one day shipping

instead of two. And it's interesting because I think in some cases we have a big city mentality here in Seattle and we don't realize that in many other parts of the country, two days is in fact the standard

right. And we get the rollout of almost everything first. So yeah, we're definitely spoiled.

Yeah, that's right. So what's the history here? Because two day shipping has been the flagship benefit of Prime for many years.

You have fun. Fact that I just learned this week when I was working on this story is that Prime is actually like 14 years old. I'd had no idea, I thought was maybe, like 567 years old. Ah, but most of that time, the core benefit has been free two day shipping on many items, Even as they've added more goodies along

the way. Why would Amazon want, at this point in its evolution to shift the core benefit from two day shipping to one day shipping?

Well, at this point, a lot of the retailers have caught up, especially the big ones target Walmart. Some of these others, they all have limited versions of two day shipping. But they also have their big networks of stores that they can basically turn into these little mini fulfillment centers they can do. Pick up, you order it online, pick up in store a couple of other new programs that some of these companies were working on. But Amazon can't really match those because they don't have the same footprint of stores that a target or a Walmart might. So they have to find another way to get ahead. Another way to set the standard. And it appears they have settled on one day. Shipping Is that new push.

It's interesting, because shipping, while it's the flagship benefit of Prime, is at this point far from the only benefit you can get prime video. You can get all sorts of different kinds of access to things on twitch. They're all sorts of different benefits that they've added the prime over the years. Yet shipping remains the core. So how much of this is about boosting prime membership? Do we know what Amazon's numbers are at this point? And does this move play into attempting to grow that number?

Amazon has only disclosed this number once before And it was about a year ago when they said there were 100 million members and counting globally globally. Literally, uh, they're they're research companies out there that estimate these numbers by, you know, surveying X number of households. They're not always entirely accurate. They're just a guess. But some of these reports are suggesting that prime membership is growing slower than it has in the past, and this would certainly be another weight it to juice that membership figure and bring more people in. Amazon's also making record profits. Right now that doesn't really jive with their character throughout the history of the company. So they had to spend their money on something. And

I guess this is it, I think the kind of company that says Wait a second, there's too much money on the bottom line. Clearly, we're doing something wrong. We're not investing enough back into the business and we're kind of joking here. But really that is their mentality. It's like, Hey, it's still day one, we're still moving. Why can't we just take this money and basically put it into future

growth? Apple's sitting over here like What are you doing

exactly? And Microsoft. You know, the companies with the traditional, you know, 70 80% profit margins on software would look at this and go. This is crazy. But in the scheme of retail, they have low margins. And so this is somewhat typical. So Brian Osofsky, Amazon CFO, had this to say about the reasons for making this move the shift to one day shipping as a court prime benefit on the company's conference call with analysts. I would say it's, uh, as simple as price selection and convenience, which is the mantra that we talk about quite often.

Um, by going to one day increases the convenience, and it increases the available selection into the consideration set. Although we have, you know, uh, many items that are available in 1 to 2 hours on also same day. The vast majority of our selection is available to you in two days. If we get that toe one day, we literally cut in half. That's tough math for you. I'm sorry to do that, but the you know, we think that that will open up a lot of potential purchases. That, and we'll open up convenience to those customers.

So, you know, we've been, uh, experimented a lot of different formats. As you know, today, one day, same day to our stores. There's all types of consider, you know, points of, uh, being there for the customer when they need us a different, uh, points in their consideration set.

So we really think it's gonna be ah, you know, groundbreaking for prime customers. Um, and we're very excited toe add this capability. And again, part of this is, uh, Cape. We have the capability because we've been at this for over 20 years and continued invest in our fulfillment capacity are logistics capacity and also find Tune it. All right. So, Net. I remember when this happened, when this news was announced, you were listening to the conference call and you came out into the newsroom. And then later on, you called it the most flippantly announced huge story I've ever come across. Tell us the back story

on this. Let me start with a little inside baseball on how these earnings work. Ah, right after the market closes, they come out with all of the key figures. In a in a release, we we look at things like revenue profit that sort of thing. Then you dig deeper for anything that stands out. Then you get your story up in about an hour. Later, you get the call where the executives jump on the line with investors, and in Amazon's case, they usually just spend the whole time saying a great quarter guys. But in this case, you know, in the middle of the second question, which was related to operating margin and why they forecasted it declining.

Ah, they just dropped this bomb right on the call, saying, Well, we're, ah, evolving to from two day shipping to one day shipping. And I was like, Whoa, that sounds like something. And I had to walk out and be like, This is new, right? Like they said it with such a low enthusiasm that it it just felt like it was like something they'd already described before

and what was hilarious. And you can't say the word hilarious very much in the context of earnings. Conference calls correct was how much this became the focus of the questions from the analysts throughout the rest

of the call. Great, thanks. Just come back to the crime one day delivery

to return to the 800 million investment to improve one day shipping

apologized. But another one day shipping question here, thanks to my question, Goto a new topic one day shipping,

by the way, in case that was lost on folks. That was some analysts humor there

at the end. I don't see

a lot of that on the stalls.

It almost felt like Amazon didn't expect the response it got from the analysts on the call. As you can see, everything really shifted and question after question was about this new shipping plan. And Amazon started to deflect a little bit and say, You know, we've already said what all we can say and here's this number in this number will have more to share with you. In the second

quarter, it became so much of a focus that Amazon CFO Brian Osofsky he had to do something really awkward to get to another piece of information that he was apparently holding back, waiting for somebody to ask about which they never did, because they were so focused on the prime one day shipping. I don't want to run out of time here, so I'm gonna ask the question for myself about AWS because I want to get some information to you. And, of course, that is ironic. Because Amazon Web service is a W S is critical to Amazon's profits. They brought in 2.2 billion in operating income in the most recent quarter, which is about half of the company's overall earnings. This is gonna cost Amazon, they say, about $800 million in the next quarter, meaning the current quarter, the one we're in right now. Can you put that in context? Because $800 million to me just sounds like a lot of money his

lot of money. But it's only around 1% of the company's expected net sales for the second quarter in the last quarter, which was the first quarter of the year, they spent roughly 7.3 billion on shipping alone, so that 800 million would be more than 10% of that. So there's definitely gonna be a bump in shipping costs in the next quarter, and I'm sure you're going forward as they continue

to build this, and it's enough to bring Amazons operating margin down significantly if you look at their guidance for the next quarter, which is really what include people in in the first place to the fact that there was something big happening, even if they didn't know what was gonna

happen. And yet they still had to kind of tease it out of them. It wasn't they didn't mention it in the er earnings release at after market close. They didn't mention it in their opening remarks that just came in in the middle of the call. In response to a somewhat related

question and to get even more inside baseball. There is not just the analyst call, but before the analysts call, there's a journalist call for about 10 minutes. And this didn't come up on that, I assume.

Nope. And the same question came up,

though. Really? Yeah. So they were waiting

to break in. They were waiting to drop it into the general call.

Interesting. And I realize this is like double inside baseball. But why? Why not just put out a statement on this if they want the news out?

I got the response, didn't it? It did. I mean, everybody wrote about it. Everyone's talking about it. Here we are, you know, raise later and we're still talking about it.

That's funny. All right, So a couple questions. Is this global, or is it us only in terms of this shift to one day delivery for prime,

it's going to be global, but they're working mostly on North America right now. That's where the starting.

And do we know how quickly this is going to roll out? Like if I go on Amazon now? And there was a product that I would have seen have two day shipping before? Will it still be two day shipping or will now be one day shipping? As of this week?

We have no idea. Basically, they they said that they've upped the number of one day items and numbers, the codes that they ship there one day items, too, in the month of April. And they mentioned that a lot of the work is gonna be done throughout the year. But they didn't give ah firm timeline on

anything. So what does this mean for FedEx and UPS and the U. S. Postal Service? Because I know Amazon has been building out its own delivery infrastructure. Does this all happen through Amazon's delivery infrastructure or they're gonna have to rely on those other companies to

feel like every couple of weeks. We get one of those rumors about Amazon cutting out their shipping partners entirely and taking over the process themselves. With this move, that seems way less likely. And the executives themselves said they're gonna rely on everything they've got those those third party providers. The UPS is the FedEx is the Postal Service. They're gonna be important to this, as will their fleet of drivers. We don't know really exact details. Are they gonna hire bunch more drivers or they gonna open it up? So the shifts or less competitive are they going to, you know, go deeper with their shipping partners? Are we gonna see something new entirely to make this happen? We have no idea. So let's wildly speculate,

I guess. Okay, I'll go there with you. Now, do it. Drones. No, no. This is where the drones were gonna come. Always, Jones. It's really the drugs. Of course. The FAA is still regulating those heavily in the U. S. But they've already started to roll that out in the UK And so who knows? You could see some drone delivery enabling one day deliveries I don't know, though the drone deliveries still seem like a big novelty to me. What does this mean for the price of Amazon prime?

We don't know for sure, but the executives were pretty clear that they wanted to keep the price similar. They said that it's gonna be a cost that they bear, which would, ah indicate that they're not gonna push this off on to the customer. So it's gonna be a straight trade of two day for one day shipping. So in theory, you wouldn't expect another price bump. Plus, they recently bumped the annual membership from $99 a year Thio 1 19 So that was pretty recent, and I wouldn't imagine that they're going to do anything different on price here.

So Amazon says that this is going to Causton additional $800 million in the current quarter. Do we know what they're going to spend beyond that? Have a forecast that at all publicly

they have not. I'm guessing a lot. Let's go with that. That's that. Let a good

round number. Yeah, I think we don't know is probably there.

I like a lot better. They tell us to stay tuned, and on the next turn and call, they'll probably be like we were gonna spend 18 billion on it. It's fine,

All right, so that is the news so far. But where is this headed next? Well, we have a little bit of a glimpse and some clues, and we'll get into that right after this break. Welcome back to the geek wire podcast. It's Todd Bishop with Matt Levy. We've been talking about Amazon's shift from to day to one day shipping free shipping as the core benefit of its Amazon Prime membership program. That there was actually a patent about five years ago from Amazon that hinted at where they could go next with this whole concept. Because once you get it down to one day, and in some cases two hours like where do you go from there? There's this approach called anticipatory shipping. This was a patent that first surfaced back in 2014. We covered

it at the time, reading

my mind. Not yet. We're gonna get to that next. OK, so the whole idea is that Amazon could speed up the shipping process by predicting using Predictive analytics to get products closer to you before you actually buy it. In other words, they could look at things like past purchases, wish lists or get this even measuring how long you've been hovering over, Ah, link to know whether or not you're interested in buying that product.

So just thinking about it will give them some

motivation. Perhaps, Perhaps s O. For example, they say a newly released novel in a Siri's may reasonably be predicted to have a similar demand profile to the last novel in the series. So if you read Neal Stephenson's prior book, they would know, Hey, Nat is gonna be definitely buying the new book and they'll have it ready and perhaps even the label partially printed to get sent to you. This is according to the patent, and we're not clear on how much of this has actually been rolled out in the

five years since. Yeah, the patents can be pretty wacky. My question is, what happens if they get it wrong? What if they predict me

incorrectly? Well, they aren't actually according to the patent going to ship it to you. So at that point, it's just sort of wasted resource is, or it could go to somebody else. Maybe your neighbors interested in Neal Stephenson, but it could get even crazier. Listen to this at Amazon were dedicated to delivering your products as quickly as possible. And today we're thrilled to introduce our latest service yesterday shipping. It's easy click checkout. Choose yesterday shipping. And when you confirm your order, you'll already have had the product for a day. Sounds simple, right? Well,

it gets even simpler the day before you order, you'll get a package that you're not expecting on the box. There will be a note telling you to call the Amazon support team. Hi. I just got a pair of shoes that I didn't order. Yes, you ordered those shoes tomorrow with Amazon yesterday. Shipping. All right, Amazon yesterday. Shipping. Are you ready for it? Nat, You know, I

don't know if this is a good thing or a bad thing, but when I watched that video, it's like, Yeah, I could see that happening in the next 3 to 5 years.

Okay. So just to be super clear, that is a spoof. That is the only thing we've talked about. That is not riel so far. Except for the patent which is more of an idea. At any rate, that is, from the builder burgers, YouTube channel. That was from 2012. It was quite a while ago.

Always interesting to get into the time travel thing. Because, you know, if I ordered these shoes that day, does it forever change my future? Did I not by other shoes? What if I was gonna go to this place, but my shoes weren't right? And I end up going somewhere else. And it changed my life entirely.

Blowing my mind that blowing my mind. All right, well, bottom line, this Amazon news on the shift is interesting because it really changes thegame for e commerce. It ups the stakes for Amazon's competitors, and it's really costly for Amazon in the short term,

and it's just getting started. We're going to see how much they're spending going forward. We're going to see how quickly they roll it out. And we're also gonna be watching how its rivals respond.

Fascinating stuff. All right, Matt, Thanks for being here. Thanks for having me working.

People follow you. They can follow me on Twitter at Nat

J. Levy. Thanks for listening to the geek wire. podcast. Be sure to subscribe in your favorite podcast app and leave us. Our rating and a review will be back next week with our regular weekly news round up the weekend geek. Until then, I'm require editor Todd Bishop. Thanks for listening.