Amazon.com 2006 Annual Report Download - page 41

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North America segment gross margins in 2005 improved by 30 basis points compared to 2004 resulting
primarily from increases in revenue by third-party sellers, increases in amounts earned from our co-branded
credit card agreement, improvements in terms with suppliers, and increases in amounts earned from service
agreements, offset partially by our efforts to continue reducing prices for customers, including from our free
shipping offers and Amazon Prime.
International segment gross margins in 2006 decreased by 120 basis points compared to 2005 resulting
primarily from changes in our revenue mix. Sales from electronics and other general merchandise grew faster
than sales from media, resulting in lower gross margins.
International segment gross margins in 2005 improved by 162 basis points compared to 2004 resulting
primarily from increasing revenue from third-party sellers and increases in discounts we receive from our
product suppliers, offset partially by changes in mix of product sales and our efforts to continue reducing prices
for customers, including from our free shipping offers.
Supplemental Information
Supplemental information about shipping results is as follows:
Year Ended December 31,
2006 2005 2004
(in millions)
Shipping Activity:
Shipping revenue (1)(2) ............................................. $567 $511 $420
Outbound shipping costs ............................................. (884) (750) (617)
Net shipping cost ................................................... $(317) $(239) $(197)
Year-over-year Percentage Growth:
Shipping revenue ................................................... 11% 22% 13%
Outbound shipping costs ............................................. 18 22 21
Net shipping cost ................................................... 32 22 44
Percent of Net Sales:
Shipping revenue ................................................... 5.3% 6.0% 6.1%
Outbound shipping costs ............................................. (8.3) (8.8) (8.9)
Net shipping cost ................................................... (3.0)% (2.8)% (2.8)%
(1) Excludes amounts earned on shipping activities by third-party sellers where we do not provide the
fulfillment service.
(2) Includes amounts earned from Amazon Prime membership program.
We believe that offering low prices to our customers is fundamental to our future success. One way we offer
lower prices is through free-shipping offers that result in a net cost to us in delivering products, as well as
through membership in Amazon Prime. To the extent our customers accept and use our free shipping offers at an
increasing rate, including memberships in Amazon Prime, our net cost of shipping will increase. Our net
shipping cost results primarily from our free shipping offers and Amazon Prime. We seek to partially mitigate the
costs of lowering prices over time through achieving higher sales volumes, negotiating better terms with our
suppliers, and achieving better operating efficiencies.
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