Amazon (AMZN): Playing Offense or Defense? Part E. Investing in Software

E. Software that makes buying easier, faster and more secure.

Excuse me for this, but I'm going to gloss over "E" and assume it's almost a given that Amazon benefits from and keeps its opponents on the defensive by investing in software that makes its services easier, faster, and more secure. 

Most of this expense falls under "Technology & Content" on the income statement, and it's clear the company sees it as an important to keep plowing cash into the category. From 2010 to 2011, its investment jumped 68 percent, going from $1.7 to $2.9 billion. It now gobbles up 6.1 percent of revenue compared to 5.1 percent the previous year and 4.3 percent the year before. I assume much of this comes from growing the cloud computing offering but that a good chunk is attributable to R&D efforts into the Kindle line of devices.

In the Overview portion of its 2011 10-K, Amazon says this about its Technology and Content expenses:

We expect spending in technology and content will increase over time as we add computer scientists, software engineers, and merchandising employees. We seek to efficiently invest in several areas of technology and content, including seller platforms, digital initiatives, and expansion of new and existing physical and digital product categories, as well as in technology infrastructure to enhance the customer experience, improve our process efficiencies, and support AWS.

We believe that advances in technology, specifically the speed and reduced cost of processing power, the improved consumer experience of the Internet outside of the workplace through lower-cost broadband service to the home, and the advances of wireless connectivity, will continue to improve the consumer experience on the Internet and increase its ubiquity in people’s lives. To best take advantage of these continued advances in technology, we are investing in initiatives to build and deploy innovative and efficient software and devices.

We are also investing in AWS, which provides technology services that give developers and enterprises of all sizes access to technology infrastructure that enables virtually any type of business.

Conclusion: It's critical that Amazon not rest on its laurels here, something that would be quite easy to do. It's lead over most other web retailing sites is big...it's an advantage...and it's an offensive move to continue investing behind it.