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Last Updated: Wednesday, 25 October 2006, 09:17 GMT 10:17 UK
Falling profit margins hit Amazon
Amazon Unbox
Amazon recently launched a new music and video download service
Online retailer Amazon has beaten market forecasts with a third-quarter profit of $19m (10m) but has continued to see its profit margins shrink.

The world's second most popular web store saw its operating profits fall to just 1.7% of revenues, compared with 3% in the same period of 2005.

Margins have fallen in recent quarters as Amazon has raised spending on technology and website content.

Boss Jeff Bezos said margins would improve in the final quarter of 2006.

Shares rise

Amazon predicted that fourth-quarter operating profits would reach between $145m and $235m, helped by lower expenditure on technology and a surge in Christmas sales.

The news pleased investors and sent Amazon's shares 14% higher in after-hours electronic trading.

Screen grab taken from the Amazon website

However, analysts were still concerned about the company's profit margins.

"While the growth rates for the company are impressive, they seem to have to keep working harder and harder to get that growth," said Steve Weinstein, an analyst with Pacific Crest.

Amazon's net profit of $19m for the three months to 30 September was down from $30m a year earlier, despite a 24% rise in sales for the period.

IBM lawsuit

Many industry watchers say that Amazon has been slow to wake up to the growing threat from music and video download sites such as iTunes.

The online retailer recently launched a new digital TV and film download service in the US called Amazon Unbox.

Backed by top Hollywood studios and TV channels, including Warner Brothers and CBS, it will offer programmes and films direct to users' computers.

However, Amazon has a court case hanging over it in Texas, where computer giant IBM is suing it after accusing the retailer of infringing its patents for online shopping technology.

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