Question-and-Answer Session
Operator
(Operator Instructions)
Our first question today will come from Robert Peck from Bear Stearns.
Robert Peck - Bear Stearns
Tom, I just wanted to clarify a couple of things. One is, could you give us a little bit of color around the spending of S3, EC2, where you see that spending going over the next couple of quarters, and what capacity are you using to handle the demand there? How does that capacity get adjusted for the 4Q?
The second question is more on gross margins, where you see gross margins trending over the next couple of quarters, how do you see the impact of any further increased shipping supplements or even the negative shipping stuff you have been testing for Amazon.com? Thanks.
Thomas J. Szkutak
Could you repeat the gross margin question again? I did not hear the last part of it.
Robert Peck - Bear Stearns
The gross margin question is just more of how should we think about gross margins going forward to reflect any further increased shipping rebates, shipping supplements, and even implications of things like -- what is your turnover there?
Thomas J. Szkutak
In terms of gross margins, certainly the endless rebate that you mentioned was also -- that’s the negative $5 shipping, if you will, is included in the results that you saw in Q1, so that is reflected in Q1 and it is reflected, whatever we might do going forward in each of our categories. Certainly reflected in the guidance that we have given, but what you are seeing in Q1 is certainly a contraction in our gross margins, meaning it was down 17 basis points year over year versus what we saw more recently, where it was down 110 basis points for the year, total year 2006 versus total year 2005, as well as a similar number for Q4.
What you are seeing really is strength in our third party business, which you saw reflected, particularly in our international gross margins, as well as improvements in COGS. As we move forward, we are certainly still working very hard to get further COGS improvements, and the growth that we have seen in a lot of the categories and the scale that we are getting is helping us do that.
Jeffrey P. Bezos
I will take the EC2 and S3 question, and just say we are -- we do not break it out. We are seeing very strong demand for those services and expect to continue to roll out new capacity for them.
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