Amazon: State of the Art for 1913
So I was working on a follow-up to a 2011 post I’d titled “Amazonification”. (most of that post is still valid – you don’t have to read it but I’d humbly submit that if you have the time: it’s a good read)
I’ve been having trouble stringing all these loose thoughts together — the essay I want to write is eluding me. So instead I’m going to try something a little different, and see if the links I was planning to use as references can speak for themselves.
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“This isn’t just tossed-off; it’s direct from founder and CEO Jeff Bezos: ‘our physical book sales experienced the lowest December growth rate in our 17 years as a book seller, up just 5 percent.’ This is Amazon’s original business, for years its core in digital retail, and brick-and-mortar bookstores across the country are shutting down. Amazon’s growth in this market was only 5 percent? And Jeff Bezos is pleased with this?”
Amazon’s digital metamorphosis: ebooks up 70 percent, video spikes as print books flatten : Tim Carmody, 29 January 2013, The Verge
Amazon rides a razor-thin wave back to profit in first full quarter of new Kindles : Tim Carmody, 29 January 2013, The Verge
[blockquote]
“Not having to sweat a constant onslaught of new competitors is really underrated. You can allocate your best employees to explore new lines of business, you can count on a consistent flow of cash from your more mature product or service lines, and you can focus your management team on offense. In contrast, most technology companies live in constant fear that they’ll be disrupted with every product or service refresh. The slightest misstep can turn a stock market darling into a company struggling for its very existence.
“Amazon’s core retail business is, I’d argue, still very secure. I can’t think of a tech retail competitor that is a legitimate threat to Amazon in selling most physical goods. Where Amazon is most vulnerable in retail is those areas where the game shifted on them, and that’s in the media lines where physical books, CDs, and DVDs are being digitized. Since no physical product must be transported through a distribution system, Amazon’s operational efficiency advantages there are less effective against competition. But in the arena of buying something online and having a box delivered to your doorstep, who really scares Amazon?’ [/blockquote]
Amazon, Apple, and the beauty of low margins : 13 December 2012, Remains of the Day [blog], www.eugenewei.com
[blockquote]
“When I shop on Amazon, I tend to check price first, then reviews, then whether the thing I want to buy is eligible for Prime. Only then do I tend to check the actual seller, which Amazon lists below whether the item is in stock. From the success of third-party sales on Amazon, I’m clearly not the only person indifferent to who has title to the merchandise I’m buying. If it’s on Amazon, I tend to think of it as from Amazon.
“That might not always be wise, since third-party sellers might, for instance, have a different return policy than Amazon’s standard guidelines. But that kind of variation seems less and less likely as Amazon makes standardization the most appealing option.” [/blockquote]
Amazon’s Future Is Not in Selling Stuff — And That’s a Good Thing : Marcus Wohlsen, 31 January 2013, Wired Business
“The time was 2004. Amazon already had cutting edge tech. ‘Amazon is a high tech company that just looks like it sells books,’ he laughs. The powers that be wanted to somehow make money on their IT.”
Amazon’s Game-Changing Cloud Was Built By Some Guys In South Africa : Julie Bort, 28 March 2012, Business Insider
“AWS has dropped prices 23 times since 2006. Jassy attributed the price drops to what he sees as a virtuous circle that has emerged as AWS has expanded. More customers leads to more AWS usage, which fuels the need for more infrastructure. As more is added, AWS gets economies of scale in lower infrastructure costs and, as a result, can lower prices.”
Amazon Web Services Drops S3 Storage Service Pricing About 25% : Alex Williams, 28 November 2012, TechCrunch
“In Bezos’ mind, we’re in the midst of a land grab for the future of retail and computing. Building and owning a market is more important than collecting profits from it. At least for now.”
Amazon Web Services Hits $3.8 Billion Revenue – But Can It Capture The Enterprise? : Matt Asay, 14 January 2013, ReadWrite
“Part of the challenge here is that the obvious long-term strategy for Amazon — drive all rivals out of business with ultra-low margins, then exploit some barrier to entry to hike prices and earn monopoly profits — is probably illegal, so you can’t articulate it publicly.”
The Peculiar Genius of Jeff Bezos : Matthew Yglesias, 30 January 2013, Slate Moneybox
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from Amazon’s own SEC filing, form 10-K, 30 January 2013
“We offer programs that enable sellers to sell their products on our websites and their own branded websites and to fulfill orders through us. We are not the seller of record in these transactions, but instead earn fixed fees, revenue share fees, per-unit activity fees, or some combination thereof. We serve developers and enterprises of all sizes through Amazon Web Services (“AWS”), which provides access to technology infrastructure that enables virtually any type of business.”
In 2012, Amazon made $2.5 Billion selling services and charging fees — now that’s only around 4% of their total revenue ($61.1 Billion in net sales) but it’s a business that is growing for them — and I think we can agree that charging fees is an easier business than shipping books and toasters (to say nothing of the differences in cost, and margin)
What is the Amazon Marketplace? Let’s take a look at Amazon’s own pages on it:
Selling on Amazon
Fulfillment by Amazon
Webstore by Amazon
“With all the buzz in 2009 about the big social networking sites such as Twitter and Facebook, I’d like to give a plug to one of my favorite social networking sites. I know, I know. Most people don’t consider Amazon to be social networking. It’s shopping, right? Don’t overlook the incredible communities that thrive on sites like Amazon, where customer reviews, profiles of those customer reviewers, author profiles and user conversations take place every day.” [emphasis in original]
Amazon as social networking : David Meerman Scott, 22 December 2009, WebInkNow
“Facebook knows who your friends are. Google knows what you’re interested in finding on the internet. Amazon knows what you’ve bought, and has a pretty good idea of what you might want to buy next. If you were an advertiser, which company’s data sounds most valuable to you? If you had a product you wanted to sell, which of those things would you most want to know? In a digital economy where some of the internet’s biggest companies and the country’s richest people have built their fortunes on the ability to more precisely target ads, one company sits on a trove of data it has barely started to exploit”
Amazon’s Next Big Business Is Selling You : Marcus Wohlsen, 16 October 2012, Wired
Amazon as a Social Network! : audio at link : Michelle Vandepas, September 2012, Talking Books TV
“So Amazon turned to third party sellers to escape the confines of the four walls; to expand its item catalog. These sellers are a motley crew of merchants, ranging from established store-front retailers to product manufacturers; from grizzly wholesalers to small-time entrepreneurs. They bring their wares to this marketplace to gain access to some 200 million customer accounts Amazon offers. And, in return, Amazon gets to embellish its catalog with the additional selection, all of which comes at no direct inventory cost to the web giant.”
Third Party Sellers and Amazon’s Drive for Universal Selection : Paul Dryden, 6 September 2012, Understanding Amazon [blog], understandingamazon.blogspot.com
[blockquote]
“Although Amazon declined to provide hard figures, it says that sellers’ sales were up 40 percent year-over-year from 2011, and that sellers on Amazon sold ‘hundreds of millions of units worth tens of billions of dollars.’
“The Amazon Marketplace allows business customers to sell on Amazon, tapping into the e-commerce giant’s worldwide reach for a monthly subscription fee plus a selling fee when the item is purchased. According to today’s release, there are now over 2 million of these third-party sellers on Amazon, reaching the company’s 188 million active customers around the world, including the 50 U.S. states.” [/blockquote]
Amazon’s Record Holiday Season Boosted Its Third-Party Sellers Marketplace, Too: Sales Up 40% Year-Over-Year : Sarah Perez, 2 January 2013, TechCrunch
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What about AWS?
http://aws.amazon.com/products/
http://aws.amazon.com/what-is-aws/
http://en.wikipedia.org/wiki/Amazon_Web_Services
http://www.youtube.com/user/AmazonWebServices
“Wang argues that Amazon is not a commerce company at all. It’s a big data company that has developed a cloud infrastructure that is profitable and subsidizes its retail operations. It has the mobile devices and content that it can spread through a network of users who pay to get it.”
Amazon Is Not A Commerce Company : Alex Williams, 30 December 2012, TechCrunch
“For Amazon Web Services Chief Data Scientist Matt Wood, the day isn’t filled performing data alchemy on behalf of his employer; he’s entertaining its customers. Wood helps AWS users build big data architectures that use the company’s cloud computing resources, and then take what he learns about those users’ needs and turn them into products — such as the Data Pipeline Service and Redshift data warehouse AWS announced this week.”
Why Amazon thinks big data was made for the cloud : Derrick Harris, 30 November 2012, GigaOm
“The chart below shows Amazon Inc.’s “other” revenue — which includes AWS — since AWS launched in 2006. From this, you can extrapolate that AWS is now a $2.2 billion-a-year business. How profitable it is remains an open question but it’s clear that Amazon CEO Jeff Bezos is always ready to sacrifice margin for volume business. And that has to worry the legacy IT incumbents.”
out of respect for GigaOm, I won’t embed their chart – it’s at the link : This year in cloud: Amazon-almost-all-the-time and the other 5 top stories of 2012 : Barb Darrow, 30 December 2012, GigaOm
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[blockquote]
“By contrast, Amazon has derived most of its recent growth from big ticket items in the ‘electronics and general merchandise’ category. Here, Amazon’s cost advantages are minimal or non-existent. Costco’s bare-bones warehouse model has the lowest expenses of any retailer, and this allows the company to frequently beat Amazon’s prices. In recent years, Costco has posted operating expenses around 10% of sales or less; less than half of Amazon’s costs.
“The other retailers have cost structures that are similar to Amazon’s. Wal-Mart’s operating expenses have averaged between 19% and 20% of sales, Target’s operating expenses have been somewhat higher at 24-25% of sales, and Best Buy’s operating expenses have hovered very close to 20% of sales. Thus, of four major retailers (which together have annual sales around $700 billion), only Target operates at a cost disadvantage vis-a-vis Amazon. Amazon’s expenses may decline in the future if strong revenue growth allows the company to better leverage fixed costs. However, it will always remain far behind Costco’s cost structure, and will also struggle to generate a meaningful cost advantage over Wal-Mart and Best Buy.” [/blockquote]
Two Big Myths About Amazon.com : Adam Levine-Weinberg, 14 January 2013, Motley Fool
“Still, although Amazon recommendations are cited by many company observers as a killer feature, analysts believe there’s a lot of room for growth. ‘There’s a collective belief within the e-commerce industry that Amazon’s recommendation engine is a suboptimal solution,’ says Mulpuru. Trisha Dill, a Well’s Fargo analyst, says it’s hard to fault Amazon for their recommendations, but she also says the company has a lot of work to do in offering users items more relevant to them. As an example, she points to a targeted email she received pushing a chainsaw carrying case. (She doesn’t own a chainsaw.)”
Amazon’s recommendation secret : JP Mangalindan, 30 July 2012, Fortune/CNN Money
[blockquote]
“‘In California, Texas and Pennsylvania where Amazon.com recently started collecting tax, it is very early, but Best Buy has seen a 4 to 6 percent increase in online sales observed in aggregate versus the rest of the chain,’ spokeswoman Amy von Walter wrote in an email to Reuters. …
“Big retailers hope the requirement to collect sales tax will reduce Amazon’s price advantage and help them recoup some sales that lost to the Internet retailer. Best Buy also saw an increase of 6 percent to 9 percent in online orders that are picked up in its stores in those three states compared with the rest of its chain, von Walter said.”[/blockquote]
Best Buy online sales rise as Amazon collects sales tax : Reporting By Alistair Barr; Editing by Leslie Adler and Andre Grenon for Reuters, 10 January 2013, Yahoo! Finance
“Indeed, one of the consistent stories in the media regarding Best Buy is how it’s being used for showrooming physical products. Best Buy’s customers are supposedly going to the stores to check out the products, and then order them online (presumably for a lower cost). This has led Best Buy to price-match Amazon.com during the holidays. At the same price, Best Buy has the advantage of service and ease of returns over Amazon.com.”
Best Buy’s Performance Is Relevant, And Negative, For Amazon.com : Paulo Santos, 11 January 2013, Seeking Alpha
[blockquote]
“With the advent of today’s on-demand culture, Google is betting that it no longer matters who actually sells the product. Consumers are squarely in control and Google will increasingly help them find that product they are looking for, and do so at the right location for the right price. This was traditionally the role of ecommerce players like Amazon and massive offline retailers like Wal-Mart and Target.
“However, with the growth of Google Shopping and the integration of those results into its core search engine, Google is quickly becoming the “digital store shelf” that it had always promised.” [/blockquote]
Google’s plan to eat Amazon’s lunch and dominate retailing : Jason Lehmbeck, 24 February 2013, GigaOm
“Google’s increasingly aggressive effort to steal online retail from Amazon is turning into one of the most intriguing business battles of the year, and not just because of the sight of two behemoths pounding on each other. Google’s unique position in the internet’s infrastructure means that it can count on more than its own resources to take on Amazon. The search giant also serves as the platform from which everyone else trying to beat Amazon can use to fire their salvos. It’s a pretty high perch from which to take aim.”
Amazon May Seem Unstoppable, But Google Is Powering the Counterattack : Marcus Wohlsen, 25 February 2013, Wired Business
“But eBay is also catering to its most active sellers — those that list hundreds (or thousands) of items every month — with a slew of changes it claims will largely eliminate upfront costs. In doing so, the company is aiming to pull merchants away from Amazon (and hold onto its existing users) with new eBay Store subscriptions that offer up to 2,500 free listings monthly. Note that those paying in yearly installments will save a bit compared to month-to-month rates. For these customers, eBay says final value fees will vary between four and nine percent, again topping out at $250.”
eBay to overhaul fees this spring in bid to keep sellers away from Amazon : Chris Welch, 19 March 2013, The Verge
“Meanwhile, some sellers are disgruntled over reported changes to Amazon’s fee structure. The company doesn’t publicize its “take,” that is, the cut it gets when third-party sellers make a sale on Amazon. But a Reuters report says fee hikes over the past year-and-a-half are leading some sellers to consider abandoning the site, despite the access it gives them to Amazon’s 200 million customers.”
Turns Out Some People Do Hate Amazon : Marcus Wohlsen, 19 March 2013, Wired Business
“Forget next-day delivery. The standard in online shopping is rapidly approaching next-hour delivery. Retail giants Walmart, Amazon, and eBay, and a few nimble startups, are testing same-day services, bringing whatever you desire — ice cream, toothpaste, a new TV — to your door, right now. To make it happen, the sellers are revving up supply chains that rely on algorithms of military-grade complexity and workers (human and robot) who roam vast distribution centers 24/7. The trillion-dollar online shopping economy is about to get bigger — and a lot faster.”
Faster Than Overnight: How Etailers Get You Stuff the Same Day You Ordered It : Marcus Wohlsen, 19 March 2013, Wired Business
“For eBay right now, sellers turn out to matter more than ever. Because just as eBay is trying to be more like Amazon, Amazon is trying to be more like eBay. Well over one-third of what Amazon sells isn’t actually being sold by Amazon, and the rate keeps growing. Many analysts suspect that Amazon makes higher margins on the sale of other people’s inventory than on its own.”
EBay Could Steal Amazon’s Most Important Customers (They Aren’t Who You Think) : Marcus Wohlsen, 20 March 2013, Wired Business
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Still with me? Good.
So my impression (after reading all that, while also competing with Amazon on a day-to-day basis) is that Amazon wants to be the new shopping mall landlord — or whatever the online equivalent to that looks like.
Instead of taking the risks or expending effort to think up and stock for every market category, just set up shop and let others ‘rent’ from you, collecting a modest fee and a cut of every sale. Amazon gets to charge some sellers again, for stocking the item in Amazon’s warehouses and shipping it out to customers. Amazon has nothing invested in actual inventory [in this one case] and actually makes money off of stuff just sitting on shelves. This is kind of a great deal.
Amazon is leveraging its three main assets: the computer infrastructure, the (expanding) base of fulfillment centers that it built to serve its own needs, and most importantly: you. The 200 million or so people who can be considered Amazon’s “install base”, or its social network, or its biggest fans — however you’d care to class them (or how you’d characterize yourself) in many ways the only thing that differentiates Amazon from also-rans is the fact that so many people actually use it — and on a damn near daily basis, too.
Amazon can make money on you three times: Once, when you buy something; a second time, by selling advertisements on its own pages to hawk related items to you while you shop; and a third time by collecting a fee from the 3rd-party seller who actually had your item and is in fact the person/company/mom-n-pop-shop who ships it to you.
Looking to the future, I’d say Amazon would also be perfectly willing to set up and host a web store for you, one not branded “amazon” in any way at all — but which used Amazon’s servers, payment services, hosting and storage via AWS, Fulfillment By Amazon to warehouse and ship the product for you, and sales analytics that will tell you how well your various product lines are doing on a monthly, weekly, or even daily basis. You could be snowed in, running your “shop” using nothing but Amazon services from a computer in a log cabin outside of Anchorage in January. It might cost you a sizable chunk of your operating margin, but this is theoretically possible _now_.
At least until you get too good at what you do, and Amazon muscles in on your turf:
[blockquote]
“The Wall Street Journal is reporting today that some retailers in Amazon’s Marketplace have witnessed the online company examining which products they sell that are popular, and then offering them itself to the detriment of those merchants.
“The Journal spoke with one retailer, Jeff Peterson of Collectible Supplies, who sold as many as 100 Pillow Pets a day. After continued success, he claims Amazon started selling the stuffed-animal pillows, which are made to look like NFL mascots. Soon after, Peterson’s sales plummeted by as much as 80 percent,” [/blockquote]
Amazon Marketplace merchants complain of competition with… Amazon? : Don Reisinger, 27 June 2012 : c|net
I’m linking to c|net because of the WSJ paywall, but here’s the original link: WSJ Technology, 27 June 2012
No matter how much money Amazon makes off of their “other customers”, the Marketplace sellers, I know they’ll hang onto some businesses themselves. Amazon will always sell books, as books are a perenial draw and a popular market. Sadly, I know they will always sell books either at cost or at a loss — because books are the loss leader. This is part of Amazon’s DNA: they will game the system, delay payments to both marketplace sellers and book publishers until long after they themselves ‘bank’ the sale, and use the ‘negative cash cycle’ that results to further push down margins and sell even cheaper.
If you’re not familiar with the cash conversion cycle, Forbes has an excellent primer on just what it is and how money can be made, seemingly out of thin air.
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Nothing Amazon is doing is new, by the way.
Amazon, at the start of the 21st Century, is only following a well-trod path, a trail originally blazed by Sears, Roebuck, and Co. at the start of the 20th.
Sears started as a catalog. Well, to be a bit more precise, in 1886 the man named Richard Sears got his start selling watches: a refused shipment ended up at his Minnesota train station, and instead of sending it back to Chicago — Sears worked out a deal. He sold watches to his fellow telegraph operators, who in turn were also selling them over the counter at train stations across the Midwest.
By 1888 Sears had moved the nascent business to Chicago, taken a partner, printed a general merchandise catalog, and was doing gangbusters business. Orders were placed through the mail, which may seem (to modern eyes) both quaint and slow: but the rail network of the 1880s and 1890s was already sophisticated enough that the US Mail was faster than ever — and the same rail network expedited delivery of goods to the customer.
The retail ecosystem prior to Sears was grim, and very basic: most of the population lived outside of cities, made a living in agriculture, and only made it into ‘town’ a couple of times a year — and likely only made major purchases once each year, right after the crops came in and were sold. The option for a 1870s farmer was the general store, which carried a little bit of everything — but emphasis on the “little” part of that, and also at markup.
The Sears Catalog was a window on the world to the farmer or small town resident of 1890: everything, everything was available to order and at prices so low it made the local general store look like a price-gouging opportunist. By 1910, the Sears Catalog included appliances, sporting goods, toys, automobiles, and even whole houses — shipped flat-packed on rail cars like a Little-House-On-The-Prairie precursor to Ikea.
Here, see for yourself: the Internet Archive (archive.org) has the 1912 Sears Catalog online for your edification and amusement.
Sears leveraged the rail network in the same way Amazon leveraged the internet 106 years later. When I call Amazon a “glorified mail order catalog” — which I have done, on at least two occasions — I’m merely pointing out the obvious. Amazon isn’t new: Amazon is big, and they were ‘first’, and they are ruthless — but there is no secret sauce. Any company with enough money and enough will (Apple, Google, Samsung, Facebook, or Microsoft) could replicate at least part of Amazon’s success, by either concentrating on a niche market (as Apple has done with iTunes) or by leveraging similar assets (Google has the infrastructure, Facebook the user base) to make a move on Amazon.
And for those who say, “Amazon’s success is because of their great customer service and their commitment to the most competitive pricing,” I’d only ask: how’s that kool-aid taste? Price is the easiest thing to match — and “customer service” via web site is easy. Come work in my store, and I’ll be happy to teach you how hard Customer Service is when you have the guts to do it in person.
In 1913 – Sears was still “online only” with just the catalog, mail order, and a state-of-the-art fulfillment center in Chicago.
I’d argue that Amazon is in exactly the same position today. But Sears had to change — and so will Amazon.
Sears didn’t open up their first store front until 1925. Sears was the clear market leader and held a position that seemed unassailable, though of course other retailers managed to gain footholds in local markets, and in specific niches [see LL Bean, Montgomery Ward, JC Penney, and of course The Book of the Month Club].
As the market changed, though, so did Sears — to the point where Sears was in fact developing the 1960s version of the Amazon Marketplace: from 1959 to 1995 Sears owned and operated the Homart Development Company — which developed at least 80 regional shopping malls, many of which were built just so Sears could move in as the anchor tenant; in 1994 (the year before Sears sold off the division) Homart was the still the landlord for 36 of the malls they had built.
Larger societal change meant the end of Sears hegemony, and well before the internet: by 1993 Sears had already stopped producing its seminal catalog. Wal-Mart was started in 1962 (by a former JC Penney’s employee!) and the first Target ‘discount store’ was opened by the Dayton Company in the same year. Best Buy followed in 1966, Home Depot in 1978 — and Toys R Us dates back to 1948. All these ‘category killers’ and the rest of Big Box retail didn’t hit their stride until the late 80s, but the seeds were there decades prior.
What does this mean for Amazon?
Not much, but also everything.
Amazon’s competitors are already in place — and no, I’m not talking about Barnes & Noble. The companies that can displace Amazon have been online for years and some of them are even older, and craftier, than Amazon and Bezos. Like Sears, Amazon is the pioneer and clear market leader — but also like 20th Century Sears, just because one is first to national-scale in a market doesn’t guarantee future success.
Amazon also relies on perception more than most retailers — right now they are the darling of the internet-shopping public, but should public sentiment turn against them: is Amazon really unique enough to survive on merit, without the mystique?
