Amazon's $4 Billion E-Commerce War Chest

Forrester Research senior analyst Andy Hoar delivered a fascinating keynote at the Rakuten Linkshare Symposium last week.  His theme was the continuing evolution of e-commerce and the insights he brought will have a lot of consequences for the performance marketing sector. Some of his points restated things that anyone that has been paying attention already knows: mobile is going to become even more important than it is already, tablets are replacing laptops, and coupons/discounts are a critical part of any etail offering.

But how many of us realised that Amazon essentially has a $4 billion per year war-chest from its marketplace revenues that it uses to cross-subsidize its other businesses? Forrester take the view that Amazon Marketplaces is a very high margin business that has increased revenues by10x since 2005, and those profits are not reflected in Amazon’s global net income of only $631 million in 2011.

Etail competitors have to try and compete by developing their own marketplaces – note Rakuten’s latest initiative rebranding buy.com as Rakuten Shopping – but it will inevitably be an uphill struggle if Forrester’s interpretation of Amazon’s cross-subsidizing strategy is correct.

The fact is that offline retail is flat; all the growth in the industry is online. Hoar pointed out that we used to be excited when Black Friday broke $1 billion in sales, but last year there were 10 other days that broke that barrier as well.

Perhaps the most interesting part of the presentation came with an analysis of how Amazon dynamically changes its prices throughout the course of a day. Decide.com tracked pricing of a microwave on Amazon, Best Buy and Sears over 24 hours.  Sears maintained the same (highest) price for the entire period. Best Buy kept their price $90 less than Sears right through except for two hours early evening, when they raised their price to match Sears exactly.
Amazon though, has a totally different philosophy and an algorithm to match. They had no less than 9 price changes over the course of the day.  Most of the time they weren’t the cheapest, but clearly they have profit-maximization data that is driving a sophisticated pricing engine.

Perhaps it is not surprising that they can do this if it is true that they have $4 billion to spend on development. But it surely raises a question of just how major etailers and performance marketing networks will be able to compete in the long-term. Investment in technology has to be the priority.