Amazon.com’s introduction this week of its zShops initiative–which effectively makes Amazon a landlord for thousands of other Internet businesses who will pay Amazon to be listed on its site and give the company a commission on all sales–was a perhaps predictable evolution of the Amazon business model. But that doesn’t make it any less potentially important.
I say the evolution was predictable because Amazon has always been upfront about the fact that it didn’t want to be just an online retailer. Monetizing its 12 million customers–turning them into real revenue–was always going to be more effective if you gave them a huge variety of goods and services to buy. The real question, though, was (and is) whether Amazon could extend its brand name and the loyalty of its customers to a panoply of products, many of which it wasn’t necessarily going to provide itself.
What Amazon has recognized from the beginning is that its most valuable asset was not its warehouses or even its Web site but rather the “stickiness” of its customers and the information about their buying habits that it was able to collect. Amazon has so far used that information in limited ways–occasionally I’ll get an e-mail suggesting I might want to buy a new CD that’s like other CDs I’ve bought in the past–but the more products it sells, the more information it will collect and the more the information that will become relevant.
At this point, of course, we don’t really know how successful zShops will be. (There were lots of items for sale on zShops’ first day of operation, but it didn’t seem like the 500,000 Amazon had promised.) But as an idea, it’s an excellent leveraging of Amazon’s brand name, because it promises the possibility of sizable returns while requiring almost no investment on the company’s part.
Some skeptics have suggested that zShops is analogous to Wal-Mart renting out its parking lot to a bunch of outside vendors. Let’s say, for the sake of argument, that it is. If Wal-Mart could rent its parking lot, get a cut of all sales that take place there, and still not disturb its regular business, why wouldn’t it? And if it had an easily searchable catalogue of all the goods for sale and could direct its customers to items in which they might be interested, the business would be all the more attractive.
One reason why Wall Street likes zShops so much is that it is a very high-margin business, which means that the profit Amazon reaps on every transaction will be very high (since its costs will be very low). And high-margin businesses are generally very good things. But it’s important not to get too obsessed with margins, because if you do you miss the real strength of the Amazon–or for that matter the Wal-Mart–business model.
Wal-Mart, after all, has minuscule profit margins, at least when compared with a company like Microsoft or Yahoo. But it earns tremendous profits, and does so while using capital very efficiently, because it turns over its inventory so often. As long as you’re selling goods quickly, you can make very little on each good and still make a huge amount at the end of the day. This is what Amazon has been able to do in books and what it wants to do in its other businesses. zShops is a slightly different model, because Amazon will make more on each good, but they’ll sell less quickly. In other words, it’s a good business for Amazon to be in, and it’s a logical extension of its online power. But don’t look for Amazon to give up its core business just for the joys of landlordship.