“The Amazon seller is the most profitable customer of Amazon," says Jason Boyce, co-author of "The ... [+]
Ever since Amazon’s earnings call this past Tuesday, the business world has been abuzz with one Amazon story and one story alone: Jeff Bezos is stepping aside as CEO and transitioning to the new role of Executive Chair. That bombshell news completely overshadowed the company’s impressive performance in fourth quarter and for the year ending December 31, 2020.
Fourth-quarter revenues were up 44%, largely due to moving Prime Day to October, with year-end rising 38% to $386.1 billion in total revenues. Net product retail sales made up over half of that total, or $215.9 billion, with service sales making up the rest, $170.2 billion.
What other talk there’s been was around the company’s highly-profitable AWS business, generating nearly 60% of the company’s operating income. That’s because Andy Jassy, who leads that division, will take over as CEO in the third quarter.
Profitable it may be, but AWS is small in comparison to Amazon’s other businesses. It accounted for only about 12% of the company’s reported revenue in 2020 – $45.4 billion. However, CFO Brian T. Olsavsky described it as currently a $51 billion annualized run-rate business in the earnings call.
And it’s even smaller if you peel back the layers and look at the actual gross merchandise value of the products Amazon sells.
“It was funny the timing of the Bezos announcement,” says Jason Boyce, co-author of The Amazon Jungle and founder of Avenue7Media, which helps brands navigate the treacherous waters selling in the Amazon Marketplace.
“Any other company would be pounding their chests about their remarkable quarter in terms of market share and profit gains. But no, they want it hidden, especially from Senator Elizabeth Warren,” he quips. “They’re big. They’re scary. They’re scary big!”
Amazon’s reach equals its grasp
What scares Boyce and should scare retailers of every size is the sheer magnitude of Amazon’s reach into the consumer market. There are an estimated 126 million American Prime members – the company doesn’t disclose the actual number – which is virtually the same as the total number of U.S. households or 128.5 million.
Further, more than half (53%) of product searches start on Amazon and only 23% on search engines. And many of those searches are likely to lead to Amazon.
Only 16% of searches are on a retailer or brand website and 8% in other marketplaces. And nobody knows how many searches originating on these sites end up bouncing over to Amazon for price comparison or free shipping with Prime.
It’s Amazon’s third-party Marketplace that the company doesn’t want to talk about, other than general messaging about how Amazon empowers small and mid-sized businesses.
“During the holiday season as a whole, small and medium-sized businesses in the U.S. sold nearly one billion products in Amazon’s store,” Amazon said in a statement, adding that sales for independent businesses selling on Amazon grew over 50% compared to 2019.
Marketplace’s hidden fortunes
What’s missing is the actual dollar value of retail sales on Amazon. “They don’t talk about the third-party Marketplace and its gross merchandise value (GMV) or the dollar value of goods sold on Amazon.com
He goes on to unpack the Marketplace numbers, which are hidden in Amazon’s SEC reporting. He estimates seller fees are 15% of the $300 billion or $45 billion. Fulfillment by Amazon is another 10% or $30 billion. And ads are about 15% too.
“That all amounts to about $120 billion added to Amazon’s top line. That is a lot bigger than the $51 billion that AWS brings in,” Boyce says, adding that Amazon has to be more open about its AWS business because so many major companies have to report AWS as critical infrastructure to the SEC.
“AWS is in the public domain, but Marketplace isn’t. And just like AWS, Marketplace is printing money for Amazon,” Boyce asserts. “But nobody knows this and they most especially don’t want the antitrust attorneys to know that they are way bigger than anyone imagines. Amazon is knocking on the door to Walmart
He further notes that based upon the GMV estimate, Amazon holds about a 50% share of the $971.6 billion non-store retail market in 2020.
Call to pull back the curtain
Amazon is too big not to to be required to be more transparent. “Shouldn’t a big public company be required to share that information [i.e. GMV]?” he asks. “That’s the bombshell for me. In the earnings call, what was not said was what was most important, but they’re worried about antitrust and they don’t want their competitors to know how profitable the Marketplace business is.”
Through a company spokesperson, Amazon says simply that its “financial reporting complies with the Securities and Exchange Commission requirements, including with respect to our segments. We do not comment on the financial results of specific operations, and do not manage our retail businesses as a separate operation.”
Boyce contends that the SEC reporting requirements and monopoly laws have not caught up with the digital marketplace in general and Amazon specifically. He observes that when Standard Oil was broken up in 1911, it held about 60% of the market and its monopoly powers were hurting consumers. That isn’t the case with Amazon. Consumers have benefited greatly from Amazon’s low prices and added services.
Who is getting hurt by Amazon are its third-party sellers, not necessarily the consumers. “The Amazon seller is the most profitable customer of Amazon. Sellers drive more profit to the bottom line, more than the consumers,” Boyce believes.
In the Marketplace, Amazon writes the rules and changes them at will. “Third-party sellers give up their rights to sue Amazon. Sellers basically have no rights,” he continues. “For example, if I as a seller offer a product for $5 less on Walmart, Amazon will do something called buybox suppression. They’ll basically kill my listing and I will lose all of my digital real estate until I raise my price on Walmart. That isn’t good for consumers or for sellers.”
And he goes on to warn that the more competitors Amazon kills off and the more third-party sellers it brings onto the Marketplace platform, the more incentive it will have to raise prices.
“The legislators need to write the laws for the 21st-century monopoly first and then go after them. Anything that that makes Amazon less opaque, that makes Google
