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Saturday, June 11, 2005

The Two Business Models Inside Amazon.Com

I have always wondered why Amazon is co- hosting & integrating other sites as part of amazon.com instead of offering that as a separate service. while this may provide some additional comfort to service users initially and can be seen as amazon showing supreme confidence in non cannibalization and if anything ability to increase cross sell and upsell, serve as a standing example of amazon's technology maturity, for me it opened more issues than it tried to solve and most importantly it would serve as an excellent reference for the emerging software-as-a-service mechanism. Nicholas Carr writes, The real problem with Amazon is not a matter of measures but the fact that it houses two very different businesses. On one side stands the on-line retailer,pitching a plethora of goods, the other consists of an information-technology company that provides merchants with a software platform for Internet sales. Amazon, is playing both ends of the supply chain - it's a retailer, and it's a supplier of software to other retailers. The two Amazons have little in common. Their economics, for instance, differ fundamentally. The retailing business relies on micro-thin profit margins. Despite Amazon's strong brand, it remains pinned under relentless pricing pressure. To draw customers, it's even been forced to offer cheap or free shipping on most purchases, further squeezing its margins.

Renting out a software platform, by contrast, means big profits. Even worse, the two business models suffer from inherent conflicts. As a retailer, Amazon competes directly with the customers of its software business. The many merchants that piggyback on Amazon's site, including giants like Target and Office Depot have to worry about directing their customers to the storefront of a price-slashing competitor intent on expanding into ever more product categories. That may well account at least in part for why Circuit City dumped Amazon as a partner earlier this year. The conflict is even beginning to muck up the Amazon.com site itself. It's becoming harder for customers to figure exactly who's selling what - and under what terms for shipping and returns. Such confusion threatens to erode the customer loyalty that Amazon's retail operation has so painstakingly built. Maybe it's time for Bezos to split Amazon into two companies by spinning off the software business. Such a division may be the only way to give the company's investors a clear view of its economics - and to offer its managers a clear playing field on which to pursue their two very different strategies and investors a clearer way to assess performance.

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