E-Commerce Strategy – Amazon.com, Software Vendor

In the latest tweak to its ever-evolving business model, online retailer Amazon.com is hawking its own e-commerce technology—software, website developing and hosting—through a new subsidiary, Amazon Services.

Amazon Services grew out of Amazon.com’s partnerships with Toys “R” Us and Target, both of which use Amazon’s technology to power their own websites in addition to selling on the Amazon site. “We’re thinking about ourselves as a technology company and a technology platform,” says Mark Stabingas, Amazon.com’s vice president of worldwide business development and services sales. “The universe of opportunity is larger than if we just want to think about ourselves as a retail business.”

The sale of products by third parties on Amazon’s website is a fast-growing portion of the company’s business, accounting for 20 percent of units sold in the second quarter of 2003—compared with 14 percent of units a year ago. Amazon gets a cut of those sales. Tim Clark, an e-commerce analyst and partner with FactPoint Group, says the move makes sense as a way for Amazon to recoup its IT investment. (Amazon reports it has spent on average $242 million per year on IT since 2000.)

But a technology partnership with Amazon isn’t for everyone, cautions Carrie Johnson, a senior analyst with Forrester Research. For one thing, she says, adopting Amazon’s software platform is pretty much an all-or-nothing proposition, and there aren’t many retailers right now that want to replace their e-commerce systems. And you’re also committed to how Amazon presents the shopping experience.

Retailers that sell commodities such as books, music and sporting goods can probably live with these constraints, Johnson adds, but companies that want lots of control over how they position their brands online may want to look elsewhere for their e-commerce infrastructures. There’s no requirement for merchants to adopt Amazon’s platform to set up a sales channel on the Amazon.com site.

In August, Target renewed its contract with Amazon for another five years. Dale Nitschke, president of Target Direct, says there have been some non-IT benefits to the relationship (for example, Target Direct outsources its order fulfillment and customer service to Amazon). With the partnership, Target gains from Amazon’s continued software development. “We would choose not to make that type of investment,” Nitschke says.

Stabingas won’t say how much retailers will have to pay for Amazon’s technology and services, only that the company aims to keep the initial investment costs low and earn its fees through its revenue-sharing arrangements. So every purchase “click” for one of its merchant partners sounds a “clink” for Amazon’s coffers.