Web 3.0 & Amazon (Part 2)

Vertical Strategy

Amazon is the most popular e-commerce site in the world. We will take a look at the Company’s various online verticals below.

Books, Newspaper and Magazines
Amazon was started as an online bookstore. It is the largest retailer of books online. It allows users to buy books, magazines and newspapers online. Amazon has created some vehicles for author engagement in the community, alongside its highly active user generated reviews. However, Amazon’s book vertical owes its success to the popular recommendation engine powered by a collaborative filtering technology that Amazon introduced early on, and that has sustained the test of time.

It has recently launched Kindle, a reading device, which allows downloading of books. However, Kindle is priced at $399 and users will have to pay $8 to $10 per book and the interface is also not that user friendly. Amazon needs to do some more work on Kindle and reduce the price to really make it the iPod of books. However, if Amazon can popularize Kindle, it will have achieved success in a category where everyone else has failed so far, including SONY. Will ebooks ever work? The answer remains in Amazon’s hands for now.

Movies, Music and Games
Amazon is a major player in the online retail of music, movies and games. It has a large database of movies and music. It also retails complete TV shows and foreign films. It recently launched Amazon MP3 store on Sept. 25, 2007.

Amazon MP3 sells 1.8 million of its 2.5 million-plus tracks, including 100 of the most popular, for 89¢, rather than 99¢. Also, it sells music only in the basic MP3 format, without any antipiracy “digital rights management” (DRM) software. The store includes music only from EMI, Vivendi’s Universal, and thousands of indie labels. Amazon could be a meaningful threat to Apple because of its interoperability advantages.

Amazon also launched Unbox an online video on demand service, which has been criticized for its use of digital rights management.

Electronics and Computers
Another key vertical for Amazon is consumer electronics and computers. The site retails audio systems, TV and home theaters, cameras, computers and PC hardware, software, media players, cell phones, office products and other electronic equipments. The Company retails products of all major electronic brands at very competitive prices. Amazon, unlike eBay, other e-commerce sites or sites of retailers who have started retailing online, has very good reviews and products details, which is helpful to the consumers. However, with the advent of vertical search, the vertical is changing in shopping dynamics, whereby, the reviews and product details are now available at the comparison shopping site, with the price being the main draw for the sellers. Of course, Amazon has always followed a very aggressive pricing strategy, and stands to win on that front, albeit at the cost of margins.

Home and Garden
The home and garden section lists various products from home improvement to tools, to bed and bath, to kitchen and dining, to furniture and décor, to lawn and garden, to home appliances, to vacuums and storage. The site has a large database of products from every category and offers significant discounts on its product range.

Grocery
The site recently launched the beta version of its grocery store. The site offers more than 22,000 non-perishable grocery items. Amazon ships all products for free, via Super Saver Shipping, Amazon Prime, or free standard shipping. To make shopping speedier, Amazon has created Shopping List, where consumers can easily save and repurchase their favorite items. Grocery, by and large, is yet another low margin category that Amazon has chosen to enter.

Toys, Kids and Baby
Amazon offers a number of branded as well as unbranded Toys, Kids and Baby staples. The site also retails electronic games, learning toys, children’s apparel, books, movies, music, video games and software. The site has products from all leading brands and offers competitive prices and deals on majority of the products. The site scores over other online toy stores due to its better content on the products listed and community tools like reviews and recommendations.

Lifestyle Shopping
Amazon has a large database of lifestyle products, which include apparel, accessories, jewelry shoes and watches. These products are available for people of all age groups.

Endless.com has the largest offering of shoes and handbags. Endless.com allows users to shop by category, color, size, brand, or price. The site has detailed product descriptions, including construction materials, heel height, and customer reviews. Alternative views and innovative zoom technology allow users to get a good feel of the shoes and handbags.

Health and Beauty
Health and Beauty is another important category in Amazon. It lists various health and beauty products from across the world including those from the leading brands. The Company retails these products at a significant discount. Again, Amazon’s aggressive pricing strategy at play here.

Sports and Outdoors
Amazon also has different types of sports and outdoors products. Cycle and Golf are among the popular product categories. A number of famous brands sell their products through the site.

Gaps in the portfolio
From my point of view, Amazon needs to worry about the margin dynamics of its choice of verticals to play in. Its recent entry into Toys and Groceries, traditionally low margin areas, concerns me. Amazon has increased its Marketplace focus of late, a business that directly competes with eBay’s high margin “facilitator” business. This is a smart move, and in fact, I like very much the integration that Amazon has between its retail and marketplace offerings. On the other hand, it continues to offer low margin logistics and fulfillment services, which corrupt the business model further.

So, in summary, the gap in Amazon’s portfolio is that of high margin businesses that can successfully move Amazon’s profitability equation from a paltry 2-4% to at least the teens.
Jewelry could be an interesting segment that has the dynamics to make this happen, especially diamond jewelry. Branded luxury products also have this dynamic.

(To Be Continued)

[Part 1]

This segment is part 2 in the series : Web 3.0 & Amazon
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