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I think Amazon dug themselves into a hole with this one. The Amazon Marketplace is the biggest liability to their brand reputation, but now it is also a big rev

I think Amazon dug themselves into a hole with this one. The Amazon Marketplace is the biggest liability to their brand reputation, but now it is also a big revenue driver. It would be in the long term interest of Amazon to ditch it, or severely clamp down on authorized marketplace participants. But Amazon is now in a sticky situation because the stock price, which they rely on for many reasons, is heavily dependent on revenue growth. AMZN's ridiculous P/E ratios aren't really ridiculous when you think about it. Everybody knows Amazon pumps most of its free cash flow back into the business, which increases their growth rates at the expense of current earnings. The prices they are getting for the stock are just the result of a market betting on the future profit potential of Amazon when the growth stops or slows to normal levels. High prices imply that investors see huge amounts of growth potential, and if you extrapolate out what that P/E means, it shows that AMZN investors see Amazon growing 10x larger (or more) than it currently is. But now Amazon has this huge liability of the Marketplace, and in order to cut it out they have to cut back their revenues by a substantial amount. And a revenue slowdown or decline signals to investors that growth is slowing. Needless to say, the anticipated future value of Amazon will cut quite drastically with a hit to revenues. Compounding the problem is the fact that so much of their compensation comes in the form of RSUs, which are new issues. This is a great growth strategy, because it reduces their dependence on free cash flow for compensation, allowing it to be used for investment. BUT, any hit to their stock price will require drastic increases in RSU grants in order to maintain personnel, further exacerbating a drop in stock prices through dilution. I don't envy the person who has to solve this problem.

sct202 8y ago
Yeah it's going to be a long draw down period if they're going to try to control this without tanking themselves. Think about all the warehouse capacity that is devoted to these third party products. Not to mention the backlash if they start to block 3rd party sellers. I was reading the other day that companies (Popsockets for example) were mad that Amazon was making them switch from 3rd party vendors to direct vendors--for reasons like control on assortment, promos, and pricing.
structural 8y ago
It's rather more likely that the marketplace won't be cut back, due to exactly the factors you've mentioned. The real issue, of course, is that all of this cheap junk sells, and sells really well, even if it's counterfeit or just junk. So there really is a lot of growth potential in that part of the business: the growth and success of Walmart over the past twenty years is further evidence of this. Probably wait for something to be announced like "Prime Plus" for premium brands as they try to figure out how to differentiate products in the market, or watch them continue to expand into new types of markets altogether... there's very little for them else to do.
siruncledrew 8y ago
This is why I think Amazon will continue to push hard on Amazon Basics. That is an area that has the potential to be Amazon's Kirkland (Costco private label). Amazon has the data from Amazon Marketplace to know the top selling products, and Amazon has the scale to arrange manufacturing deals with perhaps the same overseas factories Amazon Marketplace sellers are using to economically produce private label brands for Amazon, thereby decreasing the market share of Amazon Marketplace sellers. Amazon could also make their Amazon Basics more visible to consumers by default, and have more control over the QA of the items. With growing negative feedback about the quality-side of Amazon's Marketplace items/sellers, there is an opportunity to accelerate into private-label territory with more control over manufacturing oversight/customer service while using the Amazon Marketplace as the "proving grounds" to determine which products are most profitable for Amazon to private-label. Sure AMZN's earnings are doing well, but the real secret sauce for Bezos isn't just logistics - it's holding control over a market. Right now, Amazon's quality-gatekeeping on their platform is the equivalent of Mac doing an "ocular pat down" on entrants. If there is monetary incentive to stray away from this, Amazon would be more willing to flip the switch on the marketplace. And thus we come one step closer towards living in an Amazon corporate town buying Amazon-branded items from the Amazon general store.

sct202 8y ago

Yeah it's going to be a long draw down period if they're going to try to control this without tanking themselves. Think about all the warehouse capacity that is devoted to these third party products. Not to mention the backlash if they start to block 3rd party sellers. I was reading the other day that companies (Popsockets for example) were mad that Amazon was making them switch from 3rd party vendors to direct vendors--for reasons like control on assortment, promos, and pricing.

structural 8y ago

It's rather more likely that the marketplace won't be cut back, due to exactly the factors you've mentioned. The real issue, of course, is that all of this cheap junk sells, and sells really well, even if it's counterfeit or just junk. So there really is a lot of growth potential in that part of the business: the growth and success of Walmart over the past twenty years is further evidence of this. Probably wait for something to be announced like "Prime Plus" for premium brands as they try to figure out how to differentiate products in the market, or watch them continue to expand into new types of markets altogether... there's very little for them else to do.

siruncledrew 8y ago

This is why I think Amazon will continue to push hard on Amazon Basics. That is an area that has the potential to be Amazon's Kirkland (Costco private label). Amazon has the data from Amazon Marketplace to know the top selling products, and Amazon has the scale to arrange manufacturing deals with perhaps the same overseas factories Amazon Marketplace sellers are using to economically produce private label brands for Amazon, thereby decreasing the market share of Amazon Marketplace sellers. Amazon could also make their Amazon Basics more visible to consumers by default, and have more control over the QA of the items. With growing negative feedback about the quality-side of Amazon's Marketplace items/sellers, there is an opportunity to accelerate into private-label territory with more control over manufacturing oversight/customer service while using the Amazon Marketplace as the "proving grounds" to determine which products are most profitable for Amazon to private-label. Sure AMZN's earnings are doing well, but the real secret sauce for Bezos isn't just logistics - it's holding control over a market. Right now, Amazon's quality-gatekeeping on their platform is the equivalent of Mac doing an "ocular pat down" on entrants. If there is monetary incentive to stray away from this, Amazon would be more willing to flip the switch on the marketplace. And thus we come one step closer towards living in an Amazon corporate town buying Amazon-branded items from the Amazon general store.