Amazon gambles on the high street
E-tail feature - Saul Klein, co-founder and CEO of Videoisland e-commerce Website talks about the phenomenon of Amazon.
Jeff Bezos has always taken the long view so, in 2001, when the analysts were panicking and traditional retailers were crowing about the dive in the Amazon share price from a high of $110 to $11 (£57 to £6), he was the first to point out that not only had the value of the shares increased tenfold since 1997 but the real growth was yet to come.
The fundamental optimism that underpinned his enthusiasm was his insight that successful e-commerce is basically about trading real estate for technology. More often than not, real estate gets more expensive every year, while technology gets cheaper.
When Amazon began trading in July 1995, Bezos gambled that while traditional retailers would need to continually invest millions in rent, rates and infrastructure to support a network of stores, he could create equivalent scale by pouring those millions into software, logistics and customer service.
When he made this pitch, it was a very big bet. But, 10 years on, his business supports nearly 50 million active online shoppers from only six North American and three international warehouses and sales have grown from $148m in 1997 to a projected $8bn in 2005.
By selling online, Amazon not only has infinite shelf-space, but needs to carry significantly less inventory than other retailers, such as Wal-Mart and Tesco, to offer limitless choice. So while Amazon was building a business which mirrored Wal-Mart's operational scale and Tesco's customer focus, it did so at a much lower cost. But perhaps the most valuable asset that Amazon has created is its relationship with its 50 million shoppers - more than four times the number that Tesco has. This knowledge is not limited to purchase information but includes hundreds of millions of customer ratings and reviews, which form the basis of its powerful recommendations to buy.
The average Amazon shopper spends $148 per year, but this has grown every year - not just by introducing new categories as Tesco has done, but by serving as a platform for others. Amazon is helping retailers with significant investments in bricks and mortar to leverage their infrastructure by operating back-end services for brands such as Waterstones, Toys R Us and Target, plus individuals and small traders who want to sell goods through its marketplace. Each step in this direction shifts Amazon's emphasis from the Wal-Mart style of "everything under my roof" to the eBay style of helping customers to discover what want to buy.
With its newly minted Yellow Pages service, Amazon has extended this model. The service is still in test mode, but, like recent moves by Google, AOL and Yahoo! into the local advertising markets, its impact will not just be felt by media owners who are already under attack from eBay and others in the classified advertising market. Now that the Internet giants are starting to play the Yellow Pages game, the likes of Yell need to start worrying.
Amazon's service offers enhanced business listings, including the now standard maps and contact details on offer elsewhere. It also has a cool feature which lets you place a call to a local business simply by clicking a button on the screen and entering your phone number - you are then automatically connected. But Amazon is most proud of the way it has brought traditional Yellow Pages to life by showing street views of millions of local businesses in 10 big US cities. In classic Bezos style, Amazon has created a system that combines digital cameras and GPS location systems, and equipped vehicles to capture images of buildings and geotag them with location information. Apparently, it has only taken a few months to capture over 20m images, while it took photographers years to assemble the images used by France Telecom's Pages Jaunes.
The strangest thing about all of this is that as Amazon and the Internet giants continue to grow, they profit most as they develop services which leverage their scale and customer bases to enhance the economic viability of sole traders and small business owners. Google has shown, with its AdWords model, the power and profitability of helping small businesses to afford advertising to a global audience and eBay has created a marketplace that supports over $34bn of transactions - can Amazon now revive the high street by sending it some of its 50 million shoppers?
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