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Web 3.0 & Amazon (Part 3)

Posted on Wednesday, Dec 12th 2007

Web 3.0 Framework discussion

Below is a quick overview of the Web 3.0 framework for the Amazon sites.

Amazon’s primary Context is shopping. Whether it is for books, music, toys, or clothes, you come to Amazon to shop.

Amazon has really good content about its merchandise. In fact, the Amazon catalog is a very well done articulation of products being sold on the site. Besides, the user generated content in form of reviews is also excellent. Furthermore, there are Bestseller lists, subject-specific lists, etc. which are also extremely useful.

Amazon has very good community features, especially great reviews. There are blogs dedicated to every important vertical. The site also has podcasts, which provides free audio interviews of authors. Amazon allows wish lists to be publicly searchable or be sent to friends or family. The site also has a popular discussion forum. Listmania consists of reading lists contributed by Amazon customers, complete with their comments about each book.

Amazon’s primary source of revenue is the sale of a wide range of products and services to customers. The Company also offers services such as Amazon Enterprise Solutions, co-branded credit cards, web services, fulfillment, and miscellaneous marketing and promotional offers. The site also retails gift cards/certificates.

WebStore by Amazon allows businesses to create ecommerce websites using Amazon technology. Merchants can customize their sites using their own photos and branding. Sellers pay a commission of 7 percent, which includes credit-card processing fees and fraud protection, and a subscription fee of $59.95/month for an unlimited number of webstores and listings.

Besides, the Marketplace service is an eBay-like platform for Buyers and Sellers to transact, and the business model is a combination of listing fees, transaction fees, and final value fees.

Amazon’s recommendation system is excellent, aided by a collaborative filtering technology developed originally at the MIT Media Lab which enables functionality like “users who bought this item also bought that”. The up-sell and cross-sell that Amazon has been successful in achieving is tremendous. It would be interesting, however, to be able to get recommendations from other people who are “like me”, and that level of personalization is still not there.

Vertical Search
Amazon has pretty good vertical search engines for the categories in which it plays. It doesn’t, however, play in the Comparison Shopping space, and it may be a good idea to consider doing so.

Business Model
Amazon’s fees are primarily based on retail or marketplace business models. Retail is straightforward, whereby, Amazon makes revenues minus COGS.

For the marketplace, there are fees for listing a product on Amazon and the site also charges fees when the product sells, plus several optional fees, all based on various factors and scales (including shipping charges). Commission rates of 6% to 15% of the sale price are customary, and in my opinion, the overall marketplace pricing structure is far too complicated.

Amazon also earns some revenues from advertising on the site, which is a revenue model that needs vastly enhanced attention ans focus.

Amazon derives about 40% of its sales from affiliates, whom they call “Associates.”

Amazon Simple Storage Service (Amazon S3) allows users to upload and store unlimited number of data objects, from 1 byte to 5 gigabytes in size, which can be stored in S3 and distributed via HTTP or BitTorrent. The service charges monthly fees for data stored and for data transferred.

Overall, the strategic re-engineering of Amazon needs to include a business model re-spin that changes the margin structure quite substantially. Too much focus on pure retail type models thus far, and the inclusion of a variety of low-margin business models like fulfillment have taken their toll.

(To Be Continued)

[Part 1] [Part 2]

This segment is part 3 in the series : Web 3.0 & Amazon
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[…] segment is part 5 in a running series Jump to part: 1, 2, 3, 4, […]

Web 3.0 & Amazon (Part 5) - Sramana Mitra on Strategy Thursday, December 27, 2007 at 1:47 AM PT