Category Archives: Amazon

Amazon and Google’s billion-dollar race to kill the mall

drone eerie

So news broke yesterday that Amazon has posted job listings for its much-derided drone delivery service. What seemed a few months ago like a futuristic whim may be getting traction, at least if you are a software engineer or communications professional willing to join “Amazon Air” in San Francisco. Soon, Amazon will be dropping packages you order from the sky within a half-hour of your click.

Same-day delivery, whether by airborne robots or regular trucks, is gathering steam. FedEx now offers same-day delivery in 50 states for packages under 150 pounds. A company called SameDayDelivery (.com) professes to specialize in the service, with 50,000 vehicles and air freight racing from coast to coast, although you have to fill out a lead form to get a price quote. And Google Shopping Express will nab you goods from REI, Toys R Us, or Staples, provided you live in San Francisco or a few other special urban areas.

While the press focuses on the cool factor of heli-robots, the real question is — what would all this do to brick-and-mortar retail? Crush it, of course. If same-day delivery scales, the nightmares of the first Internet bubble in which pet food companies worried about Internet disintermediation will become reality. Simply put, when you can click your way to a particular product and have it on your doorstep or office desk within minutes, why would you drive to the mall? Same-day shipping will reboot all the “channel conflict” challenges of the late 1990s.

Most retailers would secretly love to kill their stores

Channel conflict, at core, means any company faces an internal conflict if, say, it can sell a shirt for $50 at the mall and the same shirt for $50 online. Both shirts must have the same price point, to keep customers using both channels, mall and online web store. Companies selling shirts keep both stores and websites running, because they know customers want both. But the shirt at the mall may incur $20 in retail rent and overhead costs, while the shirt shipped to the home may eat up only $2 in shipping. That 90% cost difference means this shirt-maker would love to push more products through the web, and fewer through malls, creating a “conflict” within its competing delivery “channels.”

Yep, you guessed it. While most goods can be delivered more cheaply via Internet orders than store stocking, retailers keep the real stores open because consumers love to touch and feel goods in physical space … and Internet orders usually take 2-3 days, killing impulse purchases.

But same-day delivery? If you could go to any website now and get that new watch or dress in 30 minutes, wouldn’t you be tempted? This near-instantaneous consumption revolution will push huge traffic to online retailers, and cannibalize the old-fashioned stores at your local mall. As Internet retailers push same-day delivery, consumers will flock around the portals that can remember their preferences the best. It’s no wonder Amazon and Google are investing in tests of this type of same-day service. Huge retail dollars, and the preceding online search or other ad revenue, are at stake. Physical stores will never go away entirely, but even a moderate shift from brick-and-mortar to cyber-insta-delivery would put billions of dollars into the winners of flying robots and speeding trucks. In 2012, only 5.4% of all U.S. retail sales were made online. Imagine what Google or Amazon could make by doubling that.

If you thought buying pet food online was a silly 1999 Internet bubble concept, perhaps you just had to wait a few years.

The miraculous illusion of Amazon’s free shipping

People are funny about perceiving value. We all want value — we run mental calculators in our minds, trying to predict transactions of love or money in our favor, and yet typically we suck at this. In a world of millions of products, we can’t tell if $400 for a leather coat or $20 for a book is a good deal. So most companies resort to pricing games to bend our minds into a state where we feel we’re getting value.

My favorite pricing gambit is Amazon Prime — a daring attempt by Amazon to convince us that every time we drop scores of dollars on an order, the shipping that supports that purchase is “free.”

Yeah.

Amazon is playing a classic pricing game, used by everyone from Apple to Walmart, to make the perceived value of a purchase feel better. It includes a basic reference price — first, set up a higher price, or in this case, “shipping costs X” … and then discount below it, in this case, “shipping costs $0.” It also uses price obscurity, bundling the real cost of something into an unusual package (sort of like candy sold in unusual package sizes at movie theaters). Amazon Prime costs $79 annually. If you pay, Amazon says you get “free” shipping for one year plus streaming of some video content, and one free Kindle book to rent monthly. Voila! We feel like we’re getting a deal.

First, obviously, shipping costs something. There are no magic elves delivering books, and the guy in the big brown truck in your driveway makes a salary. Analysts have figured this Prime fee actually costs Amazon $90 in shipping and streaming services for a typical customer, so Amazon loses money per “Prime” customer … if you only count the cost of shipping and streaming. For every $79 covering shipping costs that comes in, Amazon spends $11 more than that to ship stuff out. All told, Amazon in 2011 had shipping revenue of $1.55 billion but paid out $3.99 billion in shipping and fulfillment costs, for a net loss on shipping of $2.4 billion. Yep, Amazon lost billions to get goods to your home.

But what about all the profit from all those books and clothes and shoes you order via Amazon.com?

Well, that is big. In 2011, Amazon made $48 billion in sales and $631 million in net income. That works out to a 1.3% profit margin per customer order — thin, because this is a competitive business, but one that Amazon certainly wants to scale. And “free shipping” is helping the company grow. Amazon sales have been accelerating, up 41% overall in 2011 vs. 40% in 2010 and 28% in 2009. Amazon notes in its annual report that “increased unit sales were driven largely by our continued efforts to reduce prices for customers, including from our shipping offers…”

When you add it up, it’s a clever gambit. Amazon loses $2.4 billion in shipping and fulfillment to gain $48 billion in sales … while jacking up growth to please investors at a torrid 41% rate per year. In balance, Amazon comes out way ahead. And all of this growth — in a world where Amazon has been the top e-commerce player for years — means on average, you’re likely spending 41% more at Amazon.com each year. Other retailers have noticed, which is why you’ll see “free shipping” on nearly every e-commerce site this holiday season. Morgan Stanley has predicted Amazon may approach $100 billion in sales by 2015, simply by moving its spending per customer from the current $275 per year today closer to the $750 per customer spent at Walmart.

Oops. Did you catch that? The typical Amazon customer spends $275 annually there today. If you sign up for $79 in Prime free shipping above that, $79/($275 + $79) or 22% of your annual spending goes to … free shipping.

So go ahead, get that shipping deal. At least, it feels like a deal if you don’t do the math.

Image: Selva

The design that may keep the web alive


Is the web dying? And if so, will something else replace it?

Pew has a new report out that goes beyond the usual “99% of Americans use mobile phone” surveys to interview experts in digital media about whether the web is going away. For years now, you see, prognosticators such as Josh Bernoff and Chris Anderson have suggested the 1990s web browser interface is being killed by one-touch apps and a splintered gadget ecosystem.

Back in March 2010, I wrote in Businessweek that yes, Apple, Amazon and Google were deliberately selling iPads, Kindles and Droid phones that won’t talk to each other, so they can ensnare their users in content sales. I noted:

A battle looms, and it’s not about selling new gadgets — it’s about using devices to lock you into a content ecosystem. In an ironic evolution of the World Wide Web that once promised consistent access to all of the globe’s information, corporate giants are now striving to wall off sections of content and charge you for access.


So back to Pew’s report. There is huge evidence the “appification” trend will continue; by 2016 there will be 10 billion mobile Internet devices on the planet, 1.4 per human, and Apple and Google mobile audiences have downloaded 35 billion apps to date. Most damning toward the old web, Pew notes that by 2015 sales of smartphones and tablets will outpace those of computers by 4 to 1. It sounds like the web must fade, and that Steve Jobs was right when he compared computers to old dusty pickup trucks, once favored but now replaced by shiny new tablet wheels.

But…

Something else is going on, something that may keep the web alive. If you’ve played with Google+ or Twitter recently, you’re seeing fluid interfaces that must make Microsoft’s software dev teams uncomfortable. Web page designs are morphing into app-like ease. Apple’s latest operating system captures swooping trackpad gestures that merge computers with tablet UX. Microsoft is launching a new OS that combines old Windows folder hierarchies with tablet touch features.

Software and web windows and one-touch apps are becoming all the same thing.

Paul Gardner-Stephen, a telecommunications fellow at Flinders University, told Pew that “HTML5 and other technologies will continue to blur the line between web and app, until the average end user would have difficulty assessing the meaning of this question.” William Schrader, founder of PSINet, said something even smarter — that apps eventually will recognize screen size and slide into large or small formats accordingly.

But the biggest idea for a web that survives came from Harvard professor Susan Crawford, who noted “apps are like cable channels — closed, proprietary, and cleaned up experiences … I don’t want the world of the web to end like this.” Consumers may rebel when they realize they can’t play Flash video on Apple mobile devices because Apple wants to sell them videos its own way.

We can already see signs that the closed app world is reopening. Amazon offers a free Kindle app on Apple iPads, and Apple accepts the app because the utility of allowing the huge Amazon giant in outweighs the dissatisfaction of grumpy tablet consumers blocked from buying readable books.

Apps may be forced to open up, because open systems create better experiences for consumers, and that stimulates demand.

If you step back, today’s closed system designs are pretty gnarly. Twitter redesigns itself constantly, and it’s a mess. (Great, this week you type your tweets into the left side of the layout!) Every app unfolds with different visual standards. Dan Lyons, the brilliant mind behind Fake Steve Jobs, once wrote in a post called “Does nobody care that Facebook looks like ass?” that “I look at Facebook and I feel the way I imagine I.M. Pei must feel when he looks at some giant public housing project. You just sit there going, Why? Why do this? Why make it so ugly when just for a tiny bit more effort you could make it, if not beautiful, at least not horrific?”

Walled gardens and poor UX designs are inefficient. Inefficiency is the signal for competitors to do something new to gain business. So in the deepest of ironies, the profit motive will keep the web open and alive. Something new will emerge, and it will look a bit like the old web and somewhat like a polished app. It will fluidly fill screens of all sizes. And it will be beautiful, because the ugly competitive forces of our world demand it.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: Linda Cronin

Amazon’s secret $90 million ad campaign


Amazon is projected to sell 5 million of its new Kindle Fire tablets by Jan. 1, a remarkable launch story. Or is it? Amazon has used its own site for an estimated $90 million in free advertising annually for its Kindles, pushing them at massive scale in consumers’ faces. Here’s the math:

– Amazon.com is the No. 8 website in the U.S., attracting 75 million unique visitors a month.
– Assume the average user visits the site 4x a month — that’s 300 million impressions on the home page.
– Amazon is running the equivalent of a marquee site ad buy. Let’s be conservative and say the value of such a dominant ad placement is $25 CPM (cost per thousand impressions).
– $25 CPM * 300,000 (thousands) * 12 months = $90 million in free advertising value annually.

This is not to complain: Bully for Amazon for leveraging its own assets. Amazon is brilliant at milking every sales angle; it gives the Fire away below cost to lock consumers into the Amazon ecosystem, and has made superb price framing plays such as “free” shipping that costs $79 a year, etc. Yet when we read about the Kindles taking off, let’s remember Amazon is putting nearly $100 million in advertising behind them on its own site, not counting other paid media campaigns. Amazon is much more than a bookstore and all-mart — it is one of the smartest marketers of our generation.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

From Google+.

Why Amazon is giving away ‘free’ books


About 5 million of Amazon’s 121 million customers subscribe to Amazon Prime, a $79-a-year service that covers “free two-day shipping” (we repeat, $79 covers free shipping…). If you thought that pricing move was brilliant, now consider this: Amazon is adding the ability to borrow one book for free a month if you subscribe to Prime, provided you also own or buy a Kindle. That’s right: Amazon is giving away its core products for free.

Is Amazon crazy? Of course not. This move will only accelerate its 58% annual growth rate.

1. Amazon has been pushing Kindles for years, but suddenly faced huge competition from Apple’s sexier iPad. Amazon just caught up with the Kindle Fire, just as colorfully sexy with a kinder price point of $199. But Amazon needs to ramp its push into the tablet market, since today’s mobile hardware leads to Amazon vs. Apple sales ecosystems.

2. People who buy Kindles are avid book readers — and likely to want more books than one free rental a month. So the giveway is unlikely to cannibalize many sales. If anything, luring readers back to the Amazon.com portal each month could increase sales as these avid readers traipse through the Amazon candy store.

3. People who buy Amazon Prime only recoup the $79 annual fee if they order a lot of merchandise — perhaps two orders a month. Given an average order size of $25 (guess), Amazon is locking in $600 a year in orders plus $79 in service fees if it convinces you to spring for “free shipping.” And if you don’t buy anything, you pay $79 for nothing for a tidy Amazon profit margin of 100%.

4. $679 a year per customer is a pretty sweet deal for Amazon; so no wonder Amazon gives away a $5 book value and some free movies as well for anyone who signs up for Prime and also buys a Kindle.

Amazon is simply rewarding its best, most-valuable customers with an offer that will get them to accelerate their spending, lock them in further with Kindle hardware, and sustain future profits all while fighting off the iPad.

It’s brilliant. And it’s “free.”

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.


Why 1to1 personalization hasn’t arrived (hint: media loses money)


The concept of 1to1 customer relationships, in which a marketer learns your needs and later gives you an offer tailored exactly to your whim, is tantalizing. Don Peppers espoused it back in the 1993 book “The One to One Future,” and brands as wide-ranging as Levi Strauss, Amazon.com, Zappos, PaineWebber, IBM and General Mills toyed with it. The idea was a clever counterpoint to the “Positioning” mass-communication strategies of the 1970s, and agencies and software companies, always ready to drink the Kool-Aid of customer focus, embraced 1to1 in the 1990s as much as they love social media hyperbole today.

Trouble is, the personalization idea never took off. No brand prepares your grocery list, picks out your clothing, or foresees what you’ll want for dinner at the restaurant Saturday night. The major impediment was not technology — true personalization requires vast inventories, efficient mass-customization of production assets, and brilliant algorithms, difficult but possible as Netflix has demonstrated with DVDs — but market incentives. Waste against the masses is usually a source of profit, and this is especially true in the media landscape.

Personalization kills media profits
Case in point: Cable television. With boxes in every home, you’d think advertising could be customized easily to every household based on your demographics, personal viewing history, even past shopping habits. It doesn’t seem hard to tie your cable box into an Experian data set to give dads with kids hitting mid-life 30-second spots for red convertibles (ahem), yet we’re not there yet. Experimenters such as Eyeview are beginning to combine audience data, advertiser assets and marketer products to personalize online video ads — in real time, showing snow or rain in the car spot based on your local weather. But that’s just a start. Personalization has become the Great Pumpkin of the ad universe, always almost here, and when it someday arrives it will be really, really big.

Personalization is a huge threat to old media empires. Truly targeting ads means you need fewer messages to get to your audience, and that efficiency is counter to what gives publishers and media giants money. Consider cable: The typical U.S. consumer watches 5 hours and 9 minutes of TV each day, enough to receive 166 30-second TV spots … and most of those are wildly off base. If advertising were truly targeted, you could receive only 10 ads a day for products you really want, and you might respond to 2 of them — enormous marketing success. But all the ad revenue from the 156 off-base spots would disappear. Online publishers, where personalization is much easier thanks to cookies that tag user computers, face similar threats as DSPs and ad exchanges begin allowing media buys that circumvent their high prices and audience control.

Most media is never seen. But advertisers still pay.
Put another way, the typical American subscribes to 130 television channels and yet “tunes” to only 18 of them (consumers no longer “surf” through channels and instead typically punch in 33 for CNN on their remote, “tuning” in to the channels they prefer). That 18 of 130 options means 86% of all programming, and its associated advertising, is never seen by each individual. The bloated waste of advertising is good for the media producers and transmitters, but not so good for advertisers who pay their bills.

Of course, consumers and advertisers want targeting. Media planners, direct marketers, and CMOs spend their careers trying to make their brands relevant; consumers rush to the malls each Black Friday looking for just the deal they crave. From the market efficiency view, personalization really is the Holy Grail — to spend production resources only against those consumers likely to respond. But it is worth noting that goal is diametrically opposed to what drives profits for the media intermediaries. Good luck, Eyeview, with those clever customized video ads; but don’t expect the marketplace forces to get behind your efficiency anytime soon.

(Bonus points: Don’t miss the 2000 press release for General Mills’ customized cereal.)

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.


‘Free’ movies: Amazon’s brilliant move to the future


Evolving a business is difficult because it seemingly requires you to take your eye off what drove profits in the past to find what will bring strong margins tomorrow. But look ahead you must; after all, the business world is littered with cautionary tales of those who did not: IBM’s hardware obsession in the 1970s led it to miss the PC operating system opportunity; Kodak pushing film as digital cameras killed the photo developing industry; Microsoft wasting away first-mover advantage in tablets for nearly a decade to be beat by Apple’s iPad core.

So kudos to Amazon for making a brilliant evolutionary chess move. On Tuesday, Amazon launched a service giving away movie streaming to members who subscribe to its $79-a-year “Prime” premium shipping service. Amazon Prime was already one of the smartest moves in ecommerce, building loyalty among shoppers while charging them more for “free” 2-day shipping. (It’s “free” shipping, you see, if you spend $79 a year for access to it. And once you spend $79 a year, well you better buy a lot of books, spending more of your money to get more of that great “free” shipping.) Amazon Prime is a sticky pricing gambit that makes consumers feel good while sending dollars straight to Amazon’s bottom line.

Now, Amazon has made the shipping deal seem even sweeter by adding “free” access to 5,700 films and TV shows, giving Netflix a competitive whack at the same time. It’s an arrow shot straight at the future of digital content, while tying consumers to Amazon’s current core product, hard goods shipped by mail. All we can say is Amazon, your strategy is Prime.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.


The forces driving The Economist to Facebook


Word came across the pond today that stiff-upper-lipped Economist.com plans to acquire half a million Facebook fans in the next six months. Publisher Ben Edwards told The Financial Times that making The Economist more social is “the core of our strategy.” What gives?

Let’s view the world of publishing competition as a play in three acts. Act 1 began 100 years ago with Michael Porter’s classic five forces model. (If you haven’t read Porter, the genius who coined the phrase “competitive advantage,” all you need to know is five things act on any organization — suppliers upstream, customers downstream, competitors in your space, and potential substitutes or entrants. This works in marriages, too, but we digress.)


Publishing thrived in this model nicely, with the nuance that it really served two sets of customers, the audience who watched TV or read the magazines and the advertisers who in turn chased that audience. Since advertisers fund 90% of any publishing venture (subscription fees are but a pittance), the size of the audience was paramount.

And then, in the late 1990s, the Internet and Google reared their heads … and audiences began to move south.


This second act of the publishing era gave us the Andersonian Long Tail, or what we call “The Era of Search Substitutes”: readers rushing from paid subscriptions to millions of free web sites, anything you desire found via Google.com. Because audiences were so vital, publishers gave away a portion of their wares online for free in hopes of luring readers back, opening a Pandora’s box of declining print circulation and ad revenue.


And then in the past two years, audiences moved again — to Act 3, “The Era of Social Entrants.” What at first seemed online games for flirting teenagers became tools attracting millions of users, who could follow breaking news inside Twitter faster than CNN and network professionally with thousands of new contacts without the onerous ping-pong of email. The iPhone, the first portable device with easy Internet access, pushed the trend, and next year both Apple and Dell are set to release larger-screen mobile tablets that will take portable interactivity further.

Can publishers rebuild subscriptions in a new sharing world?

Once again, publishers face a threat, but there is also hope of more control … since marquee brands can sound their own voices in social media forums. Tablets are being eyed especially closely, since they provide a narrow window for publishers to improve their content in exchange for new paying subscribers. (See this Sports Illustrated tablet demo for a sneak preview at their tempting tablet layouts.) The trick will be to move beyond gimmicks to give users some skin in the game; The Economist, for instance, will encourage commenting inside Facebook and Twitter by building a new Economist.com “reputation system,” similar to the rank-scoring mechanisms of “follower counts” that make Twitter so popular.

Since social propagation can’t be controlled and requires constant experimentation — there is a Talebesque randomness to the fads that “go viral” — The Economist is making managing its social media presence a full-time job. Major retailers are moving this way, too: Pepsi just announced it is skipping SuperBowl advertising in 2010 to instead drop $20 million on social media experiments, and Amazon.com now provides widgets helping bloggers link its online products for a cut of the sale.

The Financial Times notes “broadcasters … are finding that mingling with the huge audiences gathering on Twitter and Facebook can be a source of traffic to rival that of search engines.” Perhaps this is a wake-up call for your business, if you’re still focused solely on your advertising, web site, or search presence. What are you doing to attract the rising crowds in the social entrant space?

Economist photo: Suttonhoo

‘Amazonfail’ wins 1.2% of all tweets


Damn. If you’re wondering why your organization should begin monitoring social media, consider that Amazon.com won 1.2% of all messages on Twitter this Sunday with the hashtag #amazonfail. Hashtags are little terms users put on a tweet so that others can find all messages related to a topic, and the fact that 1% of all Twitter users felt compelled to label their opinion of Amazon as a failure means the company had to take action.

The firestorm erupted after Amazon removed 57,000 gay- or health-themed titles from its main search function, including such risky content pieces as “Ellen DeGeneres: A Biography.” Amazon apologized, first calling it a glitch, and then a “ham-fisted cataloging error.” Point is, people are talking about your brand, too. B.L. Ochman has a good spin at Ad Age.

Take the Amazon Kindle sales logic test!


In its fourth quarter ended Dec. 31, 2008, Amazon.com, Inc. reported $3.63 billion in North American segment sales, $3.07 billion in international segment sales, $2.89 billion in worldwide electronics and other general merchandise sales …

Oh yes, and Amazon reported no sales data on the Kindle.

This is a noteworthy PR move because analysts and pundits are lauding the Kindle as being a hot-seller despite the fact Amazon has released no sales figures for the e-book device. Amazon pushes the Kindle (now updated in design) on its home page constantly, and crows it will transform how people read books. Stephen Dubner over at Freakonomics, usually an intelligent writer, illustrates the buy-in when he notes: “although Amazon is famously quiet about releasing sales figures, the consensus is that the Kindle has been a big success.”

So let’s do a logic test: Say you are Amazon and you launch a new technology product to great fanfare, and the numbers roll in, so you:

A. release the sales data to boost your stock, since you’ve exceeded expectations;
B. don’t release the data, since true figures wouldn’t meet expectations and thus would hammer your stock.

Hmm. No, really, Amazon, we believe you. Feel free to comment below with the actual Kindle sales results.