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Monday, December 14, 1998
THE DAY AHEAD: Amazon.com's new feature has Wall Street buzzing
By Larry Dignan TDAIN
December 14, 1998 7:10am
ZDII
Amazon.com Inc. (Nasdaq: AMZN) quietly launched a new feature to allow consumers to comparison shop, but sure managed to get the attention of some Wall Street analysts.
The company's "Shop the Web" feature is only a few days old, but has
Amazon.com fans buzzing. Are these analysts stretching for yet another reason to justify Amazon.com's valuation? Probably. They can use all the help they can get (chart).
But the quiet launch of "Shop the Web" does have some interesting
possibilities. The "Shop the Web" service is the first feature stemming from Amazon.com's acquisition of Junglee a few months ago.
The new feature positions Amazon.com (financials) as an intermediary between shoppers and other online merchants. Instead of taking on a
bunch of different product categories, Amazon.com can just point
consumers to where they need to go and collect a few tolls along the
way.
And oh by the way, the company is sure to pitch a few books and CDs
while you're doing research.
Even though it's a bit early, Wall Street is already connecting the dots
for Amazon.com's future business model.
The big deal according to Amazon.com fans is that Amazon.com could use the service to boost gross margins and add incremental revenue. These extra services will be key for Amazon.com because margins for books and music are going to get squeezed by intense competition.
"If the 'Shop the Web' service catches on, it should also be possible
for the company to monetize it in some way, most likely by charging
referral fees, transaction commissions, or slotting fees," said Henry
Blodget, an analyst for CIBC Oppenheimer.
Blodget said Amazon.com has to be careful that it doesn't lose its
objectivity, but should be able to grab some extra revenue via referral
fees.
"The good news about this type of revenue is that it carries a much
higher gross margin than straight product sales do--a feature that could help the company achieve the 28 percent to 30 percent gross margin we estimate that it is capable of (versus 23 percent today)," said Blodget.
Blodget wasn't alone in his assessment.
Derek Brown, an analyst with Volpe Brown Whelan, said the service makes Amazon.com an intermediary and an "e-commerce hub." Like Blodget, Brown was salivating over better margins.
"The company has not publicly discussed the business model for the new service," said Brown. "With this said we are very optimistic about the high-margin revenue-generating potential of this new service."
That's a lot of gushing for what essentially is a fact-finding mission
at this point. Amazon.com is using the next two quarters to gather
information and see how consumers use the service. Who knows what impact Shop the Web will have on revenue?
But don't dismiss the information gathering part of this service. By
tracking how people are using Amazon.com to research products, the
company should get a decent picture of what categories it wants to enter and the potential pitfalls.
With Amazon.com's lofty valuation it can't afford any missteps.
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