AOL Invests In Amazon
from the the-big-get-bigger dept
Still trying to figure this one out (and it seems I’m not the only one), but AOL has agreed to invest $100 million in Amazon. It’s unclear exactly what they’ll get out of it, other than that Amazon will promote AOL to their customers, and will eventually power some of Shop@AOL. It sounds like it could be a good deal for both – or a huge waste of money and resources, depending on the exact details of the deal – and how they end up executing. However, the two firms both have a pretty good track record for executing things well.
Comments on “AOL Invests In Amazon”
Analysis
Amazon is a badly run business. Books and media have a high value to weight ratio, and a huge variety of offerings, but the other areas that Amazon has moved into do not. For example, there are many more books available than there are stereo models. Amazon can’t offer you a stereo that is _much_ different than the one you can buy at a superstore (as compared to, say, a rare book that you can’t find in your local bookstore). Amazon also cannot sell you a stereo at a price that is competitive with your local superstore, because of shipping charges.
Simply put, to be competitive Amazon must meet the following formula:
Amazon price + shipping charge = less than the price at Bestbuy
As weight increases, so does shipping charge. For the above formula to work, Amazon must decrease the price as the weight and shipping charges increase. So if a heavy item, like a stereo, costs $40 to ship, then this means that, to be competitive, the price Amazon charges for the stereo must be _at least_ $40 less than Bestbuy. Can Amazon charge $40 less and still make a profit? No, because the retail markup on a stereo is quite small–I’m guessing 10% or less (probably much less). So if a stereo retails for $300, the profit is only $30. Discounting by $40 means that Amazon loses $10 on the sale.
Amazon won’t become profitable long term unless it divests and concentrates on profitable lines like books and media, with high value to weight ratio.
Now, is AOL’s investment in Amazon a good idea? Probably not. Who benefits here?
Can Amazon help increase AOL’s business? More to the point, can Amazon increase AOL’s business by $100 million, enough to repay the investment? Not be exposure (is there anyone left who hasn’t gotten a free AOL disk yet?). Not by sharing Amazon’s profits, since they aren’t profitable. Finally, can Amazon ensure AOL’s long term survival? Probably not. Sears couldn’t do it for Prodigy.
Can AOL increase Amazon’s business? Again, probably not. By analogy, imagine that GAP owned NBC. GAP already advertises on ABC, NBC, and CBS. Would owning NBC, and running slightly more ads, make that big an impact? Probably not. Certainly, it’s cheaper to just run ads, rather than buy the network.
Analysis
Amazon is a badly run business. Books and media have a high value to weight ratio, and a huge variety of offerings, but the other areas that Amazon has moved into do not. For example, there are many more books available than there are stereo models. Amazon can’t offer you a stereo that is _much_ different than the one you can buy at a superstore (as compared to, say, a rare book that you can’t find in your local bookstore). Amazon also cannot sell you a stereo at a price that is competitive with your local superstore, because of shipping charges.
Simply put, to be competitive Amazon must meet the following formula:
Amazon price + shipping charge = less than the price at Bestbuy
As weight increases, so does shipping charge. For the above formula to work, Amazon must decrease the price as the weight and shipping charges increase. So if a heavy item, like a stereo, costs $40 to ship, then this means that, to be competitive, the price Amazon charges for the stereo must be _at least_ $40 less than Bestbuy. Can Amazon charge $40 less and still make a profit? No, because the retail markup on a stereo is quite small–I’m guessing 10% or less (probably much less). So if a stereo retails for $300, the profit is only $30. Discounting by $40 means that Amazon loses $10 on the sale.
Amazon won’t become profitable long term unless it divests and concentrates on profitable lines like books and media, with high value to weight ratio.
Now, is AOL’s investment in Amazon a good idea? Probably not. Who benefits here?
Can Amazon help increase AOL’s business? More to the point, can Amazon increase AOL’s business by $100 million, enough to repay the investment? Unlikely. Is there anyone left who hasn’t gotten a free AOL disk yet? And AOL won’t benefit by sharing Amazon’s profits, since they aren’t profitable. Finally, could Amazon ensure AOL’s long term survival? Probably not. Sears couldn’t do it for Prodigy.
So who benefits?
Can AOL increase Amazon’s business? Again, probably not. By analogy, imagine that GAP owned NBC. GAP already advertises on ABC, NBC, and CBS. Would owning NBC, and running slightly more ads, make that big an impact? Probably not. Certainly, it’s cheaper to just run ads, rather than buy the network.