Amazon Discusses its Long Tail Strategy (AMZN 2Q05 Conf Call Quotes)

Amazon has arguably lagged eBay and Google in profit growth because it has benefited less from the overall growth of e-commerce. Google's profits have rocketed as more companies use keyword ads to drive sales, and eBay has grown as the number of Web retailers rises and many choose eBay as a platform. Amazon's growth, in contrast, has been driven mainly by its own sales.

But Amazon has a two-pronged strategy to monetize the emergence of third-party sellers and producers. First, it has acquired two companies (BookSurge and Custom Flicks) to facilitate the direct publishing of books and movies which it can then sell. Second, Amazon is pushing third-party sales via its web site and providing e-commerce tools for large etailers. 975,000 venders now sell on Amazon's site, and 28% of Amazon's sales came from third-party sellers in Q2, up from 24% a year earlier.

Amazon's conference call included discussion of Harry Potter sales and the impact of Amazon Prime; but this issue - Amazon's abilty to become a platform for third-party sales - will matter more for Amazon's future growth than any other issue. Here are quotes from CEO Jeff Bezos and CFO Tom Szkutak on the topic:

… we are investing very heavily in all parts of our third-party business… in the… third-party business where sellers sell on the Amazon site, and… in the Merchants.com business where we private-label  (basically do the plumbing for other people's websites). A lot of what you see in our tech and content expense line… is going to make things better for our sellers and better for our buyers who are buying from our sellers…

…there will be as much change and as much opportunity for growth and free cash flow generation over the next 10 years with this kind of technology innovation as there has been over the last 10 years.

… what we're doing is slowly and systematically step by step driving parity between the third-party seller and the Amazon owned inventory business. So those two experiences from a customer point of view are as similar as we can make them.

So we want to be at parity with these third-party sellers on our own website, open it up to them. If they can offer a better bargain to our customers or better availability, we want to cannibalize ourselves in that way…

(Quotes are from the CCBN StreetEvents transcript.)