Amazon ranks among the biggest retailers in the world and is the biggest of all in the e-commerce sector. In its press releases, it always refers to the 'Earth’s Biggest Selection', as well as the claim 'Earth’s most customer-centric company'. For a company that has innovated quickly and shown double-digit growth for years, that is an extraordinary claim. It appears to be true as well, as the company regularly wins prizes for customer satisfaction.
At the same time, the company has embraced a wholesale model, by opening its infrastructure (both for physical and digital delivery) to competitors. Amazon's infrastructure is impressive, with dozens of distribution centres and almost as many data centres spread across the US and various countries in the world. Amazon uses the infrastructure not just to serve its own retail customers, but also to serve competitors. Numerous web shops use the distribution platform, and many developers and internet companies (such as Netflix) make use of the data centres.
The recent statistics show that Amazon's wholesale activities, which include Fulfillment by Amazon (physical delivery) and Amazon Web Services (digital), already represent a substantial portion of revenues. Amazon had the following to say about FBA:
- The number of Marketplace Sellers (those who use FBA) grew in 2013 by 65 percent to more than 2 million.
- The number of items sold via FBA doubled to over 1 billion.
- These items were worth in total tens of billion of dollars.
On the face of it, there is a lot to say for Amazon's wholesale strategy. It leverages the infrastructure, improving the utilisation rate. It also helps pre-empt any regulatory concerns, should anyone become concerned about Amazon's significant market power.
But there is also a downside: Amazon as retailer is competing with its own wholesale customers (as a columnist of VentureBeat recently noted). This is something we come across in the telecom sector as well, where retail and wholesale sometimes come into conflict. Chinese walls and regulation are expected to minimize the negative consequences, but the complaints are well known. Regulators often receive complaints from wholesale customers of incumbents bothered about delays and unfair treatment compared to the retail operations of the network operator.
As far as Amazon is concerned, there could come a day when regulation is imposed to guarantee a level playing field. Another solution is also possible: wholesale-only. The infrastructure owner may one day decide to spin off or sell the retail organisation in order to put an end to the competition with wholesale customers, essentially a conflict of interest. The infrastructure owner can then focus entirely on operational excellence and optimum performance of the network. This also rids it of the common problems associated with retail, which requires a completely different focus on marketing and customer care.
At the moment, the likelihood of a wholesale-only model emerging appears small. EE, the joint venture between Deutsche Telekom and Orange in the UK, appeared to be heading in this direction, but then decided to launch its own retail services. In the Netherlands, the FTTH operator CIF was unable to sell its retailer Caiway, which would have opened the way for a wholesale-only strategy. Reggefiber is also being acquired by KPN, effectively putting an end to Reggefiber's attempt at wholesale-only. Structural separation, what we've been describing, looks good in theory, but still needs to be proven in practice.
