Amazon Gets Third Party Started

Last month, Amazon announced that it had signed up Sears'(SHLD) Canadian operations as a partner in Merchants.com, and Bezos promised that the company would be "investing heavily in Merchant.com."

Revenue from Merchant.com programs show up in the "other" category on Amazon's balance sheet -- where it is combined with other initiatives like Amazon's cobranded credit card.

Amazon won't break its revenue down further, but analysts believe third-party business such as Merchant.com is contributing to the growth in "other" revenue, which more than doubled to $50 million in the second quarter from the year-ago quarter.

Now, $50 million may not seem like a lot for a company that brought in $1.75 billion last quarter. But consider that much of the business has much lower margins than Amazon's own sales. It doesn't need to invest any research money in Merchant.com, and in some cases, it doesn't carry the fulfillment costs.

"It's essentially gross margin flow-through," says Devitt. "If there's no fulfillment, then other than the cost of processing the credit card, it's all gross profit margin."

Of course, the risk for Amazon is that its big Merchant.com partners such as Target and Macy's will learn from Amazon's hard-won know-how and strike out on their own.

But Amazon will have two advantages: First, if enough big names sign up, it will still have a cost-savings edge through sheer economies of scale. Second, its heavy investment in technology will soon leave its ex-customers far behind in innovation.

And it's also unlikely that those traditional retailers have studied at the Costanza School of Management.

>To order reprints of this article, click here: Reprints