Amazon Earnings: The Big Loss You Won't See There

Last Updated Apr 23, 2010 12:23 PM EDT

Amazon.com (AMZN) reported a rather obscure set of Q1 numbers yesterday, leaving investors confused and its share price shaken. Because Amazon hasn't broken out its numbers to isolate either the Kindle, its best-selling e-reader, or its recently-acquired Zappos.com division, we really have no idea what's going on inside the Seattle retailer relative to prior quarter. Except, perhaps, panic.

Why? One of its most valuable assets is under serious threat, and I'm not talking about the Kindle vs. iPad battle royale. No, I'm referring to Amazon's vast database on customer purchases: the history of every one of its 114 million accounts, which it uses to recommend products ("you might also like...") and to grease comparison shopping between its thousands of partner stores.

Amazon's precious database is under attack on two fronts: by both Facebook and a new crop of startups.

Facebook's new "Like" button (get the lowdown here) will be a way for the social network to collect the same kind of data that Amazon has: namely, what its users are buying and reading on partner sites. There is perhaps no more valuable metric on the Web, and Amazon is no longer its one and only mistress. A manager for Facebook Platform gave this example on the company blog:

For example, if I like a pair of jeans on Levis.com, my action will be shared with my friends on Facebook, where they can comment on it. I can also see which of my friends like the jeans on Levis.com.
Because Facebook's Like-system (as I'm dubbing it) is so frictionless, it'll amass valuable data at tremendous speed; the company expects to inhale as many as 1 billion "Likes" in its first 24 hours (the feature is live now). For Amazon to collect data about what its users like, the users actually have to purchase an item. In Facebook's system, all a person needs to do is 1) press the Like button on a given retailer's page and 2) be logged into Facebook. For every purchase Amazon needs to add to its metrics, Facebook merely needs a mouse-click. The social network already sells its data, which means that all this Liking isn't staying inside some Facebook silo; it's being made available to anyone, even Amazon's retail competitors.

As the New York Times reported on April 22, several Valley startups have also cropped up to harvest the value of purchase-data -- and further erode the value of Amazon's recommendation engine. Cutely-named Blippy and its arch-competitor Swipely both allow users to share the contents of their credit card statements with their friends. (Yes, you read that right.)

As Brad Stone of the Times says of Blippy:

The startup, based in Palo Alto, Calif., allows people to link their credit cards and e-commerce accounts to its site, so those people can share with friends and strangers everything they buy--from dinner at a local restaurant to their cosmetic surgery.
Blippy's founder contends that our purchase histories "used to be private only because there was no way to share them," and his company's growing user base bears out his theory. And the more users that do this, the more they drive down the purchase price of this kind of data. If any site can buy Blippy's (or Swipely's, or Facebook's) purchase (i.e., "Like") data and use it to power their own super-recommendation engine, smaller retailers will be emboldened. They can use that data to buy more accurate targeted ads, pursue media coverage, and form alliances with other retailers. No longer will they need to be under Amazon's big umbrella.

Amazon's only way out of this fiasco is to somehow qualitatively improve the nature of the information they're collecting about consumers' purchases so that they can deliver better results to customers and keep retail partners in line. Some outlets have suggested that the Zappos acquisition will bring new social Web smarts to the company; perhaps Amazon will find an ingenious way to compete with Facebook's "Open Graph" initiative, which aims to make everything you listen to, buy, like, watch and consume part of its social database. Or perhaps it will acquire a semantic Web engine like Glue, an excellent browser add-on which already ads the kind of smart "like" engine that Facebook's system will.

Another counter-measure, which Amazon is already pursuing, is to bring its retail partners deeper into the Amazon fold. The company reported this week that it would be improving its Web Store suite, a self-service toolset used by partners to run their sites. It's also improving its SNS system, short for Simple Notification Service, which helps retailers communicate with customers.

A last-ditch option is to find new conduits for sales. The Kindle could be a much better vehicle for selling media -- not just books, but music and movies, too. (E-ink screens are quickly becoming more proficient at presenting moving images and color, while maintaining their outdoor readability and low power consumption, so the hardware is not an issue). A slicker multimedia Kindle could easily vault to iTunes-level sales with such a powerful buying infrastructure as Amazon's behind it. The iPad has already set the precedent for such a device; a tablet done Amazon-style (minimalist, durable and light) would boast real competitive gravity. Look for Amazon to be digging into its $2.32 billion free cash flow -- up 62% over last year -- for some serious R&D.