Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Analysis: Turning Amazon Into An Affiliate

Posted by Tom Foremski - February 8, 2010

I never believed in online shopping price comparison services. Because I never believed that retailers would allow their sites to be scraped and their prices easily compared.

Why would they do that? What advantage is there in allowing third-party services to undermine their business?

I have rarely been able to find a straightforward price comparison that was able to factor in everything, such as shipping, taxes, and extras.

The East coast camera retailers, for example, would advertise low prices online but then charge you extra for flash memory, shipping, warranties, and 'camera kits,' that quickly negated any savings.

And it makes sense that retailers would try to make it as difficult as possible to get a clean price quote because otherwise they are at the mercy of the lowest price competitor. They would also be at the mercy of their stupidest competitor -- the one that charges an unrealistic price, too low to maintain profitability or viability.

Today's New York Times has a report by Brad Stone on yet another aspect of online pricing - manufacturers seeking to control what price retailers can advertise on their products.

The Fight over Prices on the Internet - NYTimes.com

On some pages of e-commerce sites selling products like televisions, digital cameras and jewelry, a critical piece of information is conspicuously missing: the price tag.

Customers have to go to the online checkout to see the price. These missing prices are more likely to be methods of thwarting price comparison engines rather than manufacturers' price controls.

Retailers have long managed to get around pricing controls by giving other things away. For example, Apple dealers aren't allowed to under cut each other on price but they can give away printers and other products, which effectively undercuts Apple's recommended retail prices.

What is much more interesting is this tidbit, buried deeper in the NYTimes article, almost at the very end:

Instead of selling e-books wholesale to retailers like Amazon.com, the publishers want to sell them directly, setting prices and having the retailer act as an agent, taking a fixed 30 percent commission.

Wow. Turning Amazon into an affiliate! How ironic, since Amazon is one of the largest affiliate marketers, offering a percentage of revenues sold by third parties.

This is the danger that online retailers now face: what if their suppliers want to sell direct?

A search engine, such as Google or Bing, would be able to make it very easy to find the online stores of the manufacturers of many goods. This would be like a huge outlet store in the cloud.

In most cases manufacturers are already drop-shipping orders on goods collected by online retailers. Why not cut out the middle man?

In addition, the manufacturers would be collecting important customer data -- data that is currently kept by the retailer. They would be able to develop a direct customer relationship for the very first time (beyond the voluntary 'warranty' cards found with many products).

And if you know who bought what and when, it becomes easy to work out who will probably be needing a new washing machine, or computer, because the old one is on its last legs. Your marketing goes direct -- which cuts out a lot of costs.

Fortunately for the retailers, manufacturers don't know how to market well, or how to manage a direct customer relationship. At least, not yet...

Amazon has some protection from this trend in that it has layered on a lot of cool features and services, such as customer reviews, and secure online payment systems. That will help in retaining customers and making it less attractive for its suppliers to sell direct.

But it's clear that there are troubling signs ahead, that the Internet does make it possible for manufacturers to sell direct; and that search engines could create the storefront; they could aggregate customer reviews; and offer secure payment services (Google Checkout).

Online retailers are caught between a rock (search engines) and a hard place (suppliers selling direct). Both have sound business reasons to squeeze out the middle guy.

This is less true for retailers that also have physical locations such as Wal-mart or Best Buy. Will Amazon make a bricks and mortar acquisition?



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