One of the most perplexing aspects of Amazon.com’s (NASDAQ:AMZN) business model is the ability to sell products and services that compete directly with its many suppliers and resellers. For example, Amazon is the world’s largest reseller of new and used books, both physical and digital, yet it offers CreateSpace, a venue for self-publishing authors, as well as seven publishing imprints. Thus, Amazon competes with major book publishers for new author talent.
AMZN also conducts a large music download business, competing directly against Apple (NASDAQ:AAPL), yet it also sells both new and used iPods on its website. In its most audacious move to date, Amazon will sell the Kindle Fire, a bona fide competitor to Apple’s iPad, and Motorola’s (soon to be Google’s) Xoom. Yet Amazon sells both iPads and Xooms on its website.
Amazon recently boasted that the Kindle Fire will support Netflix’s streaming service, even as it ramps up its own movie and television show streaming service, a portion of which will be free for any Amazon.com Prime customer, of which there are millions.
How and why does Amazon do—or get away— with this?
First, it is important to know that its seeks to be dominant in any category in which it participates. This means that it takes an interest in not just reselling others’ products, but in creating products itself.
Second, unlike other companies that evaluate profit margins by product line, seeking to maximize the sales of their most profitable products, Amazon.com has a completely different strategy: maximizing gross margin dollars. This means that it seeks to gain market share, regardless of the level of profitability generated by the category.
Finally, I suggest that the company is respectful, or perhaps fearful, of the potential anti-competitive implications of its success. Amazon.com’s management team is likely mindful of Microsoft’s (NASDAQ:MSFT) missteps when it fought against the US government’s anti-trust efforts. It is not difficult to imagine Amazon.com, through the success of the Kindle Fire—or Apple through the success of its iPad—guilty of anti-competitive behavior, should the government decide that bundling proprietary services stifles competition.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.