Venture Capitalist at Theory

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2 minute read / Oct 9, 2012 /

Learning from Amazon’s Startup Judo

This week Amazon made public its advertising initiatives. Given the massive trove of invaluable purchasing data Amazon collects, I’m certain Amazon could build a rival to AdSense. But they aren’t.

Below is a quote from an interview with Lisa Utzschneider, the head of Amazon Media Group:

Q: Can you give us a sense of how important advertising is to Amazon?

A: I think the way Jeff [Bezos] would answer that is, if we think about Amazon in two worlds, one world is an Amazon with ads and lower prices. Another world is an Amazon with no ads and higher prices. Which one would we choose? I think nine times out of 10, or 10 times out of 10, we would take Amazon with ads and lower prices.

In other words, Amazon doesn’t view advertising as an adjacent business to their eCommerce business. Or even a standalone business. It would be easy for Bezos to juice the single-digit margins of the ecommerce business with the much 30 to 40% margin revenue from the Media Group to appeal to Wall Street and boost the stock price in the short term.

Instead, Bezos is staking a much longer term and bigger bet: the Media Group will become a growth engine for the eCommerce business. Amazon will use ads to reduce prices, shifting the supply/demand curve and shipping more products.

Customers are happier because the prices on Amazon are the lowest on the web. Advertisers are happy because Amazon sells more of their products and benefit from consumer purchasing data. Meanwhile, someone else’s marketing dollars are fueling Amazon’s business, both eCommerce market share and consumer purchasing data. This cycle reinforces Amazon’s strengths and ultimately dominance.

Bezos truly is a master of startup judo. He is leveraging other company’s strengths to grow his own business.

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