Will Amazon Ever Make Money?

A few weeks ago I covered a story for PaymentsJournal (originally published on 9to5mac.com) that indicated Amazon would be releasing a mobile payment card reader similar to the products offered by Square and PayPal. That product came to market today (August 13) under the brand Amazon Local Register.

It is again worth noting that some providers of mobile card readers, most notably Verifone, have found that processing payments for micro-merchants is unprofitable as a stand-alone business. Even Square’s profitability is uncertain, and that company is arguably the most successful provider of these services.

The following is an excerpt from the transcript of Verifone’s Q4 2012 investor conference call:

“Our experience through 2012 with tens of thousands of these micro-merchants tells us that the standalone economics of micro-merchant acquiring are fundamentally unprofitable,” Doug Bergeron, chief executive of VeriFone, said during a conference call with analysts.

The cost of tracking down and signing up small and individual merchants, through things like TV and Internet-search advertising, “will never justify the razor thin-margins produced by merchants with infrequent volumes and extremely high attrition,” he added.

I have long argued that the companies that provide card acceptance services to micro-merchants will need to offer some other value-added (and presumably profit-generating) services to make the business work. Square tried offering a mobile wallet, which has since been abandoned, and others are engaged in what appears to be a break-even-at-best fight for market share.

Product development at Amazon has often conveyed minimal concern for short-term financial performance. The company has lost money in three of the last five quarters, including a $126 million loss in the most recent quarter, which ended June 30. Not only has Amazon just entered a market with extremely thin profit margins, but it is doing so with market bottom prices. The company is offering promotional pricing of 1.75% of purchase volume (swiped transactions only) through the end of 2014 for customers who sign up before October 31. Standard pricing is currently set at 2.5%, which is still below the 2.75% and 2.7% that Square and PayPal charge respectively. For keyed transactions, Amazon charges 2.5%. Square and PayPal both charge 3.5% + $0.15.

EMV support is notably absent from Amazon’s product. Square and at least one other competitor in the U.S. market (Bindo) have already announced EMV-compliant readers. Did Amazon underestimate the market’s interest? Is Amazon planning a pre-liability shift update to support EMV? Are the market leading prices designed to make up for this lack of functionality? These questions are still unanswered.

Amazon’s pricing strategy means that the bar will be set even higher in terms of the value-added services required to make the business viable. That said, the company could leverage the relationships it has already formed with sellers in the online world (and its price leadership) to rapidly build a user base. From there Amazon could presumably use buyer and seller data to track shopping patterns, which could then be used to sell more merchandise through Amazon.com. Alternatively, the register product could increase Kindle ownership (although the reader can also be used with iOS devices), which Amazon has been reportedly selling at a loss to drive content sales.

So will Amazon ever make money? No, not as long as it continues to reinvest profits merely to gain market share in markets for emerging products.

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