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Amazon.com: The E-Commerce Landlord

In the early 1990s, when a small company called AOL (AOL) started to aggressively giveaway free disks, the prevailing wisdom was: How are these guys going to make money? Aren't they spending them themselves into oblivion?

In hindsight, AOL was brilliant. The company is in an enviable position because AOL understood that the more eyeballs the better. Period.

I think Jeff Bezos also understands this lesson. Much like AOL, Bezos has been aggressively marketing his company, building a customer base of 13 million. The losses have been huge, but the rewards can be enormous.

On Wednesday, there was strong evidence that the Amazon.com (AMZN) strategy of "lose money at all costs" is bearing fruit. The deal was with NextCard (NXCD) , an online provider of credit cards.

In fact, the deal smacks of AOL-type of arrangement. Here's how it works: NextCard will offer co-branded credit cards to the Amazon.com user base for a five-year period, starting next year. With the card, you get such things as automatic bill paying, electronic statements, account alerts, reward programs and custom designs. All receivables generated from the credit card accounts will be the assets of NextCard.

Amazon.com disclosed that it will get about $150 million in fees over the life of the agreement. Given the fact that Amazon.com will incur minimal costs, the fees will mostly go straight to the bottom-line. Interestingly enough, Amazon.com also gets a warrant to purchase 9.9 percent of NextCard.

NextCard will pay this premium for a variety of reasons. First, Amazon.com customers are probably good credit risks, which is critical for an online credit card company. Second, these customers use their credit cards extensively (you can't buy on the Web without one!). Third, NextCard has an exclusive arrangement with Amazon.com and thus can block out competitors. But most importantly, Amazon.com can be a cost-effective way to acquire a huge number of customers.

When the deal was announced NextCard's stock surged 9-3/8 to 41 (the stock was as high as 53-1/8), which helps validate the concept. Interestingly enough, several analysts said that the Amazon.com deal will make NextCard a leader in online credit cards.

This deal will likely not be the last from Amazon.com. I think monetizing its rich online user base may ultimately be the key to the profitability of Amazon.com. And as for selling books and other items, well, this may be gravy.


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