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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