Amazon Shopper Panel – Amazon’s latest big bold move

Yesterday, Amazon announced a new initiative called Amazon Shopper Panel, which I think can have major ramifications for the company moving forward. Amazon Shopper Panel (ASP) is an opt-in and invite-only program in which participants can earn rewards by sending at least 10 eligible receipts a month to Amazon. To be eligible, receipts have to come from non-Amazon purchases, excluding even transactions at Whole Foods, Amazon Books or Amazon Go. There is no language on the minimum value that a receipt has to reach to be eligible. If a participant successfully sends 10 receipts to Amazon in a month, he or she can earn $10 in Amazon Balance or as a donation to a charity organization of their choosing. ASP’s participants can opt out at any time and delete previously posted receipts. In addition, participants can earn more rewards by completing surveys. There are few disclosures on what the surveys will be about and how much responders will earn for each survey. But my guess is that they will be aiding Amazon to complete a shopper’s profile with demographic information.

In my opinion, this is a consequential move for Amazon for the following reasons

Build an unmatched shopper database

As a retailer, one of the biggest challenges is to understand who your customers are and what they do outside of what transpires between you and them. If you are a Target shopper holding a Target-branded credit card, all they know about you is what takes place on Target’s website and between Target’s store walls. With some effort, Target may work with their credit card issuer to understand a bit about your spending behavior on your credit card. Unfortunately for Target, they have no idea on other parts of your consumer life and what you do. And you can bet that they want to know!

By compiling and analyzing receipts on a regular basis, Amazon can build a powerful and formidable database. Receipts carry a lot of information. Not only do they tell where you shop, when, how much you pay, how you pay and the frequency, but receipts also reveal what you buy down to an item level. Essentially, Amazon can theoretically know what vegetables, fruits or milk you buy every week. Normally, retailers can at best gather data down to a merchant level such as Walmart or Target. However, I don’t know of any retailer in the US that can basically gather intelligence down to that level of details.

Enable more sale on Amazon.com and Amazon’s private labels

The first application would obviously be to increase sale on Amazon.com, specifically the sale of Amazon’s higher-margin private labels. The intelligence Amazon gathers from ASP can help them decide which products can be produced as private labels, which can be marketed to whom and at what time. Information is worth as much, if not more, than money. Amazon operates at a scale that even a good idea or a degree of increased efficiency can mean millions of dollars.

Their Amazon Basics brand now has 3,000 SKUs.

Improve their ads business

Though small as a component of Amazon’s revenue, advertising is now a business with $20+ billion annual run rate and the latest YoY growth of 41% (as of Q2 FY2020). Advertisers like ads on Amazon because Amazon shoppers already have intention to buy, something that is lacking on Facebook and Google. When you search for something on Google or scroll down your Facebook Newsfeed, the intention to buy isn’t always there. However, if you go to Amazon, it’s likely that you will end up with an order and that’s what advertisers want. Though impressions are great, advertisers prefer much more hard cash coming from new purchases.

ASP gives the strongest and most reliable signal as to what shoppers are willing to pay for down to the item level, how much and when. Sophisticated and powerful as Facebook and Google are, they don’t have a system in place to know what shoppers buy in store. On the other hand, Amazon would be in a unique position to help advertisers place an ads to the right audience with the right message and at the right time. And to charge a little premium on that service as well. An expansion in advertising means an expansion for both revenue and gross margin for Amazon as this segment is surely more profitable than their online store.

Closing

The understanding of consumer behavior in physical stores carries a lot of value and offers potentially great applications. I am confident that somewhere some smart heads at Amazon already came up with more use cases than what I laid out above. Moreover, this kind of capability is pretty hard to emulate. To gain the intelligence that Amazon hopes to achieve, a company needs to have financial and technical resources that Amazon possesses. Having photos of receipts is one thing. Parsing out information and turning that into actionable intelligence is a completely different matter. while this move may raise red flags for privacy concerns, it’s a shrewd business move. In my opinion, there’s no better way to create a moat in retail than building up a deep understanding of consumers and leveraging your size, technical and financial advantages. I, for one, look forward to what this move will bring about.

Disclosure: I own Amazon stocks in my portfolio.

Weekly readings – 4th September 2020

What I wrote

I detailed my thoughts on the common criticisms of the App Store

I found a new business content website called InPractise and it is great!

My thoughts on Walmart’s new membership program called Walmart Plus

Business

Analyzing the Bentley Systems IPO Prospectus

A breakdown on Palantir’s S-1

Vietnam recorded 30 million daily online transactions in April 2020

Apple looks to expand its advertising business. I am not sure I am a fan of this move.

CB Insights deep dive into Stripe

Source: Credit Suisse
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Source: 2020 Debit Issuer Report

Technology

A developer’s account of trying to set up App Clip for his app

MongoDB History

Inside Amazon’s New Fresh Grocery Banner

Stuff I found interesting

Larry Ellison, one of the world’s richest people, asks for a second chance at charity

The Hustle’s piece on designers who help restaurants improve sales through menus

Electric bike owners progressively use cars less, finds study

Social media preferences in Vietnam. Source: Decision Labs

My thoughts on Walmart Plus

On Tuesday, Walmart unveiled its a long anticipated membership program called Walmart+. For $99/year, members can have unlimited free qualified deliveries from stores, fuel discounts at Walmart & Murphy stations as well as shopping tools such as scan & go to avoid long lines. To qualify for free shipping, deliveries must be $35 or more. Walmart said that there were more than 160,000 items available for this program, ranging from groceries, toys, household essentials to technology. Additionally, members can get 5 cents per gallon off at Walmart and Murphy gas stations. The company said that customers would be able to subscribe for this program starting 15th September 2020 with a 15-day trial.

How competitive is it?

Compared to Amazon Prime, Walmart Plus is years behind. First of all, at $119 a year, Amazon Prime includes many more additional benefits such as exclusive discounts, unlimited deliveries of qualified items without minimum purchase requirement, media & entertainment perks, just to name a few. Among the biggest benefits that Prime offers is the ability to get unlimited two-day delivery for low value items. I can’t count how many times I order stuff less than $15 individually. Second, Amazon carries a lot more items for Amazon Prime than Walmart. Third, when it comes to online shopping, it is a much more established name than its Arkansas-based rival. Shoppers trust Amazon and that’s a true competitive advantage.

What works for Walmart Plus in comparison to Amazon Prime, I believe, is that it offers less expensive groceries. My experience with shopping groceries on Prime is frustrating. I was confused about groceries on Amazon itself and then Whole Foods. Plus, they are not as cheap as groceries sold by Walmart. Hence, if customers are geared more towards grocery shopping, I think Walmart Plus can make a play there.

Other grocers or retailers follow almost the same playbook. Deliveries have to meet a certain threshold to be free and if retailers don’t handle delivery themselves, they’ll partner with Instacart. In that case, customers either pay a small fee for each delivery or enroll in a membership with Instacart (in either case, you are expected to tip drivers). Each retailer will appeal to shoppers in a different way. Take Aldi for example. Its unique selling point is inexpensive fresh groceries. Look for cheap grapes and great Greek yogurt? Head to Aldi. The downside is that Aldi carries few SKUs and less flexibility for shoppers. Target offers much more flexibility and choice as it carries more items, but its groceries are significantly more expensive than those at Aldi or Walmart, in my experience. Costco seems to match Walmart on the grocery front. A Costco member (at least $60/year) can have free grocery delivery for orders of $35+. Groceries at Costco are competitive in prices, compared to those sold at Walmart. Other items can have free delivery too, and with no minimum order requirement, but it will take at least two days.

Figure 1 – Delivery options at Costco. Source: Costco

There are other important players in this space such as Instacart and Shipt. Instacart Express or Ship membership is almost identical to Walmart Plus. Both cap membership fees at $99/year and a qualified basket has to be $35 or more. Unlike Walmart, Instacart is more focused, almost exclusively, on grocery delivery. Shipt is similar to Instacart and owned by Target, but also delivers for other brands as well. An advantage that Shipt or Instacart has is their network of partners. Walmart Plus works only for items sold by Walmart. With Shipt or Instacart; however, shoppers can order from different stores that sell different private brands. It offers shoppers more choices and flexibility. This is the list of retailers partnering with Instacart at where I live. I am sure in bigger cities, the list will be much longer

Figure 2 – Retailers that partner with Instacart in Omaha. Source: Instacart

It’s worth pointing out that even though you can order from multiple stores within Instacart, each store has its own check-out and minimum purchase requirement. The value for customers here is that they won’t have to create an account or download multiple apps on their phone. Within Instacart, they can place orders from different apps. What works for Walmart against the likes of Instacart is that Walmart offers non-grocery items for deliveries as well. Walmart Plus also offers fuel discounts, something that isn’t possible with Instacart.

This is how I think about the positioning of a few retailers who either have their own delivery programs such as Walmart or Amazon, or have their delivery powered by Instacart/Shipt

Figure 3 – 2×2 positioning metric

Among the ones I picked to analyze, Costco is the most similar to Walmart in terms of positioning. Their assortments and offering of inexpensive groceries are pretty similar. While Costco membership, the lowest level at $60/year, is cheaper than Walmart Plus, the fuel discounts and in-store shopping tools from Walmart make the comparison interesting. As far as I am concerned, Murphy and Costco stations are pretty similar in gas prices. Throwing in another 5 cent discount can be attractive to shoppers who drive a lot. Plus, in-store shopping perks like Scan & Go and pay with Walmart Pay can offer extra flexibility. Sometimes, we just need one or two quick items that wouldn’t qualify for a free shipping and we don’t mind stopping at a store for a few minutes. These shopping perks can make life a little bit easier for shoppers to get in and out of a store quickly.

What’s next?

It’s both interesting and challenging to look at this space as there are so many ways to slice and dice. For instance, Walmart Plus enables Walmart to keep their faithful customers from joining the likes of Instacart. If somebody tends to shop more at Walmart for groceries, they now have more reasons to stick to the brand. If some people usually shop at Costco, both Costco and Walmart have its appeal and the decision will rest with each shopper. For those who like to shop non-grocery items a lot and prefer the convenience, I don’t think Walmart Plus stands a chance against Prime yet. If some shoppers prefer the flexibility of ordering from multiple stores within one app, Instacart is the way to go.

Walmart Plus has tailwinds behind it. First, various stores across the country will power their delivery and be a huge competitive advantage. Few retailers can rival Walmart in this sense. Second, the ongoing pandemic and the explosion of grocery eCommerce are significant positive trends for Walmart. Moving forward, Walmart will likely continue to add more benefits to its membership program. The most obvious play is to expand the selection, pushing Walmart’s position in Figure 3 to the right. The more items are available for delivery, the more attractive Walmart Plus will be. Another idea is to mirror what Amazon did with Prime by throwing in other perks such as books, music, movies, etc…I suspect Walmart won’t increase Walmart Plus membership fees in the next two years at least. It took Amazon almost ten years to increase Prime’s fees from $79 to $99/year and another four years to $119.

The future isn’t without challenges for Walmart Plus. There is really subscription fatigue among consumers. How many consumers are willing to spend money on entertainment subscriptions (Netflix, Spotify, Disney Plus…), Amazon Prime or Instacart or Costco membership and then Walmart Plus. The economic uncertainty may be a factor as well. Folks may try to tighten their budget more and not have enough disposable income for another subscription. Plus, as Walmart moves to make its membership program more attractive, others don’t stand still. Instacart will continuously expand its partnership network. Amazon will definitely work to move more into grocery delivery.

Get to know Square, the owner of Cash App

How Square was founded and what it is today

Shortly before 2009, Jim McKelvey and Jack Dorsey were looking for a business idea to work on together. Jim was operating a glassblowing studio at the time. He had a customer come in ready to pay for an order. The customer had an American Express card, which the studio couldn’t accept. Jim lost the sale. He started to dig into the payment world and soon realized that there was a problem. The payment world is highly complicated with different credit card vendors and a myriad of rules and fees. To make its store accessible, a merchant had to work different credit card networks. Worse, in 2004, credit card vendors were making 45 times the amount of revenue on Small & Medium Sized merchants (SMB) as much as the revenue on large corporations.

Book Review: The Innovation Stack :: UXmatters
Figure 1 – Small and Medium Sized Merchants made up the majority of credit card vendors’ revenue in 2004. Source: uxmatters

The two co-founders of Square came up with an idea of a simple-to-use dongle that could read different credit cards, along with unprecedented transparency over fees to eliminate confusion for vendors. Their value proposition to customers was to simplify the process of working with different card vendors and to avoid the situation that some cards like Amex couldn’t be accepted. To lessen the fees for merchants, Square waived the per transaction fee and relied on the sale of their dongle, a small cut of interchange from transactions and likely a one-time fee to be able to use the dongle. That’s how the company started.

Fast forward to 2020, you can hardly recognize that Square company. It has grown leaps and bounds so that their offerings expanded to include a set of solutions for business and consumers. On the seller ecosystem side, Square offers software, hardware and financial services, namely:

  • Software: Online store, Square for different industries, Gift Card, Marketing, Dashboard
  • Hardware: different POS types
  • Financial services: managed payments, instant transfer, Square Card and Square Capital

On the Cash App side, the app can enable users to store & transfer funds to another person, spend via a debit card called Cash Card and invest in stocks, ETFs or Bitcoin.

Figure 2 – A simple way to look at Square business
Figure 3 – A more granular look at Square’s offerings. Source: Square

How does Square make money?

  • Transaction-based revenue: Square takes a small cut from every transaction from some services that they help facilitate through products and services
  • Subscriptions and fees: For some Square services, customers have to either subscribe or pay fees to be able to use them, including Square Capital, Instant Transfer, Cash Card, website & domain hosting and other
  • Hardware: Square also makes money from selling their hardware, including Stand, Register and Terminal, card swiping devices and chip readers
  • Bitcoine: allowing users to buy, sell and deposit Bitcoin, Square makes money in this segment by charging a fee for every transaction as well as raking in the difference in Bitcoin’s prices. For instance, the company might buy a Bitcoin at $9,950 and sell it at $10,000, netting $50 in revenue, on top of 1.7% in transaction fees
Figure 4 – Revenue breakdown from the Seller ecosystem. Source: Square
Figure 5 – Revenue breakdown from the Cash App ecosystem. Source: Square

Square has been growing very nicely in the last five years. The top line increased from $1.3 billion in 2015 to $4.7 billion in 2019, a CAGR of almost 38%. Meanwhile, the company went from losing money to the tune of $175 million in 2015 to making a modest operational income of $27 million in 2019.

In terms of segment revenue, transaction-based was the dominant source of revenue, making up 66% of Square’s revenue in 2019. On the other, Bitcoin was the fastest growing segment, growing at 211% YoY, followed by Subscription & Services.

Figure 6 – Square’s revenue by segment. Source: Square

Among Square’s segments, hardware is consistently the one that loses money. It’s the case of razor and blades. Square is willing to lose dozens of millions on hardware if that means they can make hundreds of millions of dollars in return from services. Meanwhile, Bitcoin’s gross margin is routinely at 2% while Square has made great improvements on the margin of Transaction-based and Subscriptions & Services.

Figure 7: Square’s Gross Margin. Source: Square

The growth of Cash App

Cash App has grown more important to Square over the years. The application was responsible for around 22-23% of the company’s revenue in Q2 2019, but the figure grew to 62% in Q2 2020, leaving the seller ecosystem only responsible for 38% of the total revenue. While the numbers for Cash App look impressive, most of the growth was attributed to the increase in Bitcoin revenue, even though Transaction-based and Subscription & Services also recorded nice growth. Additionally, Square increased the pile with a lower gross margin between Cash App and Seller ecosystems. If Cash App had 23% gross margin in Q2 2020, Seller notched 44%.

Figure 8 – Square’s Q2 2020 result. Source: Square

Over the years, Square has increased their marketing leverage. Sales & Marketing as % of revenue for Cash App decreased from 27% in Q2 2019 to 12% a year later. As a result, even though Cash App offers a lower gross margin than Seller, I suspect the increased marketing leverage enabled Square to turn a profit in Q2 2020. Whether this will persist as a routine in the future or whether it is mainly driven by Covid-19 remains to be seen.

Square defines “active transacting customers ” as those who have at least one cash inflow or outflow during a month. The base that had 1 million active transacting customers in Dec 2015 grew to 30 million in June 2020. Covid-19 helped accelerate the use of Cash App as these customers transacted 15 times per month or more on average every other day, up 50% from a year ago.

Figure 9 – Square’s Active Transacting Cash App Customers

At the end of FY 2019, over 50% of Cash App customers brought revenue to the company, a figure that was exceeded in Q2 2020 as the company reported an uplift. Revenue per customer, excluding bitcoin, was $45 on an annualized basis, compared to $30 in Q4 FY2019 and $15 in 2017.

Cause for concern

While Cash App seems to be going on the right track, Square does seem to have a problem at hand with the Seller ecosystem. In Q2 2020, Seller revenue decreased to $723 million from $870 million a year ago. In the meantime, Shopify’s revenue almost doubled in Q2 2020, compared to a year ago while offering essentially the same solutions and going after the same market as Square. Another competitor that had an impressive growth in the same quarter is Amazon. Their 3rd party segment’s revenue grew by 52% YoY. As I expect us to continue struggling with the pandemic in the months to come, what I have seen so far shows that Square may have a tough time competing to facilitate eCommerce with the likes of Amazon or Shopify. Other players include eBay, Google, Etsy, BigCommerce or Facebook.

It’s valuable indeed to help businesses manage their operations, but it’s not enough. The biggest worry of businesses is to generate revenue. As the pandemic fast-tracks eCommerce, revenue usually means website traffic. Amazon is the king of eCommerce in the US. Shopify partnered with Walmart, Facebook and Pinterest to bring traffic to their vendors. Meanwhile, I am not aware that Square has a similar capability to bring traffic to their customers. That’s a huge missing piece in their puzzle.

Another challenge that Square has to face for its Seller ecosystem is fulfillment. Walmart, Shopify and Amazon all have their fulfillment network. Even though Square already partnered with UPS, it’s not the same as owning that capability themselves, especially when the fulfillment demand scales up.

Cash App is also having to deal with a growing and fierce competition. Apple is pushing very hard to market Apple Pay, Apple Cash and Apple Card, whose basic utility is the same as that of Cash App and Cash Card. There is also Paypal/Venmo, Facebook with their own payment system and neobanks such as Point App. Although Cash App is in a pretty good shape, there is still a lot of work to do to stay competitive and fend off rivals. Having the ability to invest and trade Bitcoin is nice, but 1/ I don’t believe both features offer a high margin and 2/ they aren’t likely to keep consumers exclusive on Cash App. One can easily use Robinhood for trading and Apple services for other purposes.

Compared to their rival Shopify, Square has an advantage of having their feet in the consumer world as well. If they can manage to connect the consumer and seller side by offering consumer trend insights in real time to their sellers, that will be a great selling point to sellers. For Cash App customers, they need to find a way to keep customers active and use their services more. Recently, a new feature was added to let users access short-term loans of less than $200. However, the feature is a horizontal expansion and not everyone will be happy with a high interest loan. Cash App needs to get customers locked in by giving them more utility than the likes of Apple, Paypal and a host of other competitors.

In sum, Square is spinning a lot of disks at the same time. One can argue that catering to both the Seller and Cash App ecosystems spreads thin Square’s focus and resources, but to fend off fierce rivals on both sides, that is likely what Square has to do. As a fan of eCommerce and fintech, I am very interested in seeing what awaits Square in the future.

Disclaimer: I own Shopify and Amazon stocks in my personal portfolio.

Weekly readings – 7th August 2020

What I wrote last week

Uber’s latest quarter

Apple’s acquisition of this promising fintech startup from Canada

Business

Inside Netflix’s Quest to Become a Global TV Giant

US citizens increasingly moved to Canada through its Express Entry program

Content creators on YouTube that no longer rely on advertising dollars on the platform grew 40% between Jan and May 2020

Why Microsoft wants Tiktok

A sensible piece on Amazon, its private label and the antitrust issue that it has to deal with

Eugene Wei’s latest essay is on TikTok and it’s good

ARK’s latest white paper on SaaS

How Tim Cook has molded Apple into his own version, not Steve Jobs’

Technology

Apple secured a new patent that could equip Apple Watch with odor sensor technology

What’s the Big Deal About Revit? Understanding the Role of Autodesk Revit in Architecture, Engineering, and Construction

Other stuff that I think is interesting

Inside look at CloudKitchens

Bill Gates’ conversation on Covid-19

Weekly readings – 1st August 2020

What I wrote

This sleeping software company has a lot of growth. Learn how the maker of of AutoCAD has a bright future ahead

I gave reasons why I am pessimistic about America’s outlook till the end of the year

Read my thoughts on the antitrust hearing this week

Take a look at this hybrid product of a credit and debit card

My notes on Amazon Q2 FY 2020. A very impressive performance

Business

Paypal’s study on how consumers used their rewards during the pandemic

A good thread on the CEO and Founder of Amazon

American SMBs had an average of $160,000 in sales by selling on Amazon, up year-over-year from about $100,000.

Technology

The Next Generation of Fintech Infrastructure: How API Platforms are Disrupting Banking & Payments

What I find interesting

A story on how Iceland managed to persuade teenagers to stay away from drinking & drugs

The percentage of 15- and 16-year-olds who had been drunk in the previous month plummeted from 42 percent in 1998 to 5 percent in 2016. The percentage who have ever used cannabis is down from 17 percent to 7 percent. Those smoking cigarettes every day fell from 23 percent to just 3 percent.

Source: The Atlantic

This country regrew its lost forest. Can the world learn from it?

The 2nd stimulus package, if passed, is going to be an important event in our fight against Covid-19 and its implications. Both parties offered their own version of the package. The New York Times broke it down visually so that everybody can follow

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An excellent commercial ads by Nike. This is very very well-done

Amazon – A giant with momentum and growth

On Thursday, Amazon released their Q2 FY 2020 results and it was nothing short of impressive. Below are my notes:

Even during the pandemic, Amazon net sales were $89 billion in Q2, up 40% YoY. In fact, if you look at their net sales in Q2 in the last 5 years, it’s an astounding 31% CAGR.

Figure 1 – Data Source: Amazon. Chart by me

North America still led the way among their three main segments with more than $55 billion in net sales. AWS is now an annualized $43 billion business and responsible for 13% of Amazon’s total net sales. In the last 5 years, CAGR for North America, International and AWS is 33%, 23% and 39%! If you look at a deeper level, online stores were still responsible for the bulk of Amazon’s net sales while 3rd party and AWS were the next two largest segments. Advertising accounted for 5% of Amazon’s net sales. Their shares have stayed largely the same for the past 3 years,

Figure 2- Data Source: Amazon. Chart by me
Figure 3- Data Source: Amazon. Chart by me

AWS continued to account for more than half of Amazon’s operating income. Historically, Amazon lost money on their International front, but in this quarter, the segment recorded $345 million in Operating Income. Total operating income was up to more than $5.8 billion, almost up by 90% YoY. Once again, this was during a pandemic.

Figure 4 – Data Source: Amazon. Chart by me

Shipping costs grew to more than $13.6 billion in Q2 FY 2020, from $4.56 billion in Q2 FY 2017. In the last four years, shipping costs rose at a faster pace (44% CAGR) than the combined net sales of online stores and 3rd party (28%). As share of cost of sales, shipping costs accounted for 26% of total cost of sales (AWS’ cost of sales weren’t recorded here), up from 19.5% in Q2 FY 2017. According to Amazon’s 10Q, here is how they define Cost of Sales

Cost of sales primarily consists of the purchase price of consumer products, inbound and outbound shipping costs, including costs related to sortation and delivery centers and where we are the transportation service provider, and digital media content costs where we record revenue gross, including video and music.

Source: Amazon’s Q2 FY 2020 10Q

There are two ways to look at Amazon’s shipping costs in my opinion. First of all, the increase in Q2 FY 2020 is likely due to Covid-19. The rising trend can also come from Amazon’s effort and investment in last-mile delivery which is the most expensive delivery type. Amazon is now the fourth largest delivery service as of May 2020. If other retailers want to compete in terms of delivery, this level of commitment and investment will likely await them. In fact, Figure shows the level of capital expenditure by Amazon over the years. Just. Look. At. The. Growth!

Figure 5- Data Source: Amazon. Chart by me

Figure 6 – Source: Koyfin

In business, cash is king and Amazon is a phenomenal cash-generating machine. As of Q2 FY 2020, their operating cash flow trailing twelve months (TTM) stood at $51+ billion, up 42% YoY. Free Cash Flow TTM was almost $32 billion.

Figure 7- Data Source: Amazon. Chart by me

Additionally, AWS’ momentum is reflected in the remaining performance obligation in the last three years. Performance obligations from contracts whose original terms exceed one year stood at $41 billion as of June 2020, up from $16 billion two years ago. It’s indicative of the revenue in pipeline for AWS.

Figure 8- Data Source: Amazon. Chart by me

Lastly, I think this is the first time Amazon broke out their expenses for digital content, including video and music.

The total capitalized costs of video, which is primarily released content, and music as of December 31, 2019 and June 30, 2020 were $5.8 billion and $6.1 billion. Total video and music expense was $1.8 billion and $2.8 billion in Q2 2019 and Q2 2020, and $3.5 billion and $5.2 billion for the six months ended June 30, 2019 and 2020.

Source: Amazon’s Q2 FY 2020 10Q

In summary, I am in awe of Amazon as a well-oiled company. Even at its size, the company seems to have a lot of good things going in their direction and real competitive advantages. The retail and cloud markets are big enough for Amazon to grow more in the future.

Disclaimer: I own Amazon stocks in my personal portfolio.

Weekly readings – 25th July 2020

What I wrote

Slack filed an antitrust complaint against Microsoft over Teams to the EU. On the surface, I don’t think Slack is going to win the case, if the EU decides to formally launch an investigation. How Microsoft structures their Microsoft 365 offers does give customers a choice to include Teams or not, a counterpunch to the core of Slack’s complaint. I wrote my thoughts here

I also wrote about matcha, how it can beneficial to our health and why it and its accessories are expensive

Business

In investing, when truly exceptional opportunities present themselves, Charlie Munger said: use a shovel, not a teaspoon

Both strategies yield the same result: that foreign affiliate employment increased as a direct response to increasingly stringent restrictions on H-1B visas. This effect is driven on the extensive and intensive margins; firms were more likely to open foreign affiliates in new countries in response, and employment increased at existing foreign affiliates. The effect is strongest among R&D-intensive firms in industries where services could more easily be offshored. The effect was somewhat geographically concentrated: foreign affiliate employment increased both in countries like India and China with large quantities of high-skilled human capital and in countries like Canada with more relaxed high-skilled immigration policies and closer geographic proximity. These empirical results also are supported by interviews with US multinational firms and an immigration lawyer

Source: NPER

How Ben & Jerry’s Perfected the Delicate Recipe for Corporate Activism

A look at how influential Facebook is in Bangladesh

Apple’s report on their sustainability progress

Where banks really make money on IPOs

An investigative piece by WSJ that looks into accusations that Amazon used confidential information accessed through its investment arm to launch competing products.

Shopify Saved Main Street. Next Stop: Taking On Amazon

An interesting piece on what appears to be a change in strategy for Apple TV+. This streaming space is highly competitive. I look forward to how Apple will compete with other heavyweights. On a side note, I really enjoyed Greyhound. You should give it a try

Technology

Giving GPT-3 a Turing Test

A good blog post on the behind-the-scenes technology that changed air travel

A report commissioned by Apple on commission rates of other marketplaces, compared to Apple Store. It’s an interesting study and it’s definitely good to have all the facts in one document. On the surface, Apple Store’s commission rates don’t look outrageous, compared to those of other marketplace platforms. However, the debate doesn’t end only at take rates

What I think is interesting

The Last Hunter Gatherers

A great write-up on beaches in Quy Nhon and Phu Yen in Vietnam. If you visit my country, I highly recommend that you go there. Wonderful beaches, few tourists, and great sea food

For years, African countries have taken loan money for China to improve their infrastructure and economy, in exchange for the use of these countries’ vast reserve of rare metal and resources. Now, a report said that Africa is more aware of the strings attached to loans from China. For a good reason!

Walmart and Shopify

A few days ago, Walmart and Shopify announced a strategic partnership that would allow Shopify merchants to list products on Walmart website and still manage their stores through the Canadian company’s system. Below is what Walmart said in their press release

The U.S. eCommerce business grew 74% in total last quarter, and growth in marketplace outpaced the overall business even as first-party sales were strong. As we launch this integration with Shopify, we are focused on U.S.-based small and medium businesses whose assortment complements ours and have a track record of exceeding customers’ expectations.

We’re excited to be able offer customers an expanded assortment while also giving small businesses access to the surging traffic on Walmart.com. Shopify powers a dynamic portfolio of third-party sellers who are interested in growing their business through new, trusted channels. This integration will allow approved Shopify sellers to seamlessly list their items on Walmart.com, which gives Walmart customers access to a broader assortment.

Growing our Marketplace is a strategic priority, and we are going to be smart as we grow. We will start integrating new sellers now and expect to add 1,200 Shopify sellers this year. Shopify has a long history of helping small businesses leverage scale, and we’re proud to be part of the solution that is helping customers and other retailers.

Source: Walmart

What does Shopify do? Why may it benefit from Walmart?

While Walmart is a household name in the US, Shopify is much less known as its business is typically behind-the-scenes. Shopify offers solutions that help individuals and businesses launch their online presence. Shopify services range from apps that build an actual online store, payments, marketing, fulfillment, shipping and order management. Essentially, Shopify can give you all back-end services you need to start an online business tomorrow. Shopify customers pay a monthly subscription to have access to its offerings and extra fees whenever the customers want to use additional services.

Although the company didn’t make money from its operations as of 2019 yet, its revenue doubled compared to 2018.

Source: Shopify

Investors seem to have confidence in the outlook of the company, especially when e-Commerce gained traction amid the Covid-19 crisis. For the past year, Shopify stock has grown by almost 185% from $300 to $869 as of this writing. Despite Shopify’s growth, it is still a long way to go to unseat Amazon as the king of eCommerce in the US. According to eMarketer, Shopify had only 5.9% market share compared to Amazon’s 37%.

Source: Shopify

Shopify’s business model puts it in a direct collision course with Amazon’s own 3rd party marketplace. Individuals and small businesses can list their products on both Amazon and Shopify. Although it’s unclear which option is more financially beneficial to merchants, one thing is clear: Amazon has a lot more traffic to its site. Amazon reported that its US site has 150 million unique visitors alone. What small business can hope to compete with that kind of website traffic? Merchants, when thinking about which marketplace they should be on, definitely have to take into account the traffic that Amazon brings.

If merchants sign up with Amazon’s 3rd party marketplace, that’s business lost for Shopify. Hence, recent partnerships, with Facebook, Pinterest and Walmart, are aimed to help merchants reach a bigger potential client base without merchants having to stretch operationally further. As a business owner, you don’t want to run your store on three different systems, do you? The executive from Shopify even said as much.

“Few companies in the world match the sheer size and scale of Walmart,” said Satish Kanwar, Shopify’s vice president of product. The deal opens the door for small and medium-sized businesses “to access the 120 million customers who visit Walmart.com every month.”

Source: Financial Post

To new businesses, sudden exposure to 120 million customers a month is absolutely a huge draw. For comparison, Amazon reported that its US website attracted 150 million visitors a month. This partnership, along with others such as those with Facebook and Pinterest, catapults Shopify into a respectable contender in empowering merchants.

Plus, it may not have to worry about losing potential customers to Walmart’s own marketplace. It was reported that Walmart’s marketplace tool wasn’t popular among merchants on the market. Hence, Shopify can pitch to potential customers the prospect of reaching millions of customers while using its well-built tools. I think this move is more about appealing to new merchants and keeping the current customers from jumping ship to Amazon than poaching merchants from Amazon. I doubt that merchants which are well established on Amazon’s platform will be interested in disruption to their business and leaving the most popular marketplace for anything else.

Additionally, I suspect this partnership is focused on the US market alone. Walmart is as American a brand as it can get, and US is its strongest market. Meanwhile, 68% of Shopify’s revenue came from the US market. Stretching resources further to compete with Amazon overseas doesn’t really make sense.

Source: Shopify

What may Walmart gain from this partnership?

In addition to its stores, Walmart also has a marketplace.

When it first launched in 2009, it had fewer than 1 million SKUs available online. Today, the retailer’s total e-commerce presence represents more than 75 million. In 2019, Walmart added 10,000 new sellers to its marketplace, bringing the total last November to over 32,000

Source: Modern Retail

Despite the progress, Walmart is still clearly behind Amazon in the eCommerce space as the Arkansas-based company only had 4.7% market share, compared to Amazon’s 37%. Industry long-time watchers said that Walmart’s marketplace tools weren’t as good as Amazon’s and that merchants didn’t buy in the appeal of Walmart (Source: Modern Retail). Plus, I suspect that Amazon carries a lot more SKUs and merchants, making it a better choice for shoppers than Walmart.

To compete with Amazon, Walmart needs to scale its assortment fast, efficiently and overcome its own inferior internal system.

By leveraging the highly received tools from Shopify, Walmart will allow merchants to be on Walmart’s website without having to use its own internal tools, effectively eliminating any friction that can scare sellers away. On Walmart’s side, it won’t have to spend resources on acquiring thousands of new merchants. Moreover, more merchants and products will make Walmart’s website more appealing and enable it to woo shoppers from Amazon.

In short, with this partnership, Walmart can bring more merchants onboard efficiently in a short amount of time while Shopify can bring its merchants to a potential bigger customer base and hopefully attract more future business. While there is still a long way to go to unseat Amazon, I think this collaboration has a great deal of potential and I am excited to see how it will unfold in the future.

What do you think? Leave a comment to share your thoughts.

Weekly readings – 13th June 2020

America’s Safety Net Is Failing Its Workers. A chilling read on some of the major social issues in the US.

How Lindsey Graham Lost His Way

Dutch Cooperation Made an ‘Intelligent Lockdown’ a Success

American Racism: We’ve Got So Very Far to Go

Amazon’s New Competitive Advantage: Putting Its Own Products First

Forced Social Isolation Causes Neural Craving Similar to Hunger

DuckDuckGo, the privacy-centric browser, is an alternative to Google, which gets rich off of your data

Apple’s success in China

Disney’s Jungle Cruise – High-emission vacations lead to trouble in a rainforest far, far away.

26 ways to launch a clean energy future out of the pandemic recovery

Why You Can’t Help But Act Your Age

A Rainforest, Maya Ruins and the Fight Over a Tourist Train

How London Transport Is Preparing for Life After Lockdown

Visa saw 13 million cardholders in Latin make their first e-commerce transaction in the second quarter