Amazon Profit Driven By MarketPlace Sellers?

Everybody knows the old business school joke about selling at a loss and making it up on volume. A casual analysis of Amazon’s balance sheet and press releases suggests that they sell many things at a loss and make it up with MarketPlace revenue. Another way to look at it would be to say that Amazon runs a highly successful MarketPlace for third party sellers with a struggling retail store attached. I’ll run through the rough numbers, and you can make up your own mind. Feel free to call me an idiot if you think my estimate of MarketPlace impact is too high, I tried to be very conservative. Just do me the favor to point out the flaws. Estimates are necessary because Amazon doesn’t break these numbers out in their financial reporting for competitive reasons. They don’t give any data about Kindle sales or eBook purchases in their reports. In fact, it’s not even clear to me whether Kindle device sales are counted as “Media” or “Electronics and other Merchandise”.

Amazon reported in their 2009 Annual Statement that 30% of their unit sales came from MarketPlace vendors. MarketPlace vendors vary from large retailers taking advantage of Amazon’s storefront to sell their items, to college kids reselling textbooks and grandparents reselling gifts from their progeny. The only difference between the large sellers and the small sellers, in terms of revenues earned by Amazon, is that small sellers pay $0.99 per listing before other fees, while serious sellers pay $39.99 a month to list as many items as they desire. Both pay closing fees on certain items (it’s $1.35 for books) and a percentage of the selling price to Amazon, varying from a low of 6% on PCs and 8% on electronics and cameras, to 15% on books and 20% on Jewlery.

Now let’s estimate how many items they sell. Amazon used to report the total number of items shipped during the holiday season in a press release each year, but they stopped after 2005. That year, the Delight-O-Meter reported over 108 million items ordered from Amazon worldwide from November 1st through Christmas. I’m leaving October out of the estimate for the time being, we’ll stick it back in a couple inches down. Amazon’s 2009 sales were more than double 2005 sales (2.8X), so could lead us to estimate that Amazon’s 2009 holiday sales were 302 million items ordered. This extrapolation is a weak point in the analysis as the averaging selling price in 2009 might be appreciably higher than 2005, especially given growth in Electronics. So instead of 2.8X, I simply doubled the 108 million items to 216 million for the 209 holiday season. From Amazon’s 10K, we know that 4th quarter 2009 sales accounted for 39% of the year’s sales (it was 35% back in 2005). If we assume that holiday items sell at the same average price as year round items, it yields a first order approximation of over 338 million items shipped during the first three quarters of the 2009.

If we now estimate that October was an average month, we can include another 38 million unit orders (338 million / nine months). This should make 216 + 338 + 38 = 592 million a first order approximation of the number of orders Amazon took in 2009. For a second iteration, we now add the 38 million estimate for October to the 216 million holiday season estimate for 254 million units ordered in the 4th quarter, and recalculate the first nine months as 397 million units. That puts the total year (minus the week after Christmas) at 651 million units worldwide. I’m not going to try for a third iteration or we’ll be here all day.

Since Amazon sold about $24.5 billion in total merchandise in 2009, that would put the average item a little under $38 dollars. I expect that MarketPlace orders would average much less, unless there are lots of people buying computers and diamond rings through third party vendors, but it’s important to keep in mind that both Amazon and Marketplace sell some big ticket items, like Kindles and big screen TVs. This leaves us with the estimate that Amazon processed orders for 651 million units in 2009, with MarketPlace vendors share at 30% amounting to 195 million units. This calculation assumes that the average MarketPlace item sold for the same amount as the average new-from-Amazon item, which I suspect is extraordinarily conservative.

So, the remaining question is how much does Amazon net from the average marketplace unit sale? For a book sold by granny, we know that the minimum is $0.99 + $1.35 = $2.34, and that assumes that granny sells the book for a penny. Serious sellers save the $0.99 listing fee, but at least one professional seller I spoke to won’t bother listing books for less than $10, which means Amazon makes a minimum of $1.50 (15% of $10) plus $1.35 = $2.85 on each of his sales. And I suspect these book examples are very conservative for Amazon marketplace, where I’ve paid around $100 (around $10 net to Amazon) for a replacement laptop battery, amongst other transactions. So let’s round down the average of the two book examples and say the average unit sold through MarketPlace nets Amazon $2.50 even.

We’re left with 195 million units at $2.50 profit each, for $487 million dollars profit. Yes, I know that it costs Amazon something to run the MarketPlace, but we’ve been so conservative at every turn that I’m going to ignore that as part of the noise and consider some other numbers. Amazon’s reported net income for 2009 was $902 million. That profit remains after they lost $849 million dollars on shipping. Under what I think is a very conservative estimate, more than half of Amazon’s net profit came from MarketPlace vendors. Another bit of conservatism was interpeting Amazon's holiday season as Nov 1st to December 25th (and not bothering with the week after Christmas), when in other places, they imply that the holiday season is Thanksgiving to Christmas.

Now let’s go back and look at a few of the variables. $38 dollars for the average unit selling price does seem awfully high, no matter what the Delight-O-Meter extrapolation suggests. If you had been asked to guess the average selling price of an item on Amazon, I wouldn’t be surprised if you’d chosen $20, which would almost double the number of units sold, and almost double the MarketPlace earnings so they accounted for all of Amazon’s profit. But let’s leave the average selling price alone and consider the average Amazon net per MarketPlace item. At $5.00 net per marketplace transaction, all of Amazon’s reported profit would come from MarketPlace. It true that some advanced MarketPlace vendors have been moving to “Fulfillment By Amazon” and saving a little on fees, but it really only makes sense for higher average ticket items, and my understanding is that it hasn’t really caught on yet. And if the average MarketPlace transaction was really $38, a number we stuck with to hold down the total number of items sold, it would almost certainly put Amazon’s net per MarketPlace transaction over $5.00. And don't forget our assumption that average item prices had risen. If the average selling price in 2009 was the same as 2005, what with all the inexpensive eBooks on Kindle, falling electronics prices, etc, the total items sold would have been a couple hundred million higher.

All of this suggests one conclusion. That it’s very difficult for any other bookstores selling new books, online or off, to compete with Amazon without losing their shirts. Amazon’s secret may be that they’re losing their shirt as well, but making it up in MarketPlace.


Kevin S. said...

Is Amazon's long term strategy to completely remake the book/publishing (and other forms of retailing) industry into a business model that provides it with a monopoly?

Is there a positive way to work their strategy to the advantage of a self-publishing author?

Morris Rosenthal said...


The short answer may be "yes" but I think the long answer is much more complicated. At some point, stockholders will no longer be happy with growth prospects and marketshare because these will level off. Amazon wants to be in businesses where they can actually make money. MarketPlace is obviously one, Kindle could certainly be another, assuming they sell the eBooks as a profit rather than a loss and have a good deal for the cellphone network access. The other retail activities may be profitable one day, they may not be, a lot depends on what the competition (if there's any left) offers. I think Amazon is in for a tough lesson about competing in an area (eBooks) where the entry barrier is much lower than establishing a multi-billion dollar network of warehouses, huge retail platform, and all the IT skills involved. It's entirely possible that I earn more from eBooks than Amazon, and I'm just selling PDFs!


Anonymous said...

It's a lesson I learnt in kindergarten - the child who gathers all the toys to himself rapidly discovers he has no friends. The other children rapidly discover new ways of entertaining each other and refuse to allow the toy burdened child back in. Permanent exclusion from the digital future is Amazon's fate if it does not allow the small people to have their little part.

Morris Rosenthal said...


Glad I wasn't in your Kindergarten class:-)


Mira said...


I’ve been reading your blog for a few years (previously your Amazon Rank Economy blog), mostly for insight on Amazon issues and how small publishers use Amazon. I thought I’d chime in here. Your theory is intriguing. It would be interesting to know the extent to which Amazon relies on third party sales, but it’s difficult to get a handle on the numbers.

One thing I noticed in your analysis is that it doesn’t take exchange rates into account, and Amazon relies heavily on exchange rates to make their financial situation look better than it is. They benefit from a low dollar, since nearly half of their sales come from European and Asian web sites and are then converted into dollars for the 10Ks and 10Qs (though the money is not converted into dollars in reality). There is a 17% difference in the dollar-euro exchange rate between 2005 and 2009. Of course, Amazon is also collecting money in yen and yuan. But we can’t tell how much is coming from Europe vs Asia from Amazon’s SEC filings. So my habit is to just use the dollar-euro rate to convert all international sales and operating costs, so it’s inexact.

So I would subtract 17% from international net sales and costs for forth quarter 2009. Amazon would be converting the money quarter-by-quarter, so they would be using different exchange rates for the first, second, and third quarters 2009. You can find the dollar-euro rate for the year and for the past five years here:^USDEUR

Also, there is the inflation rate to consider. CPI numbers are not to be trusted, so, unless you know someone who is tracking a basket of goods similar to Amazon’s major product categories, calculating inflation seems to be a crap shoot. But personal experience tells me that there has been some inflation in media products and electronics in the past 5 years.

As you point out, the average selling price of Amazon products may have changed since 2005 due to the explosion in electronics sales. On the other hand, all of the ebook sales since the Kindle’s debut may have reduced the average selling price.

(mirasreviews on Amazon)

Morris Rosenthal said...


I have to laugh, I forgot about that old blog:-)

It's absolutely true that Amazon often makes money on exhange rates, I didn't look to see where they came out this year. And it's also absolutely true that CPI is a bad joke, wrote a little about that myself several years ago:

But it doesn't affect the math on Marketplace. In the end, it's the absoulte amount of profit coming from Marketplace that's interesting, my applying it to Amazon's overall business is just one way of looking at it. I mean, if Amazon was somehow netting $100 selling laptops and sold ten million of them without anybody noticing, that could account for all of the reported profic as well. I don't have any insight as to the profit or loss of any particular items they sell, they don't break any of that out in their SEC filings. In theory, they could be making $5 billion dollars in net margin selling once bunch of stuff and losing $4 billion dollars selling another bunch. Or they could be making billions on web services, though I've seen analysts claim those are run at a loss.

So my goal is just to estimate the Marketplace share, and if the Markeplace share amounts to their net profit or more, to say, "Marketplace makes all the profit." I think for many publishers, that comes as a shock, but for book retailers who do nothing but sell books and can't compete with Amazon on price, it's probably, "Duh, we've known that for years."


Anonymous said...

If your theory is true, then why is Amazon chasing marketplace sellers to try to get them to sign up for their "fulfillment by amazon" program? This would basically turn the goldmine of marketplace into a retail situation not unlike all the other products they ship directly, lending doubt to the theory that they are all that excited about leaving marketplace alone, let alone growing it.

I would like to cut and paste the letter I got from them begging me to join the fulfillment program (complete with perks like getting a shot to be the only seller who gets to have an "add to cart" button on a given book's page for a used copy), but I can't dig up the letter since I read it on vacation on my dad's laptop and my inbox doesn't seem to have it.

Regarding the "add to cart button" - the letter said that Amazon plans to allow buyers to bypass the marketplace COMPLETELY and simply add used books to their cart same as new books, right from the book detail page, and that the ONLY marketplace sellers who can even apply to be a part of the new button, are those who use their fulfillment services.

Not only would that mean that Amazon is getting excited about handling my used books rather than just collecting a commission on them, but they are also steering people away from the entire listing of marketplace sellers by enticing buyers to simply add a used copy to the shopping cart before they even see the marketplace listings.


Morris Rosenthal said...


Ah, there's the insanity that make the Amazon business model work, at least as far as stock valuation is concerned. Why should they lose over $800 million a year on shipping? Nobody came along and told them to do it, they came up with it on their own because they wanted market share. Maybe they feel that by getting the bigger MarketPlace sellers to use Fulfillment By, they will increase their share of the third party bookseller world, where they have plenty of competition online, for the time being.

The small sellers won't go to Fulfillment By, it would just be to complicated for them, and I don't have a clue how MarketPlace for books breas down between large and small sellers.

Your description of how they say Markeplace will work is absolutely correct, I've been seeing it for months. You need to spend more time looking at random titles on Amazon, though it's likely happened with one of your own by now. My memory is awful, but I think they charge a flat $4.00 for shipping if the customer doesn't spend over $25.

So aside from the idea that they can grow their sales (at the expense of other online selling platforms) if enough Marketplace sellers adopt Fulfillment By, there's this thing called "the future" which is at the heart of the Kindle controversy. What may be a great deal today might look like less of a great deal five years from now if Amazon raises their fees and they've become the whole game for third party sellers.


Morris Rosenthal said...


Disregard the flat $4.00 bit, don't know what I was thinking. Just took me fifteen minutes to find a book in the fulfillment program to check:-)


Mira said...

You have to take exchange rates and inflation into account if you’re trying to extrapolate unit sales from Amazon’s net sales numbers, because those things don’t represent actual sales. The part of Amazon’s international net sales that is attributable to exchange rates is just accounting slight-of-hand. It doesn’t represent sales or even real money. Similarly, increase in net sales due to inflation since 2005 does not represent an increase in sales.

When I took exchange rates and inflation into account, I did not get a very different number from yours in the end. Using the difference in the euro between 2005 and 2009 and a 5% inflation rate, I got that overall net sales in 2009 were 1.8x (as opposed to 2.8x) what they were in 2005. But I didn’t subtract 28% (as you did) to compensate for a higher percentage of sales being big ticket electronics, because Amazon also started selling a lot of Kindle books and 99-cent MP3 downloads during that period, which may offset the electronics.

I got 530 million unit sales in 2009, 159 million of which would be Marketplace. Using your estimate of $2.50 average profit from Marketplace sales, it would mean that Marketplace constitutes 44% of Amazon’s 2009 declared profit.

But then it occurred to me that this doesn’t work. There is another big source of revenue that we’re not considering: advertising. Most bookstores would not be in the black without their co-op advertising, and Amazon is no exception. They sell more advertising space than anyone. Not just co-op advertising but also billboard advertising all over their web site. It’s likely that all of Amazon’s profit (and then some) comes from sales of advertising. This also explains why our average unit sale estimates are unrealistically high (mine was $46, yours $38).

I agree that Amazon’s Web Services and other technology businesses couldn’t be making money, so I don’t think there is any need to consider them. But the revenue from advertising makes it impossible to use Amazon’s net sales or net income to calculate retail sales. It would be nice if Amazon had left the Delight-O-Meter up, so people could compare unit sales year-over-year. But I’m sure that’s precisely why the Delight-O-Meter was short-lived.


P.S. – I’ve seen those shopping cart buttons for Marketplace sellers also, but I still have to look at Marketplace to find the item in the condition I want for the price I’m willing to pay. So the buttons on the main product page seem pretty useless to me.

You were right about the $4. Marketplace charges $3.99 shipping for books. If the seller is using Amazon Fulfillment, the customer gets free shipping if he spends at least $25. They’re trying to beat out ebay,, and alibris with that deal. As it is, ebay and half charge less shipping for paperbacks, so they offer customers a better price with the same seller selling the same item.

Morris Rosenthal said...


I haven't done the exercise to check your numbers, but I think it's a good example of the limits of extrapolation this way. The media vs electronics mix was traditionally very different overseas than in the North America (tilted more strongly to books) so if you want to account for FX diffences, you'd have to pump it back up for media being a higher proportion of item sales - at least that's my memory. Can't say I agree with the introduction of an inflation rate, I have no idea whether Amazon's product mix is cheaper or more expensive over the last 5 years, and if you used the CPI, it would probably be around 2.5%.

I don't understand the introduction of advertising to the discussion. Yes, Amazon may have earned $2 billion on co-op advertising and then subsidized Kindle sales by $2 billion. The net sales is the only number we have to work with. Either we live with rough calculations based on the result or give up. The most important rough factor in all of this isn't the net sales of Amazon, the exchange rates or inflation, it's Amazon's profit margin on a Marketplace sale. The $2.50 guess could be off by multiples.

I always buy enough from Amazon to get the free shipping so I don't know what they charge for a single book these days, probably depnds on weight. I don't think the Fulfillment charge for shipping is tied to Marketplace - two different programs.


Uri said...

I haven't checked Amazon's latest numbers, but I did recall and pulled up a post that I wrote a while back to the pod_publishers group which is relevant to the topic:

[begin quote]
Amazon released quarterly sales figures:

A quick look at the numbers reveals a very interesting fact. For the
quarter, Amazon earned $118 million. Of that, a full $59 million is
profit from shipping programs alone (Amazon Prime memberships, etc)

So a full 50% of Amazon's profit didn't even come from sales of "real"
products like books, etc.

[end quote]

Morris Rosenthal said...


That's strange, you're the second guy in a week to tell me that Amazon makes money shipping. They don't. They lost around $850 million on shipping last year, it's one of the few numbers they actually break out in their annual report.

I don't know what the CNN guys were smoking (the link didn't work for me) but I can assure you that Amazon loses money on shipping every year, the numbers just get higher and higher. And even if everybody bought a Kindle, that wuld only fix the shipping problem for books.


Morris Rosenthal said...


I looked up the 10-Q filing for the quarter the CNN article must have been talking about, 3rd quarter 2008 which was filed with the SEC on 10/22/2008, the day of the CNN story you refer to.

They lost $132 millon on shippingthat quarter, you can check yourself below:

They further say, "To the extent our customers accept and use our free shipping offers at an increasing rate, including memberships in Amazon Prime, our net cost of shipping will increase", ie, increasing Prime adoption is costing them increasing losses on shipping.


Uri said...

I also tried the cnn link with no results and even after searching around can't find the original page. The 10-Q numbers don't seem to support the cnn story I quoted just as you said.
Have a great day,