Amazon’s Most Under-hyped Business

Amazon recently cracked the trillion-dollar market cap milestone, so it’s natural to ask what will sustain the company’s growth moving forward. Much of the focus continues to be on cloud (~$40B revenue run rate), traditional e-commerce (~$200+B), subscriptions (~$30B), and a variety of ads and hardware projects. Hardly mentioned in any of the Amazon commentary you’ll read is its B2B marketplace, Amazon Business. (You wouldn’t be blamed for missing it: Amazon didn’t even mention Amazon Business in their year-end earnings call last year, and the mainstream business press has largely ignored it save for a few articles when it first launched). And yet it seems likely that 10 years from now Amazon Business will be the company’s crown jewel. Let’s consider a few reasons why:

• “Double marketplace” dynamics: As with the company’s traditional e-commerce function, Amazon Business also provides a marketplace for third-party sellers and buyers to transact. But for buyers Amazon Business isn’t just a marketplace for physical business goods. It’s also a suite of business service offerings associated with these goods (e.g. guided buying, installation, etc.). This means that if you work in the purchasing division of a company you no longer need to rely on middlemen brokers or supply chain service companies. Not only that, but you can make the purchasing process “complete” (i.e. “I need someone to install the printers and mount the TV monitors I just ordered for the office”). But what’s even more interesting to consider is that if Amazon is able to capture the market for the services associated with these physical goods, it becomes a path to owning all business services, not just those that associated with physical parts. In other words, in a world in which you go to Amazon to find your ideal business parts providers, it’s only natural you might also use the marketplace to find other business service providers: outside legal counsel, advertising firms, specialized consultants, accountants, etc. This makes Amazon Business a marketplace for potentially all goods and services associated with running a company. At that point, Amazon is the singular provider of business infrastructure.
• A market size that puts retail to shame: B2B e-commerce is the largest market of any that Amazon plays in. At ~$6 trillion in the US alone, it’s 2x the size of B2C e-commerce (and this doesn’t even account for the B2B services mentioned above). While Amazon Business is doing only around $10 billion in sales at the moment, it’s growing much faster than AWS or retail (~120% yoy vs. ~40–50% for cloud and e-commerce). Importantly, Amazon Business Prime has been a key feature of the marketplace from the beginning, whereas it took several years to be rolled out on the consumer side. (For buyers, Business Prime includes not only free delivery, but also spend visibility and 5% back or 90-day payment terms to help with working capital requirements). Given its appeal, then, it’s not unreasonable to expect that both the marketplace and its Business Prime offering will spread much faster than Amazon’s traditional, consumer Prime offering. (In only 3 years, Amazon Business is now available in 8 countries and Amazon Business Prime has expanded to Canada and Spain). The faster it grows, the larger its lead and the greater the size of the B2B pie it captures.
• A PR-friendly counter to the “big bad Amazon” narrative: It might seem trivial, but if you accept the argument that regulatory and political pressure is one of Amazon’s greatest threats, then Amazon Business is one of the best PR tools the company has. Put simply, it’s a way to combat the image that they’re squeezing small businesses. Not only can Amazon say that Amazon Business is helping smaller businesses to streamline purchasing, it’s giving a whole set of third-party, small manufacturers and suppliers an opportunity to increase distribution. (One data point that makes me think Amazon is going to continue to focus on these small businesses as a core customer base: one of the features it highlights in Business Prime is the Amazon Tax Exemption Program — ATEP — which allows small businesses to apply their tax-exempt status to eligible purchases from Amazon and all of its affiliates. That isn’t a selling point for large enterprises, and yet it’s a huge perk for small businesses using Business Prime).

There are some limitations to the Amazon Business marketplace, of course. For one thing, while the supplier base is built out, the profile for purchasers is somewhat limited. For instance, the majority of the purchasers that Amazon highlights in their Business Prime program fall into one of the following three categories: schools/school districts, senior centers/hospitals, and vacation resorts. If they do have large enterprise clients or OEM’s they’re not advertising them openly. But if you believe that the future of business services is contingent on supplier-driven dynamics, this is a short term problem. Why? Well, as more suppliers move onto the marketplace, Amazon will have more power with buyers who want to be able to compare the most number of SKU’s and lowest available prices. (If you poke around, it’s really remarkable how diverse the brands and suppliers are on Amazon Business, and how easy it is to navigate them if you already know what parts you are looking for and just want to compare prices). Another potential shortcoming is that Amazon does not facilitate any technical consulting, initial design scoping or post-purchase installation for more technical parts. In other words, while Amazon does say “we can source and mount this TV monitor for you”, it does not currently come in and say “here are the specific parts you need for your massive windmill” or “we can help you install these parts in your massive windmill.” Amazon Business may eventually branch into these more specialized goods, but for now their absence is unlikely to slow marketplace adoption. Lastly, there is the question of how long Amazon empowers third-party business sellers on the marketplace before trying to own all B2B distribution itself.

Amazon Business has largely been ignored up to now. After all, school districts buying desks isn’t as sexy as producing movies at Amazon Studios. But as the company focuses on the next decade, expect it to be the central pillar of its growth strategy moving forward.

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**One ethical disclosure note: I’m an Amazon shareholder but have no relationship with the company**

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