Amazon Reorganizes, Emphasizing Third-Party Services

E-commerce giant Amazon.com (Nasdaq: AMZN) has reorganized its business operations into five departments -- with an increased emphasis toward third-party services -- the company confirmed Thursday.

"We obviously want to make changes to the organization that make sense for the business," Amazon spokesperson Patty Smith told the E-Commerce Times.

Amazon's investor relations department sent out an e-mail late Wednesday announcing that effective immediately, the company would remake itself into the following segments: 1) retail and marketing, 2) application software, 3) services, sales and business development, 4) architecture and platform software, and 5) operations and customer service.

Also significant is that Amazon is removing any distinction between U.S. and international sales . All categories fall under a worldwide umbrella.

Diego Piacentini, who ran Amazon's international business, now becomes head of worldwide retail and marketing .

Acknowledging Reality

"There are two reasons for this org change: to structure ourselves as a truly worldwide company, and second, to put the proper resources behind our third-party services business," Amazon director of investor relations Tim Halladay wrote in the e-mail .

Morningstar.com analyst David Kathman told the E-Commerce Times that the reorganization reflects that the service part of Amazon's business is becoming more crucial.

"I don't think [the reorganization] necessarily makes them a different company," Kathman said. "It's just an acknowledgement of what they've been becoming already. They said they try to reorganize once a year because things change in their business, which makes sense."

Margins for Error

While Amazon has seen growth slow down in its core category of books, music and video, other non-retail sectors have proven to be increasingly profitable for a company that is determined to prove to skeptics that it will soon operate in the black.

"[Services] is not nearly as capital intensive, and the gross margins are much higher in their service business," Kathman said.

"Fulfillment costs are a huge part of their expenses," Kathman added, "that eats up most of their gross margin, which is the difference between what they pay for stuff and what they sell it for. With services, they don't have that -- they're providing a service, not a physical object."

Help Me, Help You

In other words, Amazon is finding that it is just as beneficial, if not more so, to help others sell products online than to try to sell them itself.

Amazon spokesperson Smith noted that Amazon is "a retailer first, last and always, but we also have other aspects of our platform that are attractive to our partners (such as used items and other third-party sales), and that helps to broaden selection for our customers."

Said Kathman: "Retail operations are still the bulk of [Amazon's] revenue. They don't expect service operations to become huge and dominant, but it's profitable and it has been for a while, so it's a nice little thing. I think if they're going to become profitable overall, that's going to be a significant factor pushing them over the top.

"Even if they become profitable, they won't be this Wal-Mart of the Internet," Kathman added. "It looks like they'll be basically a niche retailer, but services could become a bigger thing for them."

Optimism Grows

Coincidentally, in stock trading Wednesday before the reorganization e-mail was sent out, Amazon rose 30.2 percent to $9.49 -- mainly on encouraging reports from America Online and the U.S. Department of Commerce concerning the progress of online shopping.

While the news did not single out Amazon, it reflected well on the company's prospects for the holiday shopping season.

Though he has hesitated to raise his valuation of Amazon stock above $6.50, Kathman said that the reorganization provides more reason for long-term optimism about Amazon than the retail numbers.

In trading Thursday, Amazon slipped 4.6 percent to $9.05.

E-Commerce Watches

The departmental shift by Amazon could also have a significant impact on e-commerce overall, as the industry bellwether leverages its online audience and expertise for others to use.

"Amazon isn't all of e-commerce, but it could reflect a trend," Kathman said. "I think I could see it becoming a case where you have maybe a few major players like Amazon that help a lot of other companies. They're like a center of a hub."