Amazon.com is launching a camera and photo development store.
Amazon’s major weakness is that it is trapped in a market (books and music) that looks likely to fall victim to strong pricing pressure. Although Amazon’s size allows it to negotiate better deals with suppliers, it will find its margins attacked by online competitors such as WH Smith in the UK. Price engines like DealTime.Com are successfully turning books and music into commodities and in the long term, there may be little profit to be made.
But the company’s key strength is its brand. If you’ve heard of the Internet, then you know who Amazon is. Most people trust the company. At Christmas, a high proportion of Internet shoppers will start at the Amazon site as they look for presents. This makes diversification an attractive strategy, since there is no reason to associate the brand with books and music alone.
The company’s partnership with Ofoto Inc to offer photographic equipment, accessories and processing allows it to avoid the major problem with diversification – the enormous logistical difficulties created. It would be extremely expensive for Amazon to set up its own warehouses and deal with suppliers itself, and the company would risk everything going horribly wrong. Instead, the company must sign up its partners to handle all fulfillment issues to the same standard as it does for its books, as it has done with Ofoto. Partners would deliver the product with Amazon branding, and feed back the same data as Amazon’s warehouses so that Amazon can maintain Customer Relationship Management software. The partner would also manage supplier relationships and product catalogs, as this would be expensive for Amazon to learn.
Amazon has invested heavily in its brand and now has many paying customers. Diversification offers the opportunity to leverage this in more lucrative B2C markets. If Amazon continues to structure partnership deals that allow it to stay away from fulfillment issues and supplier relationships, product diversification represents a tremendous opportunity and is perhaps the company’s only route to long-term survival.
