Impact of Amazon Flexible Payments Service: Computing as a utility

The announcement of Amazon FPS made my whole week, on a lot of different levels. I'm excited about the service itself, I'm excited about what it means for the development of web applications, and I'm excited about what it'll eventually do for the mobile data world.

Okay, I'm just excited.

About FPS. Before I talk about what it means, I should give a quick overview of what it is. FPS is a web service, meaning it's a set of online APIs that the creator of a website or web application can use to perform tasks. What FPS does for you is billing -- you can use it to accept payments for something you sell online. Basically, you transmit the customer's info to Amazon, and they take care of the credit check, credit card processing, billing, and so on. They send you the money, less a percentage cut that they take.

That's not at all revolutionary. PayPal and Google Checkout offer the same thing already. Amazon's cut is about the same as PayPal -- about 2% to 3% of your revenue, depending on the amount of business you do, plus 30 cents per transaction. Google is a tad cheaper, plus you get AdSense credits for using it.

(For more information on FPS, there are good articles here and here).

What impressed me about FPS is its flexibility. Amazon says you can set different payment terms for every customer, set up subscriptions and multiple payment schedules, manage a store in which you pass payments from a customer to your suppliers, set up either pre- or post-payment systems, and most importantly you can manage micropayments down to a couple of pennies per transactions (link).

The competing systems either don't offer this at all, or do it badly. I think FPS is a really important change to the competitive situation in payment services. And, because the payment services are all available to any website, that means it's an important change to the whole web platform.

New forms of online business. So far, e-commerce online has been limited mostly to selling things that we could already get through regular stores -- books, clothing, software, etc. One of the main culprits for this was payments. The current credit card system, with its strong discouragement of small transactions, makes it very hard to sell anything priced below a few dollars online. I think the most interesting use of online commerce will be the creation of markets for things that we can't buy through stores today. Most of those things are intellectual property of various sorts, and the natural market for them is a buck or less a copy. So the payment system is a big barrier.

I won't recap my whole argument for minipayments; I wrote about it recently, and you can read it here. Minipayments have already changed the world in music, where Apple's proprietary minipayment system in iTunes has revived the market for music singles, something that was virtually dead in stores. Another example: iStockPhoto has created a market for low-cost stock photography. By creating an easy system of practical minipayments, Amazon FPS will help to enable the creation of lots of iTunes and iStockPhoto equivalents for other products and forms of intellectual property. Think short stories, art, games, and probably a lot of other things we haven't even thought of yet.

I know FPS isn't perfect -- for example, small payments have to be aggregated and then billed in a single larger transaction. But it advances the state of the art dramatically, and more importantly it challenges Google and PayPal to improve their own minipayment handling. That competitive dynamic should eventually result in a truly great minipayment mechanism online, no matter who makes it.

Amazon vs. Google: A contrast in strategies. I think Amazon's approach to web services makes Google look bad. Both companies are taking on PayPal, but Google's approach so far has been pure blunt force -- duplicate PayPal's features, underprice them a bit, and tie it to another Google product (you get AdSense credits for using Google Checkout). Let's see...you compete by duplicating someone else's features, underpricing, and tying back to your dominant product. Does that remind you of a certain company in Redmond?

In contrast, Amazon has been trying to find holes in the infrastructure that nobody has filled yet. Its storage and compute services provided very important infrastructure that helped accelerate the growth of Web 2.0 companies. Although its payment system is not as unique, the emphasis on minipayments is, and I think it too will play an important part in the online ecosystem.

Bottom line: Google is often copying, Amazon innovating. I'd say that I'm disappointed in Google, but actually given their size they would crush everyone else if they were also innovative. So maybe we should be grateful.

What will Amazon do next? Their pattern is clear -- they're picking out things that they know how to do well (because of their retail operation) and turning them into services for other developers. A logical next step would be if they offered developers the infrastructure needed to set up an online store -- order tracking, support request tracking, inventory, displaying merchandise, etc. That would work with their other services, and would put them in a position to start draining business from eBay.

I'd also love to see them offer some sort of unified product and content discovery system. One of the things missing from the online ecosystem is an easy way to find goods and services that are for sale online, and comparison shop between them. You can use search for it, but it's not very well organized, and comparisons are difficult. eBay kind of does that, but you have to be registered as one of their sellers, and eBay does the billing. I'd love to see a looser directory than eBay that doesn't take the payments directly, but just points you to things you can buy.

That's what I thought Google Base would evolve into, but Google hasn't made the move yet, so there's still time for Amazon to seize that territory.

What it means for mobile. You can probably guess what I'm going to say here. The operators consistently charge up to about 50% of revenue for any songs, games, or other content sold through their networks. The mobile software stores like Motricity and Handango charge about the same. Amazon, Google, and PayPal each take about 2-3% of revenue, and that cost is likely to decline due to competition. As the wireless Internet takes hold, how many users will be willing to pay 50% extra just for the pleasure of having a game appear on their Sprint or Verizon bill rather than their Amazon bill?

If an operator bit the bullet now and priced competitively, they might be able to hold onto about 10% of revenue in exchange for the greater convenience of running content purchases through the mobile bill. But a 50% cut is like waving a red flag in front of a bull. There's no way Amazon and friends will be able to resist the temptation to target the mobile web. The question is not if, it's when.

The name of the game is infrastructure. In an open, decentralized computing environment like the Web, the best way for a software company to succeed is to create a control point -- to offer a piece of critical infrastructure that others need, and build a franchise around it.

Google understood that concept with search + advertising, and did well with maps, but has been remarkably inept at creating other strong points. I think that's because, to be blunt, engineering PhDs don't necessarily make the best business strategists. Google, if you want to go to the next level, ya got to hire business people who are as smart as your technical people. And you have to give them some authority.

Microsoft seems to get it, but is still trying to retrofit its applications into services rather than really thinking through what's needed in an online ecosystem. Apple seems to understand, but so far hasn't been interested in opening up its services to others (it could easily have turned iTunes into a content discovery and billing service, long before either Google or Amazon hit the market). Some other big Internet companies, like Yahoo, don't seem to really understand yet that this is the competitive battleground of their future.

Amazon is the one major web company that seems to both understand the situation, and be able to consistently come up with good new services. They already have two strong points (computing services and storage), and payments looks to be the third. If some of the other players don't wake up soon, Amazon's going to end up in an extremely powerful position online.

12 comments:

Peter J. Cranstone said...

Great post, well thought analysis. Amazon is going to do well with this. What Amazon Mobile needs is a default Menu option on the browser that takes you straight to Amazon Checkout. I'll work up a demo and post it on my blog.

Anonymous said...

I think the question that needs to be asked is how long before these "chinese" walls fall. Companies in the mobile space are taking large margins because there is still relatively little competition and because sending content wirelessly and dealing with mobile content is difficult and expensive. Those companies charge a premium because they can...and it's still early adopters in the market. Like Europe where the operators have learned to open up their networks and encourage off-deck billing (subsequently taking a smaller share of the revenue), the US publishers/aggregators/and carriers may well take suit..the question is when?

Moose6912 said...

Nice article on Amazon Flexible Payments. I was actually expecting Google to come out with something like that instead of Amazon. Guess I was wrong on that. With the micropayment option, mobile game services companies such as mine will have another avenue of payment instead of relying on the content providers who still think that 50% is reasonable.

Erkko said...

Great post! I am just continously amazed how Amazon is able to fill the small gaps in the market with their service offerings. FPS, non-DRM MP3's, their video solution and the list just goes on. After they bring out these services, the value is just so clear and simple.

Also, playing on both the infrastructure game and the direct sales gives Amazon an inherit advantage over a lot of their competition because of their great market understanding, which they seem to be leveraging well. Understand what business are doing and what consumers are doing, brilliant!

Michael Mace said...

Cool comments, folks. Thanks!


Anonymous wrote:

>>I think the question that needs to be asked is how long before these "chinese" walls fall.

Agreed. I wish I knew when. I think we're probably waiting for one of the operators to bolt, and then the rest will follow.


>>Those companies charge a premium because they can...and it's still early adopters in the market.

I think it'll continue to be just early adopters until we get the business model fixed.


Moose wrote:

>>I was actually expecting Google to come out with something like that instead of Amazon.

Me too.


Erkko wrote:

>>Playing on both the infrastructure game and the direct sales gives Amazon an inherit advantage over a lot of their competition because of their great market understanding

I agree. The interesting thing to me is that there are a lot of other big e-commerce companies, but you don't see them doing something like this. I've got to give Amazon a lot of credit for being able to think of itself as more than just a retailer. That is incredibly hard to do, because there's always something important that you should be doing to fix your core business rather than playing with other business ideas.

Tamas said...

Interestingly the ebook community did not pick up this news - despite the new business models it will enable such as pay-per-chapter or even pay-per-page.

This reminds me of what you wrote about the How? vs What?

Even techies sometimes just don't get it :)

Anonymous said...

Reading this article I am wondering how long it will be before the mobile operators are willing to allow transactions to be billed to a customers account in place of a credit card or bank debit. What I mean is that the operators would get a merchant fee cut just like the banks that issue credit cards but not be affiliated with the service.

In particular I am thinking about outside the US where many people are not near as confortable with credit cards and cash still dominates small transactions. What I am really wondering is if it would be practical for debits to eventually come from prepaid phone accounts. In particular if the commisions paid for the sale of refill cards would exceed merchant fees and therefore not allow this.

In europe and Asia the customer base for such mobile delilvered services that could be established quick and easy without any negotiation with the operators could be huge. The consumers in that part of the world tend not to like subsciptions and would prefer to pay as they use. They also do not want to either register or give a credit card number or any personal information to sign up for web services. An example of this aditude is that europeans in particular prefer prepaid phone services that work out of the box and do not require them to register with their name and address before usage. Exposure to a whole untapped market could be acheived if these payment systems were extended to allow debits from these accounts.

giff gfroerer said...

FPS certainly will have a say in the mobile payments world. However, the ease of having a micro charged to your phone bill versus having to set up an Amazon or Google account and/or then have to enter credit card information over your mobile is still a HUGE plus. The customer is ready to buy and we are going to send him off somewhere else to register or to start typing in credit card information? We will lose a good deal of these. Customers want something to be easy, quick and for it to work. Micros with the carriers billing the end user do this.

Obviously the supplier would prefer Amazon. But we have to think of the end user/customer here.

Sure, I think what the carriers do is monopolistic and will cost them down the road. But right now they have the big stick and all we can do, for now, is nod our heads and say "please sir, may I have another!"

Anonymous said...

In the future these payment systems would be wise to negoiate with the mobile providers to offer direct billing(to customers phone bills) as a payment option versus credit cards. The key is for the providers of the services not to have to work together with the mobile operators. The payments route should be handled through FPS or other service. The mobile operator would essentially become another credit card company as far as the transactions are concerned.

Another way to look at it is as the mobile data version of a 900 number. When you call a 900 number your phone company get a portion of the revenue too provide the connection and billing. But they are not a partner in the service. You can set up a 900 number and your service are open to anyone with telephone.

Just Expressing Myself said...

A big step in the right direction.
It reminds me of how Pay Pal changed the being able to take credit cards online.
I'll be bookmarking and passing this post along.
Frances

Rob said...

another great post. One quibble; You say 'As the wireless Internet takes hold, how many users will be willing to pay 50% extra just for the pleasure of having a game appear on their Sprint or Verizon bill rather than their Amazon bill?'

It isn't the user who makes the choice. The content provider gives 50% of their revenue to the operator in return for getting prime position on the user's device.

At the moment, the operator really can give more prominence to content than it would get by simply being 'somewhere on the web' - so the 50% is still probably a great deal for the content provider.

Michael Mace said...

More great comments. Thanks.


Anonymous wrote:

>>What I am really wondering is if it would be practical for debits to eventually come from prepaid phone accounts.

I think that's a great way to go, and I agree with you that it might be a hit first outside the US, where credit cards are less popular. Japan's doing a lot of this already, and I think it's being worked in some other parts of Asia but I don't have all the details.


giff wrote:

>>the ease of having a micro charged to your phone bill versus having to set up an Amazon or Google account and/or then have to enter credit card information over your mobile is still a HUGE plus.

If the take from the operators isn't too high, you bet. If they keep it at 50% or anything like that, they create a huge incentive for others to bypass the operator somehow.

Also, think about this -- out of the people in the US who are likely to buy content or apps on their phones, how many already have accounts with Amazon? I have a feeling the overlap is pretty high. Supposedly, Amazon has about 50m unique shoppers per month. That's bigger than Verizon's customer base, and about the same as AT&T's. For those people, using FPS will be very easy as you won't have to sign up for anything new.

Things will be more challenging for Amazon outside the US, where its penetration is not as high.


Anonymous wrote:

>>Another way to look at it is as the mobile data version of a 900 number. When you call a 900 number your phone company get a portion of the revenue too provide the connection and billing. But they are not a partner in the service.

Good analogy. I think one of the operators' worries is that they will be expected to provide the support for anything they bill for. That's a customer education issue, but it's a real one -- users tend to call the operator for support whenever anything happens to their phones.


Rob wrote:

>>It isn't the user who makes the choice. The content provider gives 50% of their revenue to the operator in return for getting prime position on the user's device.

Tell me more. What I've heard consistently from app and content developers is that the operators try to take a huge cut no matter how buried you are on the phone. But yeah, I could see top screen placement as being more valuable -- it's the same as purchasing an ad for a popular search term on Google.