EP106 - Amazon's Q3 Results Hot Take

EP106 - Amazon's Q3 Results Hot Take

This episode is a hot take of the Amazon Q3 Results as well as a few misc pieces of news

Apple opened it's new midwest flagship "town square" store in Chicago Amazon opened a new "Pickup and Return" retail concept in Chicago For those interested in todays update who want more, we have deep dive episodes on three topics: EP024 – Amazon Deep Dive EP089 – Amazon Acquires Whole Foods Hot Take EP093 - Prime Day Hot Take Breakdown of Q3 Results Core commerce/marketplace Forecast going forward International Prime membership Whole Foods Ad revenue Amazon Alexa/Echo Headcount AWS Amazon received licenses to distribute pharmaceutical equipment in 12 states, which could be a precursor to Amazon entering the pharmacy business.  The news immediately drove down stock prices of traditional pharmacy companies. In coincidental news, CVS announced a bid to acquire Aetna for $66B.

Don't forget to like our facebook page, and if you enjoyed this episode please write us a review on itunes.

Episode 106 of the Jason & Scot show was recorded on Sunday, October 29th 2017.

http://jasonandscot.com

Join your hosts Jason "Retailgeek" Goldberg, SVP Commerce & Content at Razorfish, and Scot Wingo, Founder and Executive Chairman of Channel Advisor as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.

New beta feature - Google Automated Transcription of the show:

Transcript

Jason: 
[0:25] Welcome to the Jason and Scott show this is episode 106 being recorded on Sunday October 29th 2017 I'm your host Jason retailgeek Goldberg and as usual I'm here with your co-host Scott Wingo.

Scot: 
[0:40] Jason and welcome back Jason Scott show listeners wow what an interesting week it was in the world of retail and e-commerce.
It really showed this tale two cities that we've been talking about Jason you had JCPenney pronounce a miss and their stock took a 15% haircut.
And put pressure on all the other department store stocks.
Not news you want to have heading into the critical fourth-quarter then over in this that's the analog side of the story so does that say.
One of our cities in another cities which I called digital City it had we had Google Microsoft and Amazon and it's really weird but this.
This quarter they lined up their announcements all on Thursday,
and each one of them really handle a blue away expectations so Friday Amazon Spike $228 and its about $1,000 stock before then and now its about 8.
$1,200 stock that's a 13% jump in one day which is the most of that group of folks that that announce Google.
In Microsoft and Amazon.
You know what happens is there was an acceleration in the third quarter of both growth and margins that stunned many Amazon Watchers.
But for our listeners it probably wasn't a surprise because we have really been seeing some bold moves from Amazon especially since Prime day at this quarter.
So in fact Amazon usually Falls within this guidance that they accept the quarter before and they really blew that away by about 5% this time in this episode we are going to do a quick take in.

[2:13] Dig into the reasons why.

[2:29] So today we're going to spend the bulk of the show digging into Amazon's 3rd quarter cuz I think it's really important for everyone in the industry to understand the Dynamics that are setting up in both the online and offline world as we head into the fourth quarter.
Jason how are you doing.

Jason: 
[2:45] I am doing it was exciting week with all these announcements going on and I'm a little sleep-deprived cuz I had to get up at 3 a.m. in New York to get my iPhone orders in.

Scot: 
[2:57] I did the same thing how did it. I know about half the people I know they did the that within the set of people that did 3 a.m. only about a half got an order off were you able to get an order in.

Jason: 
[3:08] I did I would give it a I was 142 so I I was intending to order a phone for myself and my wife and I should mention.
In my wife's case it's kind of part of her birthday package so it was somewhat more critical and my wife and I are both in there.
Annual upgrade program which like frankly the main reason we're in that program is because you're supposed to get priority.
For that the new phones so we have both pre-qualified for the next phone earlier in the week so we did like half the the ordering process.

[3:44] How you do a week in advance got up at 3,
was not able to order my wife's because it turns out you have to do it through the store and the app did not like me changing Apple IDs on my phone to her Apple ID to place her order so,
kind of suckly I had to use my Apple ID and place my order which went super smooth and I have my phone coming out on Friday.

[4:12] And then I had to call my wife who is sound asleep and wake her up and talk her through placing the order on her phone and she was also successful but she got like 2 to 3 weeks to every window so now I'm I'm dreading the fact that.

[4:27] My phone's going to come on Friday and her birthday phone is like going to come a week or two after that.

Scot: 
[4:33] Yeah it's interesting I was able to get I had to order for so I've got all of my phones have been waiting for the 10 so,
I got to off on Verizon pretty quickly and then to on Apple I'll be interesting they all say Friday so we'll see who can live up to those expectations,
it's funny I'm not in that program and those two people I know that are in that Apple program had a trouble with or treating her so excited before he let me put it in my car and it's already I just have to press a button.

Jason: 
[5:03] Yeah to their credit I will say in past bones it actually has worked out in our vanity but I I would 10 degrees right now it did not feel like it was expedited deal this time around.

Scot: 
[5:14] It seems like usually using the store work better cuz they would bring up the API is that the stories is fast and then the website was second with the seems like this time they switch those for some reason another weird observation there.

Jason: 
[5:27] Yes I tend to be hitting Refresh on both just too Archie had two iOS devices when logged in with my wife when I logged in as me and then and then the web browser and it we ended up using the store app in both cases.

Scot: 
[5:42] Yeah I need the cloud guy. The iCloud is so yeah it's tricky weak weaker sit daily.

[5:48] Speaking of Apple before we jump in the Amazon you did I saw on the twitterverse you did a really cool visit to the the new flagship store there in Chicago.

Jason: 
[5:58] Yeah just just last week they open their their new store in Chicago they've always had a big store on Michigan Avenue and so they move the store few blocks and opened.
The new the new Apple Store concept was it called the Town Square concept so they're there been a few of these I want to say.
The first one might have been in Memphis there definitely is one in San Francisco and all the new stores that are open or are based on this.
This this New Concept but this is the first one in the Midwest and it supposed to be there Midwest Flagship and that it is it is very impressive store the differences between the traditional Apple store in East Town Square stores,
I'm going to call it subtle.
You know this is largely the reimagining of the Apple Store under Angela Earnhardt who used to be the CEO of Burberry.
She came over to Apple.
And this is why Julie her concept and so the big thing is hey we're not just a retail store where at ounce where where where like the center space where people come to meet there's some controversy about them trying to own that.
That positioning a lot of City centers don't don't particularly agree that apple is the center of their towns.
Dave made the stores more organic so the genius bars go away and they literally have trees green trees in the store and it's called the Genius grow and so you know.
You used to hang out under the trees and meet your Genius who then takes you to a to a table to to help resolve your issue in the wet.

[7:36] You and I might have called shelves they not called The Avenues and have upgraded the displays for some of the the Apple products.
So I can the old days they wouldn't have a very elegant display for headphones and how to have these like beautiful white.
Wooden mannequin heads in the headphones are on mannequins they have wood grain modeled.

[8:00] IPhones that the cases are mounted to so you can see them the actual cases mounted on the on the shape of the phone you know stuff like that.
The the biggest new thing they've done those they have a big seating area in every store this kind of meant for just ad hoc meeting.
It has some interesting like saw sitting there like bean bags that are under stools.
And they have a a giant beautiful large format display and it's actually 6K resolution so super high resolution.
And they have community events and stuff there so so in this.
This new Apple Store what they did is they moved it from the middle of Michigan Avenue to sort of the the end of the shopping strip in Michigan Avenue right on the the river in Chicago.
And so they now the whole front of the store is a glass window facing the river at super beautiful they had concerts going all all weekend for the grand opening.
I'm in there you know doing graphics on the big screen and they had a band in front of the screen.
And tell Buzz there's actual wait to get in the store most of the weekend as people are coming to check it out and.

[9:10] When humorous but potentially sad unintended consequence.
Is these giant glass windows right on the river apparently were confusing the birds and so they started finding.

[9:22] Dead or injured birds that had tried to fly into the Apple Store and so now they're apparently.

[9:27] Making some adjustments to the lighting to try to help the birds figure out that they shouldn't try to fly into the store.

Scot: 
[9:34] Ouch that it was Town Square but not for the birds I guess.

Jason: 
[9:39] Exactly yeah so so.
You know you will get all this stuff and it's the merchandising is a little better again they they do spend a fortune on some premium materials there's like actual Limestone and there's.
There's a marble that comes from a single query in Italy and the amazing glass architecture that they do for all these stores.

[10:07] Interesting that's all part of the the brand experience which is a super important part of why Apple has the stores.
I have not seen any announcements about how the this model store compared to the previous model store and they actually.
Make any substantial changes in the financial metrics of the store.
It's not obvious that there's like dramatically higher converting experiences like it's a very incremental upgrade in in most cases and.
Specific to the Chicago store the Michigan Avenue store was never convenient right it's a huge tourist destination it's a huge shopping street but if you.
You know it's a really difficult or to drive to and certainly there's no parking there and now they moved it to a place where do I go there literally is almost no Road access so it's a very pedestrian access door.
If your interest in your walking Michigan Avenue it's easy to get to but like.
If you are a resident that would be the store you would most avoid because it's the logistics are super complicated and normally in retail.
You would you would you know desperately try to avoid those.
Does transportation Logistics problems but I think Annapolis case that that store is just really designed for the out-of-town visitors that are on Michigan Avenue and it is a it is a cool historic site that used to be at.
A young Courthouse vet but more importantly it was it was the site of the first settlers in Chicago so the first kind of cabin that got set up for it by a permanent resident of Chicago.

[11:38] Is now this this big guy Apple Town Square store.

Scot: 
[11:42] Can I get a smartphone.

Jason: 
[11:44] Exactly push me over the edge I ordered a bunch of iPhone tens although I Kyle met in my head I keep saying iPhone x.

Scot: 
[11:53] I have a problem that to you have this Xbox to do that and think over the years.
And then this is a nice Segway into our Amazon coverage you we were talking about this podcast to go where you were,
doing something on Amazon and it kept hitting you in saying don't you want to come to this pickup store you explored that further and tell us what you discovered.

Jason: 
[12:16] Yeah so I've been at this a literally happened while recording a show that I was you were explaining something and I was falling along on the Amazon website and I put something in my cart and it offered me this new.
Pick up an Amazon location option that I had never seen before.

[12:33] And that's because Amazon had his just opens to Dedicated pick up locations in Chicago and so.
Tired of these locations they had something very similar on a lot of college campuses they had these college pickup locations.
And these these stores are very clearly a close cousin of those locations and effect.

[12:56] If you look at some of the URL patterns that's it seems like they're kind of the exact same URL pattern as the the campus pickup locations but.
You don't need a school ID on these and then they tend to not be on campus so one of them is just in a high-traffic area in Chicago that happens to be.

[13:13] A little less than a mile from me and the other is right outside of DePaul University so accessible to the public but presumably also useful to DePaul student.
And I sent you the value property or is this is a Amanda location.
So it has specific hours with a bunch of lockers in side the location and so you can place an order on Amazon and have anything delivered to the lockers as opposed to.
Your home and you can also take your returns to that location and so you might be saying hey Jason Amazon already has a lockers all over the place including this whole food stores.

[13:49] How is it different to open a new a new location with Lockers in side in the big answer is most of the Amazon lockers that are unattended.
Will only hold your package for 3 days so you have to pick it up within 3 days of delivery or they take it back that's obviously cuz they have a finite number of lockers and they don't want stuff just sitting in them for a month.
I'm so at this pickup location near your.
Items can stay in the locker for for a little more than two weeks for 15 days and the reason they do that is because the items aren't actually in the lockers the lockers.

[14:23] Don't have backs.
And behind all of the lockers is a Amazon little mini Amazon storage fulfillment center so all your order is it shipped there held in this fulfillment center and when you walk in the store and scan your barcode saying that you want to pick up your order.
A human picture order from that that little storage area and put it in one of these lockers so your products tend to live in that Locker for 2 minutes.
Before the front opens and went in the front opens you can actually see through the locker to all the the storage stuff.
So in that way they don't tie up on the lockers they can accommodate a lot more packages a lot more different size packages but it does require labor.
And said to me that's a a little bit of a trade-off the unattended lockers you generally have 24/7 access to them.
These Walker's you can only get two in the stores open the stores open like 9 and 9 during the week and noon to 9 on the weekends.
So I actually did try my first pick up at like 10 a.m. on a Saturday and couldn't get it but it is it is interesting that the pickup.

[15:27] Is a significant part of the e-commerce experience it's become a big Battleground and we've seen lots of other Innovations around pick up.
Amazon's also rolling out these lockers that they call Hub lockers which they're providing two buildings.

[15:44] To allow package deliveries in the buildings and you know the Hub lockers don't just take Amazon packages they also take us in UPS and FedEx so they're kind of a utility for the building machine Amazon Footlocker's in all their Whole Foods.
Some sort of interesting side note on that a lot of the whole foods are in malls and a lot of the other stores in malls have contracts with them all that.

[16:07] Only certain that certain kind of product can't be sold by other retailer so.

[16:11] There now ain't like Target is enforcing those small contracts to not allow Whole Foods to have lockers that would receive products that are restricted from other sellers in the in the mall so that's been kind of a.

[16:24] A funny little thing we're seeing fly fight out and then of course this last week we've seen Amazon launch Amazon key which is.
Amazon having access to a Smart Lock that they provide so that a delivery person can actually come into your home and drop off your package and you can monitor them over an Amazon Cloud cam which is kind of their version of Amazon Nest cam.
And interesting Lee Walmart had announced about a week before that they had a partnership with August smart locks and they were doing.
Doing service similar programs or seeing all these guys make a bunch of new plays in new pickup models too kind of you know accommodate all the edge cases for people that don't have coming in.

[17:04] At their home or office and at least pickup location certainly seem like one of those and then of course the pickup locations also provide.
Four very easy returns so when you have a return you can bring the product in an open box or a no box.
You you can log into terminal in the store see your history order history so you want to return something.
And just throw the box in the print you a code right in that that store you throw your return into a poly bag you put your label on top of the polybag.
Drop it in the slot and generally within 10 minutes they'll have received that return you'll get a credit right away instead of you know waiting.
To mail it back to a fulfillment center you don't have to do any shipping or packing or any of those sorts of things.
Until the return Logistics feels like another area where we're starting to see a big e-commerce Battle Ground and once again the course Walmart announce these this mobile Express returns.
Which is sort of a similar experience you don't need a box you don't need to wait in line to return anything at a Walmart store so this seems like the the the new areas for fighting or are pick up an anniversary Justice.

Scot: 
[18:17] About how big was the Amazon pickup store.

Jason: 
[18:20] It's not a huge door I'd say it's about 1500 square feet.
I haven't been to both in Chicago yet so I've only I've only been to the one and you know there's definitely some like a couple motivated employees in there that are like trying to spread the word and I brought home a bunch of.
Amazon swag that was custom labeled with the address of this this location.

Scot: 
[18:43] Do they sell Echoes or anything like that I was just just lockers and drop off.

Jason: 
[18:48] Yeah I know no said no product merchandising whatsoever they weren't selling anything that none of the terminals in the store could be used to like browse the inventory or purchase anything so it's purely a post-purchase experience either pick up or return.

Scot: 
[19:01] Russia.

Jason: 
[19:02] At least for now I would say they a service they were heavily promoting and they actually had,
sidewalk signs and all these things is in Chicago we have a somewhat of a unique offering that I think Amazon starting to roll out to more places but we have same day delivery that is not Amazon Prime now.

[19:20] I'm still at work close enough to a number of fulfillment centers that a lot of items in Chicago you can order by noon and have delivered by 9 p.m. and the sets actually delivered by a fleet of WW2 Amazon employee so it's not the w.
It's not the Amazon Flex delivery people it's not UPS it's guys that work for the Fulfillment center driving stuff up from Indiana fulfillment center did it to deliver it to customers in Chicago,
and so they're kind of leveraging that same day service with these lockers to say same day pick-up in the locker right so you can,
you know order something before noon so like the locker for delivery and then 3:00 picking up that same day I actually found that to be a little bit annoying would actually like 5 hours from the main fulfillment center that most most goods come from from.
From Amazon and said that,
you know most same-day deliveries do end up getting delivered right around 9 sometimes 10 and the store closes at 9 so in my case,
I ordered a I did a test order at like 10 a.m. promise for same-day delivery and I got a notification at 10:15 p.m. that I could pick it up same day if the locker but of course the locker have been closed for now.

Scot: 
[20:35] We found a bug.

Jason: 
[20:37] Yeah yeah yeah so I Growing Pains.

Scot: 
[20:42] I wonder if they're working on stopping that 24/7 there's kind of working up to work to it.

Jason: 
[20:47] You would think it would certainly like you can imagine them adjusting those hours as they see demand and there are newer fulfillment centers that have open closer to Chicago so I'm somewhat curious if,
there is a plan in Works to shift some of that same day delivery volume to the the light closer Wisconsin fulfillment centers.

Scot: 
[21:08] They must love you guys cuz they're trying so much the stuff there so I'm sure they'll figure it out.

Jason: 
[21:12] Yeah or there's some senior Logistics exact that has an apartment here or something.

Scot: 
[21:18] We are just such a big Prime user they're doing it all for you.

Jason: 
[21:21] They're just trying to get off early mentions on the Jason and Scott show that's why they did.

Scot: 
[21:25] Just just listens and priming the pump.

Jason: 
[21:30] Masters of PR.

Scot: 
[21:32] Cool. Thanks for those those reports from the field always interesting to see what's going on there in the big city is shy town.

Jason: 
[21:39] Yeah hey I know we have a lot to cover but I did mention the Amazon key would you ever trust Amazon to have access to your front door.

Scot: 
[21:46] Don't think so I like the ones that give you access to your card like that doesn't really bother me at all like people putting stuff in my trunk but you know access to the house is just a whole nother thing.

Jason: 
[21:58] Yeah. I think that's that's been an interesting conversation is you know you know the trust issue has come up a lot and in many metrics Amazon is one of the most trusted,
companies out there and yet that still feels a little scary to folks and it'll it'll be interesting I actually saw me because,
just wave as people are using it but I actually saw the less blowback when Walmart announced it than I did when I was on an esta.

Scot: 
[22:24] Yeah yeah I don't know if the Walmart thing was as widely distributed.

Jason: 
[22:30] Know that I mean.

Scot: 
[22:31] May have been part of it.

Jason: 
[22:32] But even that being the case you got to give Walmart some credit like you know,
I feel like it's a moral Victory these days when you're launching customer experiences ahead of Amazon I mean it like Amazon may have gotten much more buzzed but they did have to announce a week after Walmart.

Scot: 
[22:51] Glory is.
I think he's really good at reading these tea leaves and getting in front of them I do want to try the Walmart quick return experience because it felt like an oxymoron when I was reading it cuz I've never had a quick return I've never had a quick customer service anything at Walmart.
It's getting worse like I got on my Walmart and I swear they've cut the number of cash registers down by half there's this like 56 Bank of cash registers and there's two people working at I don't know if it's just when I go to Walmart or something but it's crazy.

Jason: 
[23:19] Interstate yeah I can speak to that I know I was Eliza Express Returns part of the solution you do have to get to a person in so they have an express lane.
In customer service dedicated just to the end in my experience that can be super helpful but that can also have.
Unintended consequences right to my analogy is if you think of them TSA Pre at the airport so when it first launched in only a few insiders had TSA Pre.
You can fly through pre and it was awesome now you got two most airports and us and it's not uncommon to see the pre line being much longer than the regular line because everybody.
Is in the know right and so you know it'll it'll be interesting of if that Walmart Express return is heavily leveraged.
Well Walmart scale the lanes to support that or will it eventually get gummed up.
I will tell you just simple things amuse me but when they launched the service they had a bunch of videos showing the experience,
and in all the videos like a different Shopper you know gets in this fast line skips all the people standing in the slow lane and get their service,
and I I watch those videos and I'm laughing cuz I'm like wait all those annoyed customers in the slow lane or Walmart customers to and it's almost like 100 making fun of their their customers and best of all they,
they hired different actors to be the stars of each of these videos but the,
annoyed customer in the slow lane is the same customer in all four videos so I'm thinking that's the most crude Walmart customer of all time.

Scot: 
[24:52] And you know what's going to happen is when people see people he's not lying they're going to get in it and argue and be like well why can't I be in the Express on I don't know if it's not clear who gets to you.

Jason: 
[25:04] I'm the guy standing in the back of the line at Starbucks that then pulls out his phone and does mobile order and pay cuz I realize it would be faster than thought you could you can imagine some of that in Walmart too.

Scot: 
[25:14] Yep you and I.
Cool well we definitely want to save a big chunk of the show for Amazon's third quarter results and there's so much to cover we can probably go for three hours so I thought the best way to carve this up would look at some of our favorite.
Platforms if you will. Amazon has yours five areas we want to cover,
Court Commerce which includes the marketplace is the big one there's some interesting Wholefoods updates would be the second one,
wilted bits around the ad platform we want to cover that which is number 3 in the number for would-be Alexa and conversational Commerce some really interesting topics there and then fits his little bit of a catch-all just been resting other.
Nuggets that we kind of got out of the release so to be able to cover this and not have to go.
Define everything over and over again we do point you to a couple of our other episodes if you want to if we say anything in this.
Part of the show that doesn't make any sense to you then I would recommend going back to episode 24 which was our Amazon Deep dive we recovered a lot of these these topics and then.

[26:18] Episode 89 we did a deep dive on the Whole Foods acquisition and what we thought was going on there. And then also Prime day when I talk a little bit about that today but you can get Fuller coverage by going to episode 93.
So that at the high-level Amazon's revenues came in at 43.7 billion that's be billion which is 34% year-over-year growth and that beat the top end of Wall Street estimates by 2%.
Jason way this works is companies come out and whenever they release a quarter they tell you what they think the next quarter is going to look like that's called guidance they usually give arranged historically I think like 9 out of 11 times in the last cut off,
of those quarters Amazon is coming within the range sent you to give a renter Q3,
and historically there's like almost a 90% chance they'll fall in there this time that they actually came in way above their own guidance so,
Wall Street loves it when this happens that's called a beat and then with the company then gives forward guidance for that next quarter if that exceeds what everyone's thinking that's called a beat in a Race So This is a classic,
beating raised you know it's kind of a You Know Not only was it a beaten raise but it would kind of trounce both numbers top-line and bottom-line forward current all that stuff.

[27:33] You and I talked about this a lot there's a common misperception that Amazon is not profitable operating income beat expectations at 347 million Amazon doesn't really focus on the operating income is a metric they look at free cash flow and in that,
performed very well during the quarter as well as we look at it as we drill into the core Commerce peace.
Commerce retail grew 28% year-over-year growth,
so just kind of a line folks e-commerce is reported by Consular that's my favorite metric at about 15 to 17% year-over-year growth so Amazon the retail part of Amazon is growing twice the rate of e-commerce which is pretty impressive.
What.
Books on Wall Street loved is in the second quarter a crew 23% see how this kind of 5% quarter-on-quarter acceleration so you know if we were charging this out there would be one. At 23%,
YouTube and another died at 28% for Q3 so a pretty material acceleration of the business from second quarter to the third quarter.

[28:36] So as you and I talk a lot that's the revenue for the core Commerce peace and that hides the underlying gmv so.
GMB is when he's confusing things let me give kind of a little background before I go into some specifics,
the the way it works is think about Amazon is to businesses you have the first party business which is a typical retail piano they get things from manufacturers mark them up.
That's cause what they pay the manufacturer and then sales is what they saw them to the consumer so $50 which is marked up $200 revenue is $100.
Easy peasy what complicates things is Amazon has this thing called The Marketplace or what we slang and Industry call the 3p and what happens there is I take that exact same widget at $100 and now because the accounting rules this is not.
I get a lot of people to think Amazon's doing something 2 Furious it's just the the Gap accounting rules would Amazon sells $100 widgets through a third party.
The they can only recognize their commission which is about 10% or an issue call this their take rate so that same widget that if it moves from one penis 3p now Amazon only gets $10 worth of Revenue.
Just has the unintended consequence of hiding a lot of the impact of Amazon.
It would call that transactional value of that third-party that hundred dollars not the $10 commission which is revenue we call that gross merchandise value in the world of marketplaces all of eBay.
Got revenue is derived from transactional gmv a portion of Amazon's comes from 1p which where are GM vehicles Revenue in a portion comes from the third-party marketplace where Revenue equals.

[30:18] 10% of gmv because that take red so with that being said the.
What's frustrates people on this is Amazon doesn't really sees numbers and historically all Amazon would tell you was the percentage of units that come from third-party last quarter for example that was 51% that went down to 50% this quarter because you had one p got all the Whole Foods,
first-party sales in there so it cut it for the first time you saw things kind of go from 3p to 1 P from a growth rate but it's cuz of that acquisition.

[30:51] So starting in 2012 at Channel advisor we came up with estimates on GMB because we wanted to help retailers really understand this and and at least put a number out there that we thought was an educated guess.
So we go to the calculus of figuring all that out.

[31:08] What were you would end up with for example last year our estimate was about 277 billion just kind of put a number out there for for a rough estimate.
Then at the end of 2016 Amazon change their financial disclosures and finally started to release.
Did something called 3-piece seller service revenues and.
The trick there though is that includes revenue from the marketplace but it also includes all third-party revenues from performing.
And didn't really tell you how to split that up so there's this really wide range of gases that come out of there so so Wall Street now kind of takes that number and backs into it,
and they come up with an estimate of 200 250 billion for that same time. So.
The my way of doing it ends up at 277 they end up at 200 to 250 so you see these varying numbers to make it even more complicated.
In that metric Amazon doesn't count books as one p they move them to 3p if the publisher counts it that way so it has this weird.
Dynamic of of I I would not count that one of the reasons were off is they put a lot of the books over in.
3p and I think they should be over one paper anyways for the purpose of the discussion what was just think of it as you.
Between 200 around 250 billion last year just kind of put a number out there that the agrees with both systems of doing this so.

[32:37] That being said when you when you look at this what's interesting is historically first party has grown about 20% and third party has grown twice that pace at 43% maybe think about that for a second,
to me that's the part that really competes with both retailers so so you have.
Amazon's overall is growing 34% if you take out AWS it's growing at.

[32:58] The Commerce peace is growing at about 30% but then when you look at the.
The marketplace is growing at 43% so so really kind of interesting and something that retailers need to be aware of.

[33:11] But what's happening is it's kind of an iceberg situation so what we see in Amazon's quarterly numbers is the tip of the iceberg which is their revenue you have to unpack that to get to the third party DMV.
Add it to the first party DMV to get the total gmv and I think that's what matters because when Amazon third-party sells $100 widget.
Walmart loses $100 didn't lose $10 on in the same is true for grocery and everything like that so so the total gmv is what really matters isn't how we should be sizing Amazon.
So if we if we now look at the third quarter by my calculations of that 43.7 billion in the quarter,
about 4.6 was from AWS so we take that out so it's clearly not in this bucket and that gives us there's some other Revenue but it's really relatively small and doesn't change the calculation so essentially 39 billion dollars on this from the retail part of the business.
Of that 33 and a half is the first party which Lee's 5.6 billion dollars front for the third party so.
So when you look at it that way third-party is actually a pretty small percent of revenues you about 20%.
But then you have to take the 5.6 billion from third-party and x 10.
Because of the the 10% thing so now you have 56 billion in GMD from third-party 33 billion ish from first-party you had those together and you effectively get 89 and a half billion in GMB for the third quarter so.
By my calculations Amazon is effectively add in 90 billion dollar quarterly run rate from DMV that represents about a 360 billion-dollar average.

[34:51] Annual run-rate.
The u.s. is the United States 60% of Amazon so if you just want to look at to you as soon as I'm out of that 360 billion it's about 55 billion for the us and that gives the u.s. business a 215 billion run.
So so just let me kind of put that in terms that.
That makes sense so last year if you look at the third quarter on you end up with about 13 and 1/2 billion in June be so effectively Amazon Grew From 13 billion.

[35:27] You make sure I get this right you should have JC Penney who I mentioned at the top of the show there at 12 and a half billion dollar retailer with with.
1100 stores so Amazon affectively grew your ear if you look at the DMV between Q3 last year and this year at JCPenney plus an extra billion dollars.
The entire JCPenney not just online sales.

[35:51] And then what's interesting at the Q3 2014 billion run rate it's going to be effectively a 50% growth so.

[36:01] Joe Young Thug what it means is that Amazon will have if you look at the u.s. revenue.
E-commerce which I want to look at a couple of the numbers like for sure they have 400 billion in the US at this kind of run rate Amazon will take him about half of the.
Total online sales when you want to unpack the DMV and it's good because we're starting to see emarketer had some date out that started include the TMV a lot of people have if not really.
Done this the right way I think in the now more than where you're starting to see people unpack that which is good.
So going forward on Amazon put out fourth-quarter guidance.
Between 56 and 60.5 billion again that really kind of was way above what Wall Street was asking for the fourth quarter this implies that the low range a 28% growth rate in the high range 38% growth range,
32 at the midpoint.
You take that midpoint and you seem something similar to three metrics you're effectively get to gmv of about 110 hundred twenty billion,
45 of that comes from first-party 75 from third-party so.
You look at that you're of your growth what happens in fourth quarter for Amazon as they just really search and,
start to just take mass of share in the fourth quarter and then it kind of sustains going in the next year so effectively if you look at Q4,
last year verses where they're projecting just a midpoint of next year it's effectively two and a half JCPenney is that the effect.

[37:33] Gobble up in market share so and that's just at the midpoint if they come into the top range it's like three or four JCPenney's so I know I went to a lot of math,
the punchline is Amazon is growing is about.
Now it's more than twice as big as people think it is because of this hidden DMV under the surface.

Jason: 
[37:53] And it's important like I can't overemphasize half the media that covers Amazon.
Still get this wrong right and they still just the use Amazon's reported revenue and talk about Amazon size and it's like just fundamentally wrong.

Scot: 
[38:11] Yeah I wish Amazon would just give it to him being number but the interesting thing haven't watched Amazon for 20 years now.
Is one of Jeff Bezos his favorite classes was game theory in Game Theory you never want.
Anyone really know what you're up to and until you absolutely have to tell them,
there's a lot of case studies over the history of Amazon where they don't disclose things and they always play kind of funny games with math where they'll say so so for example we don't know how many prime subscribers there are they don't disclose the DMV should go back and do things but they got rid of some of my favorite ones that used to break down,
the difference between media and electronics and General Merchandise so we had an idea for how those two categories are going as a switch some of these new metrics they got rid of those so,
it's always this game of of kind of,
why people think it's in the Furious but what Amazon's doing is in my experience when they when they think they have a strategic Advantage then they try not to tell people what's going on in that part of the business stuff because they want to protect,
The Secret of that strategic management and I'll definitely put this market place as one of the top ones that they.
3 purposely do not disclose what's going on here because they don't want people to know how big this is.

Jason: 
[39:24] Yep and is it you sort of implied it but it may be as worth also stating that well it's possible to be profitable or not profitable in one piece else it's almost impossible to not be profitable in 3-piece house.

Scot: 
[39:39] Yeah if you the best proxy is Alibaba and eBay which are pure kind of marketplaces and those companies have like,
85 to 90% gross margins and then like 30 40% kind of net margins so you know a very profitable business of posited that the marketplace has been kind of cash cow that's really fueled started in 2006 all the way for the last 12 years that's what's fueled all the build-out in,
Prime wellness centers all that because it's a hugely profitable kind of a line that the Amazon his pets humble down.

Jason: 
[40:14] Yep and your point because they don't have to break it out they don't show The Profit just from the marketplace and so you you get a lot of the this narrative where they they have to share the profits from from AWS in there they're fabulous and so you get a lot of people talking about well,
AWS is the,
the the profitable component that carries Amazon and in reality this this Marketplace is almost certainly a much bigger and more equivalently profitable.
Business that that just say they don't have to disclose his ass as overtly.

Scot: 
[40:48] Yeah one of the one of the folks that really gets this is Mark Lori so he don't know the whole reason I started yet was effectually to go after this cash cow and then obviously Walmart has bought into that night,
after imagine he spends a lot of time internally kind of helping educate folks there that this is going on because if you're a traditional retailer in my experience there are even more kind of.
Blind but have a harder time getting their head around it because there's no offline analogy you know you can't point to something and say We'll look over there that's how that works cuz it's such a weird anomaly of the online business Amazon.

Jason: 
[41:23] Yep yep me you mentioned Prime members anything else we should cover on the the marketplace before we jumped.

Scot: 
[41:33] Quicken International really accelerated so it grew.

[41:38] North America grew 35% International Group 29 International a couple points due to the impact of currency exchange of so everything I say takes that out,
but I think the last quarter grew 26% so nice kind of quarter-on-quarter 26 to 29 per cent in the management team,
I specifically called out International AWS and Prime / Prime day is as the the key reasons that they beat their expectations so I'll kick it over you do for some prime coverage.

Jason: 
[42:11] Yep and that you did trigger I guess it one last piece of editorial on the on the growth of the marketplace so if you add up that hole general merchandise value and I think you said that that you got that.
Empire growth is somewhere between 28 and 38% so we call it let's call it 32% growth the.

[42:33] The second largest e-commerce site which is way smaller than Amazon in the u.s. is Walmart they last cup of quarters have grown even.
Much faster than that on iMac or so much more bass in so you think about,
man Amazon which is arguably half of e-commerce are ready and they're growing at 32% and yet the industry average for growth is about 15% and so the reality is.
There has not been a heck of a lot of growth for the rest of the e-commerce industry outside of Amazon.

Scot: 
[43:05] Yeah yeah I think small folks really struggle you seem eBay announce the results we didn't cover it specifically I think they're GMB grew five or six percent you know I think some folks had a surge kind of as they they played catch up but I think a lot of them are really starting to slow down as they they run into the Amazon buzzsaw.

Jason: 
[43:26] Yeah for sure and so as we talk about besides let's talk about prime prime is another one of those things that Amazon does not disclose as you mentioned in so it's left a lot of third parties to sort of,
estimate what the prime memberships are in there was a lot of Buzz and a lot of articles,
earlier this month I want to see around October 18th of the consumer intelligence research Partners released their updated estimate they've been doing an annual estimate for I think,
two or three years now and this year they're estimating that there are 90 million Prime subscribers,
which is up 25 million from their previous estimate right so they were,
what was that 65 Million last year and 90 million now answer that that generated a ton of buzz but I think you and I have taken that with a grain of salt because,
I'm not sure 90 million Prime subscribers really passes the smell test to me what about you.

Scot: 
[44:26] Yeah an enhanced again to it that's a u.s. number and there's the Census Bureau says there's 125 million households so that that would be like you know 60 to 70% coverage which feel tie,
now there's not I've seen studies that show that kind of coverage at the high-end so you don't,
got more affluent homes over index on Prime and they get up into the 67% but I think that's pretty aggressive to look at the whole us when,
what I read the Wall Street research things were Amazon Street clever and they say we have tens of millions of subscribers and then they always everything is always relative like.
It was our biggest day or we saw a 2X increase in sign on state they never give you a number when I,
there's a fair number Wall Street folks that run surveys Witcher are always tricky but they're going into the you have tens of thousands of people in the survey sand,
they they effectively kind of get to 60 million in the US and then another 30 internationally Prime hasn't been out in as many countries they're just really rolling it out to India for example most people.
The metric size C say 90 million total 60 us and 13 on us so that would make this number pretty aggressive because I think you would have to have another.
30 on to that that 94 International so you it would be like 120 million all in so I think it's it's an over.
Overstatement no one of the other things is.

[45:58] All the Wall Street people are looking at paid Prime there are some free Prime program so there is prime for students and Prime for moms so maybe that adds another 5 or 10 unpaid Prime members and their but he and I have a hard time getting that 90 million in the u.s. number.

Jason: 
[46:12] Prime for government assistance as well not to.

[46:16] Yeah and I I-10 and greet like just a couple of kind of benchmarks you can use to to just sort of check this,
which tell you that 90 million is potentially possible but highly optimistic so so one thing to know is the analog equivalent of prime memberships is probably Costco membership so I think it was by far the most successful,
membership base retailer out there and they have been phenomenally financially successful for a long time predicated almost exclusively on the revenue they generate from their memberships and Costco has 90 million,
members so,
you say hey if Costco could do it Amazon certainly could get there but it's doubtful there are ready there a particular you reconsider what,
percentage of the u.s. population have embraced digital shopping versus the the percent that have have shopped in brick-and-mortar right and that brings me to,
the second metric I like to look at the these Prime studies are not very big like this eirp thing I want to say was it a few thousand.
Respondents in my memory might like what's even say generously 10,000 there's a much bigger studies that study,
retail buyer penetration into the the the retailer in America that has seen the most us consumers is Walmart 95% of the u.s.
Coshocton Walmart,
89% of the USA shop in McDonalds. You drop down to like 85% at Target and then you get to some of these these retards that are ubiquitous but Target more fluent Shoppers like Starbucks has reached only 48% of the US.

[48:00] Despite how many Starbucks we see out there and those Studies have an Amazon is about 42 to 45% of the US have shopped Amazon so,
there's a good news bad news thing there if your Amazon you go man we're performing terrifically and we've only reached 45% of us so we have a lot of growth left but if they only reach 45% of the US there's no way they could have 90 million Prime subscribers.

Scot: 
[48:24] Yeah and they're so there's two metrics there's 300 people in the US and then 125 million households so I think it's the one you just said would be against the 300,
45 yet should be like a hundred fifty million people have shocked Amazon see what expect you to be hard for.
More than half of those two really be primary I'd be shocked so.

Jason: 
[48:45] Yeah nevertheless it was a interesting in the the Q&A after the,
the announcement that the CFO had to answer a number of questions and you don't want it one of the questions is,
hey how come you guys like see the guidance like what went better than expected and interesting Lee the cfo's answer was largely that Prime memberships,
outperform their expectations expectations and specifically that Prime day,
was driving a lot more Prime subscribers than expected and that,
that that was having a carryover effect throughout the the corners so that Dad is super interesting wheat of course in our Prime Day episode we've talked a lot about the real gold Prime day being to get more Prime subscribers and here we have some some evidence from the horse's mouth that that's,
exactly what it's what it's a exceed succeeding and doing.

Scot: 
[49:45] Yet even tired that International acceleration to Prime day being strong globally and getting a lot of global signups on Prime so the flywheel is Prime and Prime day is a way to remind people that it's out there,
getting pulled in that flywheel in and get the flywheel going even faster.

Jason: 
[50:04] Yeah and I might take away from that that's terrifying is just,
you'd expect that you know is Amazon girls they get more Prime subscribers at some point you hit this equilibrium where you've captured all the easy,
Prime subscribers and it becomes much harder to acquire new ones and here's the CFO saying hey we've had pretty consistent Prime growth,
and now we're seeing it accelerate and beat our expectations that that tells you that there's a lot of gas still left in this this growth tank.

Scot: 
[50:33] Yeah the other clue in the financials around us and again it's a little squishy but there is a line item called subscriber Revenue,
and this is another way Wall Street kind of takes that in in the inside subscriber you have the revenue that comes from Prime.
Which comes in many flavors now you have people prepaying annual you at like 99 bucks and you have monthlies go through here but then they have a number of other subscriber program so you have Amazon Prime music you have.
The book program I think audible kind of falls into hear some parts of Ottawa so it's a little again it's so hard to pick a part.
But what they said is the expression Revenue grew 59%.
Not your rear and that was an acceleration it was I think 53% in the last quarter so again that kind of correlates to what's going on there and then they talked also about.

[51:30] The echo so they said let's see.
Within subscription Services music especially is working really well with Echo we're seeing a lot of growth in that area as we increase the number of Echoes so you and I are both examples of this where you have to pay a little bit of an upcharge you get,
you get Prime music for free that were with your Prime subscription but to access it to your Echo you have to pay that $5 extra month this is one of those things you just kind of forget.

Jason: 
[51:58] A couple programs yeah you can pay 5 bucks a month to get it on a single Echo and they call this.
Prime music unlimited so it's a bigger category library and you can have it available in a single Echo for five bucks a month or they have a family plan which makes it available to,
on the mobile phones are five of your family members and to all the Echoes you own in in one household for 9 bucks a month,
so I suspect you and I are paying nine bucks a month.

Scot: 
[52:27] I suspect that's true yes I remember I started with the first one and then like everyone want to listen to different music and it would specifically tell her she can't do that and then I was annoying so we upgrade it is very effective.

Jason: 
[52:39] In the in the last quarter they also added a feature to to the echo that enables multi-room music for the first time so now you can,
you can email that same song to a bunch of different echoes in the same time or different music in each room it is become.

[52:55] Pretty cool in terms of music playing device.

Scot: 
[52:59] You're very so no seeing that capability to shoot music to where we want to but at a fraction of the cost.

Jason: 
[53:04] Absolutely and I'm sure it was not Material in these reporting but there's actually one news source of what I assume is going to go into the subscription revenue for the first time they have added a.
In-app purchase option for one of the echo skills.

[53:23] See you now can pay a premium if you're using the Jeopardy skills to get access to more jeopardy games.

[53:32] So I am not a big Jeopardy player on Echo apparently that's a big thing that I've totally missed,
but I guess by default on the free app you can play 6 rounds are Jeopardy a day and you can only play that days Jeopardy so,
now they blunch the service where you can pay extra,
to get access to as many games of Jeopardy as you want every day and that in and of itself may or may not be interesting to you but to me what's interesting about that is,
that means they put the mechanism in there to have,
in-app purchase revenue for Echo skills and when you look at the other app ecosystems out there like at the iTunes Store the Google Play Store all the big money is in these.
Free to download and an in-app.
Purchase options in so that that potentially is a whole new economic ecosystem that's getting added to the Amazon juggernaut.

Scot: 
[54:26] Yeah it's interesting there there's a big tie in when you're watching Jeopardy and always fast forward to the commercial said it,
makes you stop because it looks like you're back on Jeopardy but then it's an,
a 30-second Amazon Echo Jeopardy tie and Commercial and then a big fan of mr. robot and they're doing a really big,
think they're where you can the robots about this this devastating thing that happens on 59 so you can say Alexa what's the five nine news and it kind of like gives you news from the dystopian future so I don't know if there's any in-app purchase there but they're doing some really clever tie-ins with TV and then NFL and all that stuff's all tied together with the streaming part of what they do is just really getting to be pretty interested in an integrated with what they're doing there.

Jason: 
[55:12] And in The Coincidence Department it this week is actually the seven year anniversary of Watson winning that Jeopardy tournament and it it's funny to think,
back then they had to rent the building next to the Jeopardy Studio because the IBM Watson computer that that,
played in that that tournament was the size of the house and now of course there's a similar amount of processing power in the the new Google home Mini.

Scot: 
[55:41] Cool about Switching gears to your favorite topic grocery would what did you pick out early surround Grocery and Whole Foods.

Jason: 
[55:49] Yeah so a couple interesting takeaways it was only mentioned in the earnings.

[55:56] They eat a lot of people are asking questions and we're interested in the future plans and Amazon did not disclose very much about the their future plans for Whole Foods.

[56:07] Which going back to your point I think they like to play their cards close to their best when they can what was super exciting for the omni-channel nerds in the room is.
Did they did add a new line item to the revenue reporting so for the first time they have offline Revenue line.
And that the revenue in there for this first quarter was 1.3 billion.
Which is a predominantly their Whole Foods revenue and that's from a partial quarter so I think that's only about 30 days of the quarter that the Whole Foods was in the Amazon number in so I assume that's.
That's a new flavor of one Pier Avenue that shows up on this this separate line for physical stores the book store revenue is in that number I assume.
Amazon has some kiosks and pop-ups and other things I assume all those things are in that number as well but I think they essentially said that all those things combined are somewhat in material.

[57:03] In that number and sort of dwarfed by the the Whole Foods number so.
Let you know this this first quarter that's not a particularly interesting number but I think it's going to be interesting to watch it grow and.
I think enough quarters where Amazon makes big investments in growing the book stores which there are a lot of bookstore scheduled to open and maybe where we don't see a lot of growth that Whole Foods it'll be interesting to see whether that number moves at all.

[57:28] You know if it's exciting for me that that number is going to be in there in the future.
I didn't necessarily learn anything from this one it is interesting they are defining.

[57:41] Physical stores as when the customer selects the item in the store so if you.
Purchase something pick something out online and you schedule it for delivery to A Whole Foods.
Locker for example or to one of those pick up locations that I talked about earlier.

[57:59] That would that would still be considered an online purchase and that someone interesting because there is some variation in terms of different retailers,
omni-channel reporting what what order do they consider an in-store purchase versus an online purchase so Amazon is clearly said.
Brass it depends on where you select the item not words for Phil.

Scot: 
[58:21] The same day they always called the revenue net sales and now they call it online sale so so for the e-commerce people that's kind of exciting so now they have online sales and physical sales so pretty.
What is a Wall Street analyst kind of said well you know what what else can you tell us now you've had Whole Foods on your belt for a Whole 30 days about the future.
You're the CFO.
Again plays a pretty close to that said nothing to announce but I think over time you'll see more cooperation and working together between fresh Prime now at Whole Foods and,
we certainly seen that with the private label and it'll be interesting to see if if they leverage your for example we we speculated that that Prime now ability to do same-day delivery would be really nice,
you know Whole Foods has partnered with instacart it doesn't make sense for Amazon to.
Your fuel competitor they're effectively and use the prime now Network just called Flex to do same-day delivery so that was my read on that one I may be reading too much into it but.
But interesting to see what they're going to do now that had the integrated for 30 days.

[59:31] Another one that was too quick when I know we're Up Against Time the Amazon doesn't break out the ad business and we have talked a lot on the show about when we talked to brands,
especially especially manufacturers removing dollars from Google advertising over to Amazon and.
You'll see if I did give a little hint there so this lives inside of the quote on quote other line Amazon is specifically historically said advertising is the largest component of that there's a lot of dogs and cats in there I think there's some.
I'm so the audible stuff that's not a subscription ends up in there and you know what you actually look Amazon doing like 80 different businesses and a bunch of them kind of live inside of here if it doesn't kind of the revenue.

[1:00:15] IPhone to the previous categories.

[1:00:19] But this line grew 58% in the CFO explicitly said advertising grew faster than other itself which means greater than 58%.

[1:00:30] I'd be shocked if advertising wasn't growing north of 100% year-over-year based on annual anecdotally when I talk to folks this is the one area that.
Everyone is really excited and seeing really good efficacy and then inside of Amazon everyone's moving over to these teams which is always an indicator the hot teams to be on it Amazon are Echo,
private label and ads so you know I'd be surprised if it's not going well north of 100% so.
I look forward to the day when it grows so big that Amazon has to break it out, see how big it is I think it's going to shock people I think this is going to be this kind of you know next multibillion-dollar business in this could be,
really really really really bad for for definitely Google maybe in Facebook as Facebook gets to be a certain size.
Yeah there's going to be a fight for one of the largest groups that spends money in and that's Brands and Retail and it's going interesting to see who wins this advertising Dollar Battle.

Jason: 
[1:01:28] Yeah I will say it's I have a feeling in the short run is going to be a mixed bag because that the estimates I've seen our kind of already in that 1 billion to 2 billion size business and in,
I'm I'm sure you're right that that Google and Facebook,
hate seeing a third player have a meaningful presents there but in some small way like again let's go let's be generous and caught two billion that that's still pretty small compared to Google's 90 billion,
so for now it's not a hugely material competitor and I have a feeling with some of the antitrust conversations that are likely to come up in the the next couple years at Google and Facebook,
don't be surprised if that the people making the strongest case for how big amazon are are Google and Facebook as they tried to demonstrate that they aren't monopolies.

Scot: 
[1:02:20] Absolutely.

Jason: 
[1:02:24] So this next one I know you have a lot of passion about because I feel like I saw you fighting about it on Twitter how many Echoes are out there.

Scot: 
[1:02:34] Yesu sisters interesting so the specific comment on the call was this was actually in the Jeff Bezos quote so if you're interested in the Amazon I definitely recommend either reading the transcript or listen