Amazon's Secret Weapon May Be A Mystery To Amazon, Too

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Is Amazon Marketplace really the E-tail giant's "secret weapon"? That's reportedly how a Walmart (NTSE:WMT) executive described it at a top-management meeting in February. Amazon (NASDAQ:AMZN) itself may not hold its collection of third-party sellers in quite such high esteem—especially since March 15, when two of them launched a class-action lawsuit complaining that Amazon routinely holds up payments it owes to the sellers.

In fact, Amazon Marketplace now brings in almost 12 percent of Amazon's retail revenues. But it also represents more than 40 percent of the goods sold on Amazon's site, which makes the Marketplace merchants both competition and a huge market-research pool for Amazon—and, potentially, a legal time bomb.

According to the lawsuit filed in U.S. District Court in Seattle, Amazon routinely holds money it has received from buyers on behalf of sellers for more than the 14 days specified in Amazon's seller contract, which also means Amazon is exceeding the 10 days that the plaintiffs claim it's allowed to do that under Washington state law.

Both the named plaintiffs in the complaint say they were Amazon sellers whose accounts were suspended without explanation. In one case, Amazon allegedly held the seller's money for 98 days after the suspension; in the other case, the seller's account was allegedly suspended in May 2012 and the money still hasn't been released.

What's not clear is how widespread that problem is. Amazon's mostly small third-party sellers may grumble, but the Washington State Attorney General's office only received about 150 complaints from Amazon Marketplace sellers from 2010 through 2012, the Seattle Times reported late last year. The accounts Amazon allegedly froze ranged in size from several hundred dollars to $30,000.

That's peanuts to Amazon. But a big win (or plaintiff-favorable settlement) in a class-action case might force Amazon to significantly improve its payment policies. That's one big problem with Amazon's "secret weapon": It can backfire.

Also potentially at risk is something that may be much more valuable to Amazon than that extra cashflow: Its detailed knowledge of every transaction flowing through the site. Knowing exactly what sells, for how much and to which customers, means Amazon can adjust its own assortment and set prices to undercut the competitors it hosts, all based on actual sales.

Amazon can also collect CRM data even on customers who have never bought a single item from Amazon. That may be what that unidentified Walmart exec was lusting after.

But that's also what has created a toxic cloud around third-party mobile wallets, at least from the perspective of big chains. Google (NASDAQ:GOOG) and Isis and (if it ever actually jumps in) Apple (NASDAQ:AAPL) can protest all they want that they'll only use the CRM data they collect in the most retailer-friendly ways possible. Balance that against what big chains know Amazon actually does with other retailers' CRM data—and, in the case of Target (NYSE:TGT) and Toys"R"Us (NASDAQ:TOYS), know it from years of having Amazon run their own E-Commerce operations—and what chain is going to trust Google not to become another Amazon?

Then there's the sheer size of Amazon's army of third-party sellers. The actual revenue that Amazon keeps from Marketplace sales is between 11 and 12 percent of Amazon's total retail revenue, based on Amazon's most recent earnings statements. But that's growing more than twice as fast as Amazon's own retail sales. Amazon says third-parties sold 41 percent of all goods on Amazon's site in 2012, up from 32 percent in 2010.

If that growth spurt continues (and that's a very big if), by 2015 Amazon Marketplace may have outgrown Amazon's own retail operations. That's a lot of small retailers. It's also an ever-increasing challenge to manage all those third-parties—and an ever-bigger risk from things like class-action lawsuits.

No one in retail has ever managed anything as messy as what Marketplace is threatening to become. There will be disgruntled sellers who want their money or don't understand why they were suspended (hint: Amazon suspends sellers who don't get high enough levels of buyer feedback, another bit of problematic social engineering to collect still more CRM data). And the actual fraudsters that are the excuse for Amazon's more draconian policies. And the ongoing risk that, if Amazon is somehow forced to explain every action and create a labor-intensive process to handle complaints (whether by a court or government action—and not necessarily by the U.S. government), Amazon will never be able hire enough people to keep the process from grinding to a halt.

As secret weapons go, that's a doomsday device. And the most secret thing about it is what Amazon will do when Marketplace crosses that line. That seems to be a secret from Amazon itself.