The Amazon Effect   //   April 15, 2021

Logistics, third-party sellers & Alexa: What to know from Amazon’s investor letter

On Thursday, Amazon CEO Jeff Bezos released his final investor letter, in which he outlined the company’s success over the past year — and, really, since he first started the company in 1996.

For example, in that letter — as well as in the accompanying proxy statement — Bezos confirmed that Amazon Prime now has “more than 200 million subscribers” worldwide, and that Amazon customers bought $164 billion worth of products in 2020.

But a few other numbers in the Bezos letter illustrate exactly where that growth is coming from — and largely confirm existing speculation about the ascendancy of Amazon’s third-party sellers, its accelerating logistics footprint and the growth of its Alexa system.

Here are a few highlights from the newly-released documents.

Amazon said third-party sellers are “close to 60%” of its sales
Amazon’s third-party sellers have, for years, represented a large share of the company’s product selection and overall revenue. Amazon recently cleared six million sellers across its global marketplaces, although only about a million are active, according to Marketplace Pulse. In the fourth quarter of 2020, when Amazon last reported sales figures, third-party seller services — which includes fulfillment payments and commissions, and can be seen as a rough proxy for the growth of third-party sellers overall — jumped 54% jump year over year.  

Amazon’s estimate that nearly 60% of its business comes from third-party sellers represents just how significant of an economic force the marketplace has become. Still, the share of third-party sellers does seem to have approached something of a ceiling: two years ago, Amazon said that third-party sellers were 58% of sales, roughly the same as today.

Amazon also estimated that, in total, Amazon sellers earned “between $25 billion and $39 billion” in profits from selling on the platform. That profit is coming from the vast majority of sellers: Jungle Scout, in its most recent report on third-party sellers, said that 85% of Amazon sellers reported they are profitable, and 44% said their sales were “better than expected” in 2020.

“This 3P market is so important,” said Danny Villarreal, head of customer success at Jungle Scout, in an email. “You are seeing other top marketplaces like Walmart quickly move to accept more 3P sellers as they realize how this has been a catalyst for Amazon’s success.”

Amazon has 2,400 Delivery Service Partners
In 2018, Amazon put out a splashy offer to third-party delivery players: Amazon would partner with up-and-coming logistics entrepreneurs, offering them leased vans, training and contracts with Amazon itself in order to build out their businesses.

The Delivery Service Partners program is specifically for businesses — and it’s only one piece of Amazon’s elaborate fulfillment network, which includes Amazon Flex gig drivers, Amazon-owned or Amazon-leased cargo planes and gig-work truck drivers.

But Terry L. Esper, a professor of logistics at Ohio State University, told Modern Retail that, on the ground, “the vast majority of Amazon vans we see making deliveries are affiliated with DSPs.” Many vans with Amazon logos that people see on the street are from companies enrolled in the DSP program: “while it appears that the drivers work for Amazon, they actually work for a local logistics company that is in the Amazon DSP program,” he said.

Delivery Service Partners are concentrated on the last mile of fulfillment, and the program has added partners at a rapid clip. By the end of 2019, Amazon announced that it had 800 partners. A little over year later, that number has roughly tripled, and Amazon said that those partners have been responsible for shipping roughly 2.8 billion packages delivered across the world.

There are risks to being a Delivery Service Partner — Esper noted that “most DSPs are almost solely reliant on Amazon volumes” — but he said the program has played an essential role in the growth of Amazon’s last-mile fulfillment operations.

Over 700,000 developers have built an Alexa skill
The Alexa skill store has become a popular way for brands to promote their products, and ingratiate themselves more deeply into customers’ lives. Through Alexa, people can voice-order a pizza from Domino’s, for example. And it’s no wonder brands are interested: Amazon disclosed on Thursday that customers have connected Alexa to over 100 million smart devices overall.

But that growth of the Alexa Skills store has begun to lag in recent years. In March, Amazon added a deep-learning developer tool called Alexa Conversations that was intended to make it easier — and cheaper — for brands to create skills of their own, in hopes of boosting those numbers.

Yet even with the new developer tools, some of the initial benefit of the skills store — the idea that it could be a way for third-party developers and brands to stand out on Alexa — is starting to fade. Last month, in a potentially telling pivot, Amazon changed the landing page for its skills store: instead of bringing users an eclectic mix of skills developed by third-parties, the U.S. Alexa skills store landing page now features only Amazon’s own, first-party skills. According to the publication, third-party skill developers say that appearing on the homepage previously could boost discovery by eightfold.

Few of the numbers that Amazon published are a shock to experts who track Amazon, but they do provide a rough approximation of just how significant these silos of the Amazon ecosystem have become — both for Amazon itself and for the retail sector generally.