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February 12, 2001

Amazon Counts Every Dollar

In a bid for revenue and lower credit-card fees, Amazon is launching an online payment system

By Cheryl Rosen (crosen@cmp.com)

More on online payments:

E-Payments Get More Tempting (12/18/00)

TechWeb: Finance Pros Lag In E-Biz (2/5/01)

TechWeb Finance: E-Currencies Are Going Offline (12/13/00)

t might be a move on Amazon.com Inc.'s part to appease a profit-focused Wall Street. It might be the giant E-retailer's biggest step yet toward building an online payment system of its own. It may even change the Internet as we know it, requiring people to pay for what they once got free.

Amazon's new Honor System provides a simple way for any Web site to collect $1 to $50 payments with just a few minutes' effort and no money down. Customers will be able to buy items or donate money on participating sites, and the charge will appear on the credit cards linked to their Amazon accounts. Amazon pays the 3% to 6% merchant credit-card fees--a cost it more than makes back by charging 15 cents plus 15% on every transaction.

Ultimately, some analysts predict, Amazon could use the service to bypass credit-card fees altogether. It could bill customers directly for purchases or deduct payments from their bank accounts. "It's no secret that Amazon is annoyed with the credit-card fees it has to pay and that it's using the Honor System to build its own payment brand," Gartner senior analyst Avivah Litan says. "It has one-click shopping and thousands of customers already registered, and it could easily extend the service into a ubiquitous Internet payment system."

Alan Caplan, Amazon VP of payment services, declined to comment on other payment services or plans for the Honor System. "It's very hard to size the market, because Web sites only recently have realized that they need revenue streams at all," he says. "But we're going to watch it closely."

Wall Street was unimpressed by the news, focusing instead on whether Amazon will run out of money before it determines how to become profitable. "We're trying to figure out whether the stock is going to be higher or lower 12 months from now, and I don't see this making a significant difference," says Tom Courtney, a Banc of America Securities analyst.

Several questions surround the offering--the largest being whether consumers will pay for services they once received free. Amazon's pitch is to business sites that want to start charging for content, without deterring traffic by making payments mandatory. So the Amazon system suggests that visitors "make donations" of up to $50. "There's a huge opportunity in online payments that nobody's figured out yet," says Bear Stearns analyst Jeffrey Fieler. "If it's going to be really big, it's going to have to be associated with compulsory rather than voluntary payments."

Still, Web users haven't been willing to pay for content--even at the low cost of $1. Just ask author Stephen King, who shelved his online serial in December after turning out six installments that netted $463,832. Amazon handled the $1 donations fans paid when downloading excerpts.

That market test helped spawn the Honor System. Any business can join the program by filling out a registration form on Amazon and installing an Amazon Paybox on its site. In minutes, visitors can click on the icon and charge contributions to their Amazon accounts. Amazon offers full refunds, no questions asked; handles customer service; and E-mails customers a "thank-you" receipt.

Amazon's 50 launch sites see the Honor System generating a new revenue stream, without the hassle of filling out paperwork or going through a cumbersome credit check. Chank Diesel, president of The Chank Co., has been giving away fonts and photo images on his Web site since 1996. Chank.com made $70 the day it put up the Honor System icon--a good return, Diesel says, on a 20-minute investment: "It didn't blow us away, but it could be a steady flow of revenue."

The Honor System also gives Amazonian-scale clout to participating sites, Diesel says. "People know and trust the Amazon name, where they don't know Chank Diesel," he says. "They feel comfortable giving Amazon their names and addresses and credit-card numbers. And now I'm just two clicks from the Amazon home page." That puts his site on the radar screen of 25 million Amazon customers, and traffic is up 50% since Chank.com launched Honor System last week.

But there's a downside to giving up control to the E-retailing database king: Diesel doesn't know who his customers are. Amazon alone holds the data on what sites Honor System users are visiting, what they're buying, and how much they're spending. And some analysts say that's Amazon's real strategy. "Every customer of every site becomes an Amazon customer, too, and Amazon adds their names and E-mails to its own database," says Gomez analyst Barrett Ladd. "Amazon sees what sites you like to visit and can market to you accordingly. If it works, it's going to be a very smart move."

Amazon expects to make some money with the system. SETI.org is averaging $12.73 per donation to its Search for Extraterrestrial Intelligence site. Its Honor System account received $522 in its first three days of operation. If each of the 50 Honor System launch sites earns just $100 a day and pays Amazon 30% (the rate on a $1 payment), the E-retailer will see an annual revenue stream of $547,500--hardly enough to fend off the Wall Street bear. But 1,000 sites at a 25% return would generate $9 million per year.

The numbers can add up quickly. PayPal Inc., an online payment system that deducts payments directly from users' bank accounts, handles $7 million worth of payments every day. But Amazon should note that PayPal remains the system of choice of 60% of eBay auction customers, despite the fact that eBay has its own system in place, says PayPal co-founder Peter Thiel.

Jupiter Research analyst James Van Dyke says the amount of revenue the Honor System generates is less important than the question behind it: Is there a better payment model than credit cards? Thiel doesn't think emerging payment systems will compete with credit cards. Rather, he says, schemes such as PayPal and Honor System are "extending the credit-card network by acting as master merchants, allowing people to use a network they wouldn't otherwise use." At the very least, Van Dyke says, adding all that volume will give Amazon the clout to negotiate a better rate on the fees it pays credit-card companies for its own charges.

But he, too, suspects that Amazon has a bigger plan in mind.

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