Is Amazon Planning A Secondary Market For Digital Products?

The world’s leading online retailer Amazon (NASDAQ:AMZN) was recently awarded a patent that will allow online customers to sell or trade digital items with other users. Amazon is a leading player in digital content and offers e-books, online streaming as well as purchase of music and video. The digital products can be accessed through its Kindle range of e-readers and tablets as well as other devices based on iOS and Android platforms.

The patent dubbed “secondary market for digital objects” allows for an electronic marketplace where users can sell digital items such as e-books, audio, video and computer applications purchased from an original vendor. The patent, that was filed back in 2009, was awarded on January 29, 2013.

The timing could not have been more apt. In its recently held fourth quarter earnings call, Amazon disclosed that its e-book business is now a multi-billion dollar business that is growing at 70% y-o-y. The growth rate is particularly healthy as the business was launched about five years ago. The company also noted that the number of users purchasing paid content is increasing.

We believe that a secondary market would enable Amazon to generate revenues multiple times from a product sale instead of one-time. Amazon currently generates about 30% of its revenues from media sales, with a significant portion coming from online media. A secondary market can provide a substantial upside to revenues from media sales as Amazon is likely to earn a commission on every secondary market transaction.

Amazon competes in the e-commerce and e-content space with companies such as eBay (NASDAQ:EBAY) and Apple (NASDAQ:AAPL).

See our full analysis for Amazon’s stock here

While the patent doesn’t imply that such a marketplace will be launched anytime soon, it does show Amazon’s interest in entering the online secondary market business that was pioneered by eBay. The patent allows for data to be transferred from the seller’s storage location to that of the buyer(s). For example, the sale of an e-book would copy it to another user’s data store and delete it from the original owner’s. Data storage, if based on the cloud, would allow the user to stream or download the file.

The patent will however impose a threshold on the number of transfers permitted beyond which the ability to move will be terminated. This threshold will prevent the issue of piracy as only a fixed number of items will be available in the market.

Assuming that Amazon charges a fixed percentage of the sale price as its fee for every transaction, the service has the potential to generate millions in sales. The value of the digital content will not depreciate on account of it being used or misused. Instead, it will depend on the version and content quality. For example, a newer edition of an e-book would fetch more instead of an older version as will a high definition movie print compared to a low definition. Also, as the seller would not have to deal with shipping issues because the product can be transferred digitally without any intermediaries, the number of users interested in reselling their content would be larger than the number of active sellers on sites like eBay.

Amazon currently generates about 30% of its revenues from media sales, which includes both physical and digital copies of content. However, the sales growth of digital content has been outpacing that of physical content and we believe that digital content will soon be the major revenue generator in the media business. The launch of a secondary market to capture the limited utility of resources (books/movies/music) would attract users looking to recover some of their investment after utilizing their resources. We are looking forward to any announcement from Amazon regarding the launch of such a market.

We have a $235 Trefis price estimate for Amazon which is 15% below the current market price.

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