Amazon’s (NASDAQ:AMZN) in-app purchasing application programming interface (API) has been in the market for a while. The app allows users to purchase digital content such as in-game currency, expansion packs, upgrades and magazine issues from within the app. Given the success of this technology, the company is now looking to sell physical goods through it. Amazon has expanded its business rapidly across the globe in the last few years finding strong support from e-commerce growth, higher Internet usage and a surge in smartphone sales.
There is a clear trend of consumers shifting towards mobile payments. Customers can walk into a retail establishment and use their smartphones to make purchases and find the best deals to compare prices with other stores. The mobile revolution has penetrated many aspects of our personal lives, and mobile devices are becoming the new focus of advertisers, marketers and retailers. For Amazon, this is an opportunity to increase sales by making it more convenient and natural for customers to buy goods through apps they love to use.
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Can Amazon Sell Physical Goods Through In-App Purchases?
Amazon currently offers three types of items through in-app purchases. These include single-device items such as in-game currency, which can only be used on the device from which they were purchased; multi-device items such as game upgrades and magazines issues, which can be accessed on multiple devices; and subscription items, which can be accessed on multiple devices with auto-renewal option on. The retailer has been successful with these items as they form a natural part of the app they are attached with. For instance, a user is highly likely to purchase in-game currency to progress in his/her game, and it becomes convenient to do so from within the app. In fact, most mobile app activity on iOS and Android smartphones pertains to gaming, which is why Amazon started off with these digital items. Can it repeat the success with physical goods?
In-app purchasing can be thought of as a form of targeted advertisement that leverages a potential customer’s state of mind. For instance, there is a good chance that a user browsing through a health or nutrition related app will be tempted to buy health products if the ability to do so is built right into the app. But how many such categories can Amazon think of? The company specializes in selling electronics, books, DVDs and other general merchandise including computer hardware, footwear, apparel and sporting goods. There are plenty of music apps, reader apps, and sports related apps that the company can target to sell its merchandise. However, the ability to connect its electronics merchandise, which is the company’s largest selling category, with relevant apps remains questionable.
Nevertheless, the overall smartphone market is growing and app usage has skyrocketed in recent years. This alone should be sufficient for Amazon to generate meaningful sales through in-app purchases.
Mobile App Usage Is Growing
The global smartphone market is growing rapidly with Apple (NASDAQ:AAPL), Samsung and LG leading the way. The primary reason behind this growth is a large ecosystem of apps that Apple, Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) have created. According to App Annie, a total of over 200 million apps were downloaded on iOS and Android based devices in Q2 2013. Global smartphone sales touched 225 million during the same quarter registering growth of 46.5% over the second quarter of last year.  Q2 2013 also marked the first time in history when smartphones accounted for more than half of total mobile phones sold worldwide. The emerging markets are fueling most of this growth and this may be encouraging for Amazon which will look to tap the market opportunity in these regions to expand. In-app purchases could be one of the ways to do that.
Our price estimate for Amazon stands at $280, implying a slight discount to the market.Notes:
- Gartner Says Smartphone Sales Grew 46.5 Percent in Second Quarter of 2013 and Exceeded Feature Phone Sales for First Time, Gartner Press Release, Aug 14 2013 [↩]