How The Prime Cross-Subsidy Model Could Eventually Lead To A Fight between Amazon And DeliveryHero

Prime Now (© Amazon)

Amazon keeps on expanding the fields it is making business in and, more importantly from a strategic point, is doing it in a way that increases the variety of offers one gets with Prime. It is expanding Amazon Prime, constantly.

Right now Amazon is rolling out restaurant delivery in US cities, making it part of its Prime Now app. Re/code:

On Tuesday, the company is announcing that it is starting to offer restaurant delivery in the Los Angeles area through its Prime Now app, which offers one-hour delivery in more than a dozen metro areas. (..)

“I’d characterize this as beyond the concept being experimental to something we’re actively growing,” Lopez told Re/code in an interview on Monday evening. Amazon plans to add the service in other cities where Prime Now is available.

(..)

Lopez said that one way Amazon will differentiate from some competitors is by being clear on pricing: There are no markups, and “no hidden service fees.” The company charges participating restaurants a percentage of sales, an amount Lopez declined to specify.

Grubhub, a publicly held restaurant delivery service, felt what it means when Amazon enters its market.

Long term, this poses the question as to how far Amazon can push the Prime model. Can Prime’s cross-subsidy model be disruptive to startups like, say, DeliveryHero, the international, Europe based delivery service Rocket Internet paid $496m for a 30% stake in?

I have long been sceptical of Rocket Internets approach of building up startups worldwide without even an optionally available platform/service one level above that could offer types of consumer facing network effects. (They have scale effects operations- and technologywise.) It leaves them fulnerable to something like Amazon Prime. Restaurant deliveries can become an example of this.

Rocket Internet may have the ‘global leadership in online takeway’ (see their PDF presentation) today. And its “Global Takeaway Group” with DeliveryHero thrown into the mix is certainly impressive for now.

But are there any moats being built here?

Making restaurant delivery a part of Prime gives Amazon a way to calculate very differently compared to companies which have to make a direct profit from the deliveries. (Remember also that every single part of the bundle serves as advertisement for the whole thing.) This gives Amazon an advantage especially in a two-sided market as is here the case. Namely Amazon can simply offer restaurants a better deal and in the process at the least(!) destroy any attempts by delivery startups at creating exclusive partnerships with restaurants.

This is why I am so bullish on Amazon Prime.

Of course Amazon’s Prime approach only works in countries where an attractive subset of its parts (like free fast shipping and video streaming) are available. This slows down global roll-out significantly. But we are ‘just’ talking time frames here. Also, in every country where Amazon Prime is already available and growing this is a potentially strong model, meaning these countries are potential Prime land. Which is to say, today this is every western country.

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  1. […] We talked about this with Delivery Hero and restaurant delivery within Amazon Prime: […]

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  6. […] How The Prime Cross-Subsidy Model Could Eventually Lead To A Fight between Amazon And DeliveryHero […]

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  8. […] How The Prime Cross-Subsidy Model Could Eventually Lead To A Fight between Amazon And DeliveryHero […]

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  9. […] This creates tremendous opportunities for Amazon to bring forth asymmetric offers. […]

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