The Secret to Amazon Finally Making A Profit Is Selling Other People’s Stuff

Inside an Amazon fulfillment center in Tracy, California. Drew Kelly/WIRED

Amazon isn’t an unprofitable company. Though it posted losses in two quarters out of the three reported so far for 2014, it ended 2013 at $274 million in the black. The trouble is: this is world’s biggest online retailer, with annual revenues creeping toward $90 billion. With that in mind, Amazon’s profits are paltry, especially when compared to other tech giants.

A key reason for its suffering is that, unlike competitors such as Google or Apple, Amazon requires a massive physical infrastructure to operate its business. Amazon can’t be Amazon without its million-square-foot fulfillment centers and the tens of thousands of workers who staff them. The company has been building and staffing new warehouses in recent years at a rapid clip—and at a major cost to Amazon’s bottom line.

But all that construction might finally start allowing a little more daylight to peak through the tiny margin between what Amazon spends and what it makes. On Monday, Amazon said that third-party sellers had sold more than 2 billion items on its site in 2014, a record that apparently doubles the previous year’s total. Those sales accounted for more than 40 percent of all items sold on Amazon.

In other words, a little less than half of what was sold on Amazon last year wasn’t sold by Amazon. And though it may sound like a contradiction, the less stuff Amazon has to sell itself, the more money it stands to make.

Money Already Spent

Third-party sellers on Amazon are those mysterious entities that show up in some product listings just below the price next to the “sold by” caption. More than 2 million such sellers sell their wares on Amazon, the company says. And for the privilege of reaching Amazon’s vast international consumer audience, Amazon takes a cut.

The advantage to Amazon of such an arrangement is that none of its money is tied up in the inventory sold by others. For example, I’m a big fan of the Golden State Warriors, but even I’m not likely to buy this lanyard with the team’s logo. But Amazon can still offer this and countless other niche items at almost zero risk to itself because someone else is going to the trouble of trying to sell it. In the case of the lanyard, the seller is also using Fulfillment by Amazon, which means the item is stored and shipped by Amazon, also in exchange for a fee.

The economics of retail are complex and don’t guarantee that Amazon is always making more money selling other people’s stuff than selling its own. But the logic is sound.

Amazon is already spending the money on real estate, both physical and web, to store, ship, and sell products. If someone else is shouldering the cost of the merchandise stored on its shelves, those are dollars Amazon doesn’t have to spend. And for a company that has seen its shares lose nearly one-quarter of their value over the past year of chronically dismal profits, every dollar saved counts.