Amazon’s Third Party Needs to Keep Raging

By Anonymous ’s AMZN -1.04% business of selling goods for others may be a growing hassle, but the e-commerce giant has strong reasons to stay in the game.

Amazon warned some of its customers on Friday that their email addresses were shared with one of the company’s third-party sellers, in violation of the company’s policies. That came just weeks after The Wall Street Journal reported that Amazon was investigating some of its own employees for leaking data to third-party sellers in exchange for bribes. Amazon reportedly also has been hit with a cease-and-desist letter from eBay EBAY -1.20% claiming that some of Amazon’s sales reps have used legally questionable tactics to recruit eBay sellers to Amazon’s own marketplace.

Third-party sales—the stuff other merchants sell over Amazon’s platform—have become a vital business for Amazon. Revenue from third-party-seller services has been growing at a rate faster than the company’s own online sales, surging to nearly $19 billion for the first six months of this year compared to $13.4 billion for the same period last year. Third-party sales now comprise about 18% of Amazon’s total revenue, and analysts expect that contribution to grow to 21% by 2020, according to FactSet.

Amazon’s Third Party Needs to Keep Raging

A worker processes customer orders at an Amazon fulfillment center in India in September. Photo: Ruhani Kaur/Bloomberg News

They also play a major role in Amazon’s rapidly expanding bottom line. Third-party sales are more profitable than Amazon’s typical retail sales as they don’t involve inventory and other related charges. Brian Nowak of Morgan Stanley estimates about 20% margins on earnings before interest, taxes, depreciation and amortization for Amazon’s third-party transactions compared to less than 5% for typical retail sales. That makes Amazon’s third-party business at least as important as its fast-growing AWS cloud segment, which has been generating operating margins of 26% over the last 12-month period.

Amazon’s stock price has surged more than 60% this year—by far the best performance against any of the other tech giants. That has come as the company has managed the rare feat of accelerating the growth of its already massive business while also fattening up its bottom line.

The third-party business has played a significant role in both.

It will have to continue. Wall Street expects Amazon’s total revenue to grow 32% this year to a record $235 billion while operating income is projected to more than double to nearly $11 billion.

Amazon strikes fear into the hearts of many businesses. The irony of its runaway success of late is that it depends on the success of others as well.

Write to Dan Gallagher at [email protected]