Like its other platforms, Amazon is taking the long view with its Coins virtual currency

By Michael Carney , written on May 13, 2013

From The News Desk

Amazon is far from the first company to create a proprietary virtual currency, but, for a number of reasons, it is among the most interesting. The limited success of previous efforts from Facebook, Microsoft, Zynga, Flooz, and Beenz, among others, illustrate the challenges of creating a notional economy, but none of them mean we should ignore Amazon Coins. Amazon has the scale, the credibility, and the longterm thinking to turn today’s early version of its Coins currency into a large scale winner.

While it’s hard to provide concrete numbers to this effect, it’s fair to assume that Amazon completes roughly as many consumer transactions per year as any other physical or digital retailer in the world – with challengers limited to WalMart, Apple, and Tencent. Amazon is so large, that it is effectively its own economy, or country, for that matter. And what do countries have? Currencies.

Not only does the country of Amazon have scale in terms of its “citizenship,” but it has a highly active and engaged population. As of Q4 of 2012, Amazon had over 200 million active customer accounts, including seven percent of the US population. The average annual purchase by an Amazon customer: $505. With the average order size being $47.31 as of June 2012, this means that the average consumer transacts with the company nearly 11 times per year.

Furthermore, the country (er, company) has recently established a class system, with Morningstar estimating that more than an 10 million virtual citizens have voluntarily bought their way into the aristocracy by way of a $79 per year ($39 for college students) Amazon Prime membership. And once users become Prime Members, they spend an average of 150 percent more within the Amazon ecosystem than non-members – $1,224 per year, compared to $505. The same research suggests that Prime membership will grow to 25 million by 2017. This fact was enough to push 20 retailers, including Barnes & Noble, Sports Authority, and Toys 'R' Us, to join forces launching a copycat $79, two-day shipping program called ShopRunner.

Given the indisputable success of Prime, it’s conceivable that Amazon Coins could have a similar transaction encouraging and consumer lock-in effect. The question comes down to the incremental value that the virtual currency can add. To overcome the otherwise frustrating process of transferring between currencies – not to mention mentally converting values at the time of purchase – and having funds locked-up in pre-purchased Coins, Amazon’s new digital currency initiative will need to deliver value beyond novelty.

For Prime, the benefit is free 2-day shipping and free streaming video, which the average member consumes the tune of $90 per year ($55 in shipping and $35 in digital content). For Amazon Coins to deliver comparable value – or more accurately, perceived value – Amazon will likely need to extend its offer of $5 worth of free Coins to more than just Kindle Fire owners and to make its 10 percent discount on bulk Coins purchases permanent, if not add on additional incentives.

And therein lies the most confusing aspect of today’s announcement. At launch, Amazon Coins, and all their questionable incentives, are limited to users of the company’s Kindle Fire tablets. This means that the shiny gold bits can be used only to buy apps and make in-app purchase. What they don’t yet allow is the purchase of books, consumer electronics, apparel, household items, or any of the other thousands of categories stocked by Amazon’s massive retail marketplace in the sky. The new Amazon coins also fail to offer any benefit or even option of participation to Prime members who don’t own a Kindle Fire device.

Amazon is almost certainly thinking bigger than the initial scope of its Coins program revealed today. Assuming the company sees an encouraging level of adoption with this initial roll-out, the next evolution of the virtual currency will presumably be to extend it across the entirety of the Amazon ecosystem.

What’s more interesting though is the possibility that Amazon could open the use of the currency to the rest of the Web. While there are certainly benefits to Amazon keeping its Coins proprietary, I would argue that they’re outweighed by the potential scale and ubiquity benefits of broader Internet-wide adoption.

It would be a monumental accomplishment for Amazon to convince global merchants and Web consumers to use an Amazon-controlled currency in transactions outside its ecosystem, but the same could have been said for Amazon’s S3 and EC2 cloud computing platforms and its Fulfillment by Amazon service.

As a consequence of Amazon’s sheer scale, and CEO Jeff Bezos’ relentless focus on the longterm, thecompany has achieved dominance in each of these improbable categories. It’s no stretch to think that it can pull off the same feat in terms of a virtual currency. The only other company which seemed to have a shot at achieving a similar feat is Facebook, but Mark Zuckerberg’s social giant has never had the breadth of commerce activity as Amazon.

With the recent popularity of BitCoin, it appears that the world may finally be ready to consider a fully-digital currency. And while the Amazon Coins platform lacks many of the anonymity, cryptography, and decentralization benefits of Bitcoin, the company’s pre-existing reach – with the credit card details of more than 200 million global first-world consumers – and its trusted status give the currency a head start on competing technologies.

At the end of the day, the goal for Amazon is to reduce any and all friction that prevents consumers from transacting with its marketplace. If the company can create a universal digital currency that even a small percentage of Web consumers adopt, then it will have taken a massive step toward that goal.