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Amazon Primes the Third-Party Pump

With so much going its way already, one might wonder why

Amazon.com


AMZN -1.98%

keeps bothering with Prime Day. The answer is that it seems to have become a profitable endeavor.

That isn’t so apparent on the face of it.

Amazon


AMZN -1.98%

has long used major events to boost sales at the expense of the bottom line. And Prime Day is replete with cut-rate deals for Prime members that hardly seem profitable on their own. For instance, the latest two-day affair that ended Oct. 14 featured price reductions of nearly 25% on the mega-popular AirPods from

Apple Inc.

—which rarely, if ever, makes such cuts on its own.

Indeed, Amazon’s North American and International retail segments showed a combined operating loss for the quarter including Prime Day for the first three years after Amazon created the pseudo-holiday in 2015, even as other quarters were generally profitable.

That has changed as the company’s third-party business has grown. Amazon recognizes only a portion of the revenue generated by sales of its third-party merchants. But the margins on such revenue are higher than on its own retail sales, as Amazon isn’t bearing the cost of purchasing the goods itself. And the recent Prime Day seems to have been a big one for the third-party business. Amazon said Prime Day sales from third-party merchants surpassed the $3.5 billion mark—up nearly 60% from last year’s event.

That still doesn’t spell out the revenue Amazon will recognize on those sales. A more accurate read on the effect of Prime Day will likely come with the company’s third-quarter results, scheduled for Oct. 29. Those results will include a projection for operating earnings for the fourth quarter that includes this year’s Prime Day.

Analysts are already forecasting a new revenue record of $5.9 billion, leading to a companywide operating margin of 5.3%. That would be the highest operating margin Amazon has reported for its fourth quarter since 2004, according to data from S&P Global Market Intelligence.

Prime Day does carry some other risks for Amazon. The company shifted the date this year from its usual place in July, due to more pressing demands early in the pandemic. That could have the effect of pulling forward some holiday-related sales.

Also, the downside to Amazon flexing its muscles now is that its Prime program and third-party business are now under scrutiny from lawmakers. A report from the Democratic staff of the House Antitrust Subcommittee released earlier this month included several bits of testimony from Amazon’s third-party sellers who were critical of the company’s market power. It even included a quote from a 2018 Morgan Stanley analyst report, describing the Prime program as Amazon “fortifying an impenetrable moat around its customers.” At least Prime Day is no longer a loss leader.

Write to Dan Gallagher at [email protected]

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