Yesterday Amazon.com announced that it is launching virtual currency called Amazon Coins that consumers can use on their Kindle Fire to purchase apps, games and associated content in the Kindle Appstore. This currency cannot be used to purchase books on the Kindle Fire or physical goods.
This is a brilliant move. Here is why:
First, note that for now, this currency can only be used in the Amazon marketplace (app store) on the Kindle Fire. This is a very important distinction. What it means is that it will drive additional demand for the Kindle Fire.
Second, Amazon will be giving away this virtual currency to its customers for free. Most likely it will be disbursed initially to the Amazon Prime customers. One possible criteria they might use is percentage of spend on Amazon over the course of the past year. This could further boost the Amazon Prime membership signups.
Third, it will significantly increase the content consumption in the Amazon app store thereby providing a huge incentive to developers to develop more apps for the Amazon app store. Developers would be able to convert these virtual payments into real dollars. No details on that yet.
Fourth, this will make transactions across international borders easier and should reduce transaction costs thereby increasing the margin for Amazon.
Fifth, eventually Amazon will allow consumers to buy this virtual currency and provide some sort of incentive to do so. What comes to my mind is the US Postal Service's for ever stamps. Buy today at today's price and they are good for ever and you are protected against future price increases. Inflation protection!
So what does Amazon sell today that they can guarantee the price on in the future? Amazon Prime membership! Buy the virtual currency today and pay for Amazon Prime membership using equivalent Amazon currency at the same rate for ever. The dollar rate for the membership might go up.
Now this last item is purely my conjecture obviously. That is what I would do. Why?
That brings me to what I think is the trump card - Working Capital Management. Dell used to be the king of working capital management in the 90s. It is Amazon now. See the linked presentation for details.
The reason Amazon's valuation based on traditional metrics of Price to Earnings Ratio etc does not make any sense is because Amazon is being valued based on its Cash Flow from Operations and the potential for increase in Margins.
This move will turbo charge both - Cash Flow from Operations and Margins.
Jeff Bezos may have just check mated the GAAFs by using the Kindle Fire as Trojan Horse while Google, Apple, Facebook and Microsoft battle it out in the smart phone market.
UPDATE May 13, 2013
Got the following e-mail from Amazon:
|Welcome to Amazon Coins|
Dear Shaker Cherukuri, as a thank you for being a Kindle Fire owner, we have given you 500 Amazon Coins (a $5 value) for free. Use your coins to purchase apps, games, or in-app items from your Kindle Fire, or from the Amazon Appstore for Android on Amazon.com.
Amazon has linked the value to USD. 1 Coin = 0.01 USD. So it is not similar to Bitcoin. You can buy them at 10% discount when you buy at least 5000 per transaction (ie $45 for 5000 coins worth $50).
If they let Coins be used for digital movies and books it would be a no brainer. Right now it is just for Apps and games. Not were I spend my time and money. Another possibility is to let you pay for the Prime Membership using coins (as stated in my blog post). That would be another reason it would be worth it.