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Damien's Blog

The Zappos - Amazon Marriage, a Surprise in Timing

By Damien Patton, (1057 words) Posted in Corporate on July 26, 2009
There are (54) comments permalink

Is this an arranged marriage, a marriage of convenience or just a surprise announcement?

For many, hearing the news that Amazon.com had purchased Zappos.com was not a surprise move, but the timing seems to be off. For years Tony Hsieh had been leading Zappos to a head on collision with Jeff Bezos and Amazon as a competitor. There had been a lot of online chatter about Zappos becoming the new "Amazon" type online company and in the end, it was easier for Amazon to acquire Zappos then to try and compete with them in a long battle that would take their attention away from other innovations and possible competition.

On the day the news broke regarding the sale of Zappos, I called our office in Las Vegas to speak to Ryan, our VP of Internet Marketing. I knew he would have his ear to the ground and based on the people he knew affiliated with Zappos. When I asked why he hadn't called me to tell me that the largest online company based in our home town of Las Vegas (Henderson) had just sold, he was in shock and thought I was kidding. His first question to me was "why would Zappos sell now, and in this economy?"

Along with many in the tech and financial world that followed Zappos, we all knew that Amazon was watching them with a careful eye. Zappos was the leader in online shoe sales, and has unquestionably the greatest customer service of any online company, and possibly offline as well. As Zappos ventured into other non–shoe related markets, the writing was on the wall, they were going to be a significant threat to Amazon. Sure, Zappos may not have the product innovation like Amazon, but they have the most loyal customers, and in the online world, nothing else really matters.

As Ryan and I talked more about the marriage between Amazon and Zappos, he brought up the point that it must be an arranged marriage, meaning Tony Hsieh, must have been forced into this union. Tony is a different kind of leader, a true online maverick, and it is hard to imagine he would want to pass on his company and vision just at the time when Zappos was poised to explode into other online markets. Also, everyone knows that unless you are financially in trouble, today’s economic climate is not ideal for a sale. Part way through the call, Ryan blurted out, "it must be the investors (such as Sequoia) forcing Tony's hand." That sounded right but how were we going to find out. The next day the story would unfold and it became clear, Ryan was right.

Although Tony Hsieh and Zappos have come out and denied stories that the investors forced them to sell, we need to probably examine the words "force" and maybe in this case it isn't so literary. The stories are out now that show that Tony fought the sale, but the pressure was on from the investors who had put $60 million into Zappos. Tony knew that selling now meant a lower market price, and less cash versus stocks. Two years from now in a recovering economy it is likely that Zappos would fetch well over a billion dollars and the sale would include more cash than the $40 million plus stock offered by Amazon. A recent quote from Zappos stated that the entire board at Zappos agreed that joining forces with Amazon would be good for Zappos. I don't disagree with this statement but, it is in the way this is worded. I am sure that all agree a sale to Amazon was in the best interest of Zappos, but this becomes a question of timing. Now that the deal has been approved on both sides, it is in everyone's best interest to come out with messages that agrees with one another. For the investors such as Sequoia, the deal is great for them and the return on investment is incredible. From their point of view one cannot blame them in this economy for wanting to get a positive return on their investment. Sure, they could get a lot more in a couple of years, but no one has a crystal ball and selling today means a guaranteed positive return; tomorrow is anyone’s guess.

As sometimes is common in these types of sales, the news comes out that Jeff Bezos and Amazon will leave Zappos staff in place to continue running the company "as is." Is this possible? Only time will tell, but if past online mergers are any indication, it may prove to be difficult. Jeff is a visionary and recognizes the value of the culture and customer service juggernaut that Tony has created. Even if the best intentions by Amazon are to leave Zappos running under its current management, and to allow the Zappos culture to continue, human nature and common sense tells us it is impossible. Eventually the culture at Amazon will influence changes at Zappos that will start the ball rolling downhill. Will Tony and his executive team have the same passion for the company that they do now? One columnist that I read says "yes." He goes on to write how the Zappos leaders and their employees are incentivized to make this a success because of the amount of Amazon stock that is being traded in lieu of cash for Zappos. I hope this is the case but history tells me it may not be. Amazon is an online monster and while the purchase of Zappos will currently affect the Amazon share prices, in the long run the impact will be far less. Amazon's stock price is more dependent on the continued success of the Kindle and the presumed upcoming fight they are going to have with Apple over Kindle type innovation.

For Jeff Bezos and Amazon, they got what they wanted and paid less for it then they would have a year ago or a couple years from now. The Zappos purchase allows Amazon to be the leader in online shoe sales overnight as their current model was never going to be a threat or true competitor to Zappos. The sale also takes away the future threat of Zappos competing in other online market areas that Amazon is currently in. At the $847 million dollar price, mostly Amazon stock, it is my opinion that Jeff and his company clearly are getting the better deal. Tony's future at Zappos remains to be seen, but one thing I can guarantee, he will end up better in the long run and probably as the inspiration and leader of a yet unknown entity.

Icon: author blog About the Author:
Damien is the Founder and CEO of FindAnyFloor.com as well as several other technolgy businesses specializing in social media and search.
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Comments (54)

Rob posted on: July 29, 2009

Excellent blog post, I appreciate the insight and I am impressed you are willing to send the time and publicly offer opinions on this subject that could be deemed controversial. As an owner of a business I am fascinated by the dynamics of Boards and the behind the scenes negotiations on how these deals come about. Great insight, appreciate you taking the time to share your opinions in a timely manner.

Jim posted on: July 30, 2009


Great article. Love the insight you bring to the topic.

What do you all think the big A bought the big Z for? Was it just the sales? Or do you think some of it was aimed toward the "alue of the culture and customer service juggernaut that Tony has created"?

Look forward to more blogs from you!

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