I was very interested to hear the news yesterday that Amazon had acquired Zappos for $847 million in cash and stock. Since Zappos founder Tony Hsieh asked and answered some of his own questions about the deal in a letter to employees so I thought it’d be useful to engage in a Q&A with myself about the deal.

1. Why did Amazon buy Zappos?
A: Two numbers answer that succinctly: About 5 percent of Amazon’s sales are apparel/footwear sales, compared with 97 percent of Zappos’ sales (according to June 2009 data from our retail tracking service). Simply put, Amazon has not dominated apparel sales as it has most other categories online. While Zappos isn’t biggest seller of apparel/footwear on the Web, it is the largest of Internet pure play retailers. More importantly, Zappos has developed a reputation for customer service (Amazon’s priority one according to founder Jeff Bezos) that will only improve Amazon’s already strong standing amongst online shoppers. More than 1 million people follow Zappos on Twitter (a cornerstone of their customer service), far beyond any Twitter account managed by Amazon.

2: Did Amazon pay too much?
A: I’m not a financial analyst, but the online apparel category is the largest online merchandise category, expected to grow to $41.8 by 2012. For Amazon not be a formidable player in this space is nearly unthinkable for the company that sees itself as the World’s Biggest Store. Amazon has tried to answer Zappos with the launch of shoe and handbag site Endless.com, but was never able to materially chip away at Zappos’ dominant position. Endless.com registered about one fourth the traffic that Zappos did in June 2009.

3: Why didn’t a company like Wal-Mart or Target buy Zappos?
A: Wow, another great question, Ken! I’m sure that this notion was entertained by the big brick-and-mortar retailers, but the reality is that companies like Wal-Mart and Target have their best online opportunities run through their stores. The fact that they have thousands of stores throughout the country is a huge asset to their online businesses that a big pure play purchase such as Zappos might be distracting to their longer term success. I do wonder, though, if Amazon’s decision to buy Zappos could have been at least partly driven by a fear that this might happen.

4: Beyond merchandise sales, how do Amazon and Zappos fit together?
A: Amazon and Zappos have relatively similar customer bases, although Amazons’ is substantially larger (60M uniques per month vs. 4.1M uniques for Zappos in June 2009). Zappos’ customer base does skew a bit more female (69% compared with Amazon’s 55%) and a little younger, largely a function of the merchandise offered by Zappos. The most telling statistic is that in June of 2009, 77 percent of Zappos shoppers also shopped at Amazon.

5: Amazon has said that it will run Zappos as a separate brand. Is this smart? What do you think that Amazon should do in the longer term?
A: Zappos elicits more passion from its customers than any other brand that I can think of, online or offline, something my colleague Pete Blackshaw has documented for some time. Amazon would have been insane to scuttle the brand. In the long run, it becomes more interesting. I think that Amazon will benefit from the Zappos halo, and vice versa. Amazon can learn from Zappos’ innovation around customer service and marketing. Zappos can learn from Amazon’s technology and database marketing. In five years, I’d say that it’s even money that Amazon looks more like Zappos than the other way around. As to how they brand it, I’m not willing to lay odds either way.

With the telecom landscape in constant flux, carriers continue to find unique ways to add to their bottom lines. While the Kindle, Amazon’s wireless reading device , has been touted as a savior for the newspaper industry, it also represents the first example of the long-predicted ad hoc subscription model for Sprint, which provides the wireless access for Kindle as subsidized by Amazon. Sales of the Kindle drove a majority of Sprint’s 394,000 wholesale additions in Q1.

But because Kindle is included in Sprint’s overall subscriber numbers, the carrier will see pressure on its average revenue per user (ARPU) numbers going forward if ad hoc subscriptions become a significant business. We estimate that Kindle may only represent $2 ARPU compared to approximately $56 for a postpaid Sprint subscriber, however.

Another alternative model is the state-sponsored Lifeline Services available through TracFone. These Lifeline Services enable low-income Americans to receive free wireless service with 40 to 80 minutes of use per month, depending on their state of residence, and this model is rapidly becoming a source of growth for TracFone.

The increase in prepaid subscriber share in Q1 is a trend we see continuing well into the second quarter. With the average consumer more concerned with budgets and bottom lines, it only follows that the disruptive unlimited players will continue gaining ground against the traditional carriers across many US markets.

Read additional Telecom insights in Nielsen’s U.S. Telecom Quarterly.

I’ve been preparing for our upcoming Webinar on Retail Coping Strategies, where we will provide constructive advice to retailers on how they can best cope with the challenging retail environment that we’re in. This has led me to think about companies that are holding up well through the recession.

There are three companies that I’m particularly interested in: Walmart, Amazon, and Hyundai. Walmart’s US sales grew by 6.7 percent, profits by 11 percent in the fourth quarter of 2008. Amazon just announced that Q4 2008 sales were up 19 percent relative to the same quarter in 2007, with profits (yes, profits) higher than expected. While sales at competitors fell by as much as 55 percent in January, Hyundai’s US sales grew by 14 percent. There are two things that these three companies have in common:

• They are all brands that are closely associated with value.
• They all offer selling propositions that allay consumers’ non-price related perceptions of risk.

My working hypothesis is that what consumers are looking for, above all else in this economy, is alleviation of risk. I should be clear that a critical component of this alleviation of risk is reduction of household debt, which is causing consumers to hold off on purchases and seek lower prices. But I think that it’s bigger than that alone. When consumers are buying, they’re looking for sellers that offer a risk-free proposition.

Walmart, as the largest retailer in the world, carries with it a high degree of comfort. You don’t worry about whether you’ll have problems returning the digital camera bought at Walmart. They’re too big to sweat it. You don’t worry whether orders placed with Amazon will arrive in the expected timeframe. Hyundai’s comprehensive warranty and buyback programs mitigate the risks that you will be saddled with unexpected repairs, or with a lease payment that you can’t afford if you lose your job.

The thing that really impressed me about the financial results returned by Walmart and Amazon (I wasn’t able to find Hyundai financial data) for the 4^th quarter is that both companies, in the most difficult economic circumstances that I’ve ever seen, grew both sales and profits.

The lesson that every brand should take away from this is not to be myopically focused on low prices. Low prices are important, but must be considered in the broader context of consumer risk management. Brands should be asking themselves how they can help consumers alleviate a broad portfolio of risks that they’re feeling, not just the need to pay less for each purchase that they’re making.

Join me on March 11th for the Webinar to discuss this idea in more detail.

View the full press release.

View the top U.S. Web brands for September and October 2008.

Unique visitors to the sites included in the Index reached 35.9 million, a 13% increase over this year’s Black Friday Web traffic.

Many of the top online retail destinations on Cyber Monday were the same as those on Black Friday. eBay drew the largest unique audience (10.6 million), while Amazon and Wal-Mart claimed second and third places, with 9 million and 5.2 million unique visitors, respectively.

Among the top 10 online retailers, Sears’ site saw the fastest growth (+58%, year over year).

Beauty was the fastest growing product category on Monday, increasing 151% over the previous Monday, November 24, 2008.

Toys/Videogames ranked second, growing 112% Monday over Monday, while Apparel rounded out the top three with an increase of 58%.

“The growth in traffic to online retail sites on Cyber Monday was better than many people expected, making retailers hopeful that this growth will carry through the holiday shopping season and drive sales,” Ken Cassar, vice president, industry insights, Nielsen Online, noted.  “It remains to be seen if people have done the majority of their shopping on these two big shopping days to save time, or if they are holding out for additional sales and promotions. If history is any indication, we expect that Monday, Dec. 15th will be the peak day for online shopping traffic.”

View the full press release.

Read coverage of Nielsen’s findings by the Associated Press and Bloomberg, as well as in The Wall Street Journal, the Financial Times, Investor’s Business Daily, Ad Age, PC World, the Orlando Sentinel, ClickZ.com, and InternetRetailer.com.

The results are based on a Nielsen Online survey, conducted November 6-11, intended to gauge online consumers’ holiday shopping plans for 2008.

Top 10 Reasons to Shop Online (U.S.)

Holiday Gift Dollars Shifting Online

Survey results indicate that holiday gift budgets are shifting online. Respondents said that they would spend an increased percent of their holiday shopping budget online, an average of 41 percent compared to 39 percent last year. And more respondents indicated that they would spend the majority of their holiday gift budgets online, up to 36 percent from 32 percent a year ago.

Prospects For Growth

More consumers plan to make purchases in the “Toys & Video Games” and “Books” categories this holiday season than last. The top three retailers when ranked by the year-over-year increase in respondents intending to shop there this season were: Amazon, Wal-Mart and Barnes & Noble.

“We believe holiday online sales will grow from 2007, but likely at a single-digit rate and representing the smallest increase we’ve seen since the online commerce market was born,” said Ken Cassar, vice president of industry insights, Nielsen Online. “If there is a silver lining, it is that consumers continue to view the online channel’s principal value proposition as convenience, more than price, allowing retailers the opportunity to differentiate on service and selection.”

Black Friday And Beyond

Throughout the upcoming holiday shopping season, which officially commences with Black Friday on Nov. 28, Nielsen Online will report weekly – and, in some cases, daily – online audience data for top online shopping destinations as well as for its annual Holiday eShopping Index.

Download Nielsen Online’s full press release.

Today, the likes of Netflix, Apple, Microsoft, Amazon, Veoh, and Hulu are betting it has.  Instead, they’re throwing their resources into developing a new video source: online streaming movies.

These new media titans may have the right idea, according to recent research by Nielsen that found online streaming video usage almost doubled in the U.S. between 2006 and 2007.  A separate survey conducted by Nielsen in 2007 found that 40% of respondents had streamed some type of video, while just over 10% had downloaded a full movie.

But while consumer generated media streaming has taken off online, movie content streaming accounts for only about 1% of all online streaming activity, according to Nielsen. 

But that trend may be changing fast, according to a new report by Nielsen PreView.  So far in 2008, movie content streaming has grown by leaps and bounds, outpacing the growth of streamed consumer generated media, the most popular streamed content, by a factor of eight.

Online video streamers are also an increasingly engaged lot, with more people streaming online movies for longer periods of time.  Between November 2007 and May 2008, those who streamed 30 minutes or more of online video grew by 4%, according to Nielsen. 

What’s trigging the growing popularity of online streaming video?  In part: broadcast TV content available for streaming online. 

Consumers who streamed more than 43 minutes of broadcast content during a recent seven-month period had the highest likelihood of being online movie content streamers, according to Nielsen’s report.

Read Nielsen PreView’s report.

Learn more about other recent Nielsen PreView studies on R-Ratings and 3-D films.