3 Looming Threats to Amazon.com

Amazon.com (Nasdaq: AMZN  ) has built a successful empire focused on selling you just about anything. No really, anything. Bacon-flavored lip balm -- check. Magical wolf shirt -- check. Wedding chapel -- check.

What's the secret behind Amazon.com's success? According to Amazon's CEO Jeff Bezos, focusing on customers is "the only reason that Amazon.com exists today in any form." He went on to say, "We've always put customers first."

However, Amazon is not without its challenges. Besides its climbing stock price, there are many potential threats to Amazon's business that might scare away investors. If you'd like to debate these dangers, share your thoughts in the comments box below.

Threat No. 1: Copycat retail sites
Amazon.com's website offers millions of items for sale. In order to offer up such a broad inventory, they pad their product selection by allowing other retailers to sell goods on Amazon's website. Last month, both Wal-Mart (NYSE: WMT  ) and Sears Holdings (Nasdaq: SHLD  ) announced that they will also allow third parties to sell goods through their retail websites.

Threat level: Low
Amazon.com has spent more than a decade building its brand, and this recognition won't disappear overnight. Like Costco's (Nasdaq: COST  ) business model, Amazon.com strives to offer broad selection at low prices, which creates a stable of loyal shoppers. According to Alexa.com, Amazon.com is the second-most-popular shopping destination worldwide, trailing only eBay (Nasdaq: EBAY  ) . 

Third-party retailers want to sell their products where shoppers are opening their wallets, and Amazon's customer-centric features -- like their robust recommendation system and online reviews -- certainly attract shoppers. Amazon's fulfillment services are also a big draw for third-party retailers, since Amazon will handle the billing, shipping, returns, and customer service of third-party products. Neither Wal-Mart nor Sears will offer a similar fulfillment service. In order to attract both shoppers and retailers, Wal-Mart and Sears will need to create a sustainable online advantage. Just opening up your website isn't going to cut it.

Threat No. 2: Direct competition to the Kindle
Amazon.com places a high importance on its e-book reader, the Kindle. Since Amazon builds the Kindle and sells digital books, Amazon is placing a large bet on the success of its Kindle franchise. Unfortunately, other companies -- Sony and IREX -- have released or are currently releasing competitor e-book readers.

Threat level: Low to Moderate
Both Sony and IREX have developed new e-book readers that shouldn't be overlooked. Each offers slightly differing features and hardware. While Amazon wasn't the first company to create an e-book reader, it was the first company to successfully launch an e-book reader and gain consumers' acceptance. That's because Amazon focused on the reading experience for customers, and had the ability to expand digital content. 

Since part of the challenge has been the acceptance of new technology, Amazon has a definite edge over its competitors. However, features offered by other e-book readers -- such as expandable memory, a larger library of downloadable content, and a touchscreen -- could offer some serious competition to the Kindle. In addition, Sony has a partnership with Google (Nasdaq: GOOG  ) for access to more than 1 million public domain books, while IREX will distribute its e-books through Barnes & Noble

Amazon currently adopts a closed system for its e-books, meaning that they're not compatible with other e-book readers. That creates an advantage, since Amazon often has the latest digital book releases. Rivals are pushing for open standards through their competing e-book readers, and establishing digital inventory without Amazon. In the near term, the Kindle should continue to capture most of the e-book reader market. But when e-books replace physical books as the accepted norm, I think an interesting battle will shape up.

Threat No. 3: The need to find new revenue streams
Amazon.com prides itself on its selection of products and consistently adds new product categories. It's always seeking new ways to diversify revenue generation and drive its overall growth. Given Amazon's history, analysts estimate that the e-tailer will grow by almost 25% over the next five years.  

Threat level: Moderate to High
Amazon.com is a smart company that has optimized its website portal to sell retail goods. This is demonstrated by Amazon's trailing-12-month revenues of $20.5 billion, the bulk of which come from its website. However, just as Apple (Nasdaq: AAPL  ) must consistently innovate to develop new products or improvements to its lineup, Amazon must also take steps to secure future growth. The big question will be if any of these strategies will contribute meaningfully to the bottom line. Currently, Amazon is exploring additional revenue streams, including:

  • Optimizing its technology platform to offer web-related services.
  • Making strategic acquisitions of companies like Zappos.com that complement Amazon's business model.
  • Producing and selling private-label products, such as Ethernet and A/V cables.
  • Launching new services to meet customer demand, such as Amazon Fresh, its grocery delivery service.

While Amazon's web-related services represent only a small percentage of total revenue, shareholders should be most excited about this opportunity. According to Evans Data, Amazon has one of the most robust systems in place for cloud computing. If Amazon could capture a share of the enterprise market, it could see significant revenue growth from this market. The other three potential revenue streams will not drive significant revenue in the near term.

Wait, what? What a letdown!
Besides customer focus, CEO Jeff Bezos believes that it's critical for companies to keep an eye on the future. (It seems that Fools have a lot in common with Amazon's CEO.) As he recently said:

Any company that wants to invent on behalf of customers has to be willing to think long term. It's actually much rarer than you might think. I find that most of the initiatives we undertake may take five to seven years before they pay any dividends for the company.

That's why it's good that Amazon is exploring private-label products and making strategic acquisitions, even if there's no immediate payout. This long-term focus lets the company test new revenue streams; one of these areas may unlock significant future revenue for Amazon.com.

Historically, Amazon.com has made a big impact on the online retail industry. To continue the type of growth that investors like to see from an Internet company, Amazon will need to capitalize on new opportunities and answer to potential threats to its business. Given Amazon's obsession with its customers, long-term focus, leadership, and track record, it seems to be up for the challenge. 

Do you think that Amazon can beating the threats above? Do you see additional perils ahead for the e-tailer? Share your thoughts in the comments box below.

Fool Katrina Chan does own shares of Apple. Amazon.com, Costco, eBay, and Apple are Stock Advisor picks. Sears Holdings and Costco are Inside Value recommendations. Google is a Rule Breakers selection. The Fool owns shares of Costco. Whew, that was a long disclosure. The Fool's disclosure policy not only approves of lengthy disclosures, but also likes to drink horchata in December.


Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 21, 2009, at 10:20 AM, lemoneater wrote:

    Very interesting. Thank you. As long as Amazon doesn't get into banking it should be fine!

  • Report this Comment On October 21, 2009, at 11:38 AM, thetucket wrote:

    I think the threat from other retail sites is even lower than you suggest, given Amazon's unrivaled supply-chain management practices. It's network of distribution centers is large, growing and strategically organized. A recent NYT article detailed their uncommon, though peculiarly successful item stocking and order-filling practices. In my own personal experience, their shipping times usual beat estimates (3-5 days arriving in 2, for example). They're also now pushing a same-day delivery option in a number of metropolitan US markets, in an effort to increase order frequency. We'll see if shoppers are willing to pay for that...

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1012693, ~/Articles/ArticleHandler.aspx, 10/21/2014 2:04:08 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement