Amazon.com: Friend or Foe?

Amazon.com (Nasdaq: AMZN  ) is many things to many people. Now the world's largest Web retailer, the company has come a long way from its days as an online bookstore. Since its founding in 1994, Amazon has taken the retail industry by storm, as Jeff Bezos' company has forever changed the way we shop.

Its role as a wildly popular digital marketplace is only the tip of the iceberg. Amazon is also a service provider, payments processor, distributor, and logistics business. But because the company is a retailer at heart, its focus on infrastructure reveals a dangerous conflict of interest.

Mining for profits
Not many companies can do what Amazon does at the same level of efficiency and scale. In fact, there are thousands of businesses that rely on Amazon for 100% of their revenue. More than 2 million registered sellers trust Amazon to sell and ship their products, handle customer service complaints, and process payments. In exchange for its services, Amazon takes 15% of every sale. Better still, the retailer is getting something much more valuable than its sales commission.

By playing the middleman, Amazon controls every part of the retail process, which makes it possible for the Web behemoth to collect, store, and analyze data about its sellers' customers. Data mining is nothing new. In fact, it's a way of life for companies like Google (Nasdaq: GOOG  ) . But what's to stop Amazon from using that information to compete with its sellers by offering popular items at cheaper prices?

Critics worry that this gives Amazon an unfair advantage. However, at the end of the day it's a trade-off -- sellers gain access to Amazon's customer base of 85 million and growing, not to mention peace of mind in terms of shipping and customer support.  

If sellers feel threatened by having to compete with Amazon, they can always hawk their products on rival online marketplace eBay (Nasdaq: EBAY  ) . Unlike Amazon, eBay doesn't operate its own retail business. Payments are processed through eBay's PayPal division, and users are responsible for shipping their own products.

Rich network of services
Amazon Web Services is also an extension of the company's influence. However, major retailers that use Amazon's computing features to power their websites are increasingly losing patience with the company. Last year, Target (NYSE: TGT  ) severed its ties with Amazon and moved its e-commerce business in-house. Of course, competition between the two retailers was the root of the separation.

Amazon delivered another blow to brick-and-mortar retailers like Target last winter, when it released a smartphone app that let shoppers compare prices on in-store products. The controversial app opened the floodgates for buzzwords like "comparison shopping" and "showrooming." Disruptive as this may be, it employs one of the oldest merchandising strategies in the book: Offer the lowest price possible.

If you're thinking I'll carry on now about the pain that "showrooming" is causing for traditional retailers, you're mistaken. This seemingly hard-nosed approach to pricing promotes competition, which in turn means better prices for consumers like you and me. As a result, determined retailers like Target are finding new ways to lure customers into their stores.

The discount retailer launched a program in which it partners with fashion designers to create limited-edition collections such as its Missoni for Target line. Offering its customers one-of-a-kind pieces at affordable prices is one way Target hopes to keep customers from seeing a product in its store only to buy it from an online retailer like Amazon.

Winning equation
Amazon Web Services is also a double-edged sword for digital-media providers such as Netflix (Nasdaq: NFLX  ) . In 2010, the video -streaming company moved from its own data center to Amazon's public cloud infrastructure. This wouldn't be a problem except that Amazon now streams videos and media content through its Cloud Player and Prime service -- a play that pits the two companies against each other in the space.

Ultimately, this is Netflix's problem, and if it so chooses, there are other companies that provide public cloud services, including newcomer Google. The search giant, along with Microsoft, is building cloud-computing platforms to compete with Amazon EC2 cloud.

To protect its lead in the infrastructure as a service space, Amazon is heavily investing in warehouses and data centers of its own. While this crimps the company's immediate profits, it's enabling Amazon to lay the groundwork for sustainable riches down the road.

I think choosing growth over profits is the right approach for Amazon at this point, which is why I've given the stock a three-year outperform mark in my profile on Motley Fool CAPS. Learn the stories behind the stocks by adding these tickers to MyWatchlist -- The Motley Fool's free tool that easily tracks and monitors your favorite stocks.     

Fool contributor Tamara Rutter owns shares of Amazon.com and Target. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Netflix, Amazon.com, Microsoft, and Google. Motley Fool newsletter services have recommended buying shares of Netflix, Microsoft, Amazon.com, Google, and eBay and creating a bull call spread position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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