Amazon's Weapons of Mass Disruption

Something big is coming. Amazon.com (Nasdaq: AMZN  ) is set to unveil a revamped slate of Kindles on Thursday that will be quicker, sharper, sleeker, and cheaper -- a recipe for gangbuster sales and a thorn in Apple's (Nasdaq: AAPL  ) side. That might not be all. Amazon is known to have a smartphone in the works. Don't be surprised to see it steal PR thunder from the iPhone 5 this winter.

But even bigger things are in store for Amazon, the 801-pound gorilla of online retail. Amazon's scale, reach, deep pockets, and tight customer ties make it a force to be reckoned with in whatever arena it wants to pick a fight. But while everyone is hung up on Kindles and smartphones, they're overlooking some of the biggest game-changers Amazon has in its arsenal.

Here are six weapons of mass disruption that Amazon could fire at a moment's notice.

1. Amazon TV
Forget an Apple television. Apple would have to pull a rabbit out of the hat to make building televisions worth its while. Competition is fierce, pricing is cutthroat, and copycatting is shameless. There are easier ways for Apple to make money.

But Amazon can make television work. Whereas Apple's content ecosystem exists to fuel hardware sales, Amazon's hardware exists to fuel repeat, high-margin media sales. Amazon could sell televisions at cost or a small loss, as with Kindles, because they more than make up the profits on the back end. Imagine televisions rolling off the line preloaded with a Prime trial, the Amazon Appstore, and a slick, interactive, at-home shopping experience that allows couch surfers to buy the item they just saw advertised via Amazon with one click of their remote control.

The biggest disruption of all would be an ad-supported television. Amazon could rip a page from its Kindle playbook and sell some of its already dirt cheap TVs below cost -- perhaps $150 below comparable rival TVs -- by building in banner and video ads that could roll when you turn on your television, flip to certain channels, and more. The possibilities are endless and a big win for both Amazon and cost-conscious shoppers. Thrifty shoppers get a premium TV at a fire-sale price, and Amazon gets a virtual storefront installed in your living room for years on end.

2. Amazon Private Label
Don't stop with TVs. Amazon could replicate Costco's success with its popular Kirkland Signature store brand and launch its own line of affordably priced private-label goods. The best place for a launching pad for Amazon is in personal care -- think razor blades, diapers, and the like. These are everyday items that consumers are already used to paying up for. Even better, they're non-perishable and cheap to ship.

Consumer juggernaut Procter & Gamble's gross margin is almost 50% -- more than double Amazon's -- which means Amazon could aggressively undercut brands like Gillette and Pampers with plenty of profitable room to spare. Amazon's Kindle has proved that it knows how to work the razor-and-blade business model. Now it's time to get literal.

3. Amazon Streaming
Amazon could cripple Netflix (Nasdaq: NFLX  ) and create a cadre of more engaged members by unbundling its instant-video offering from Prime and selling it a la carte. Sure, Netflix boasts a bigger selection today, but Amazon would steal oodles of customers if it priced its subscription at $5 a month -- $3 below Netflix. Upselling Amazon instant-video subscribers into Prime would be a snap. Or go even more rogue and roll out an ad-supported free instant video experience. Admittedly, I'm not sure that this move creates more value than keeping instant video bundled with Prime over the long haul, but it would make Amazon an instant heavy hitter in video membership and keep Netflix -- a dangerous foe -- stuck playing defense.

4. Amazon Stores
It might sound antithetical, but Amazon needs a physical presence. Yes, really. That's why it has launched Amazon Lockers and is rumored to be fiddling with a bricks-and-mortar store concept. Give me more, Amazon. Amazon Stores should serve as Kindle showrooms, cozy shrines to reading, and convenient ordering and fulfillment locations. And the concept should extend beyond U.S. shores. Amazon Stores in developing markets would be prime venues to see and touch Kindles, operate as massive lockers, and help bridge the comfort gap from offline to online spending while cutting shipping costs.

Here's another twist on a physical presence -- without the burden of big budget. Amazon could kindle a relationship with fellow Seattle consumer biggie Starbucks (Nasdaq: SBUX  ) . Books and coffee shops are a natural fit and crossover opportunity. Starbucks locations could carry Kindles, host Amazon lockers, and offer a free coffee or other discounts when you order a new e-book while on Starbucks' Wi-Fi network. Options abound. This natural alliance gives Starbucks customers one more reason to make it their "third place" and Amazon a real-world footprint that jibes with its brand and model.

5. Amazon Browser
Google's (Nasdaq: GOOG  ) smashing success with its Chrome Web browser is a wake-up call. Amazon could follow Google's lead and build its own desktop-centric Web browser with an eye toward moving it closer to the customer. Tapping into users' Web browsing and search-query data would allow Amazon to hyper-target the virtual storefront to shoppers' desires. And consumers just might bite: An Amazon browser could differentiate by weaving in instant video, its app store and social games, and an enhanced, integrated shopping experience. It helps that Amazon could smartly offer users, say, $10 in Amazon store credits when they download the browser.

6. Amazon Travel
Amazon is the first place I look for physical goods. It should be the same for travel: airline tickets, cruises, car rentals, and hotel stays. Everyone from Google to Kayak has a different twist on the third-party travel sales model, but Amazon has a unique edge that would allow it to undercut competition and steal share. Amazon can upsell you on your purchase. Flying to Italy? Maybe you'd like a discounted Amazon Kindle to help you pass the time. And, naturally, some e-book travel guides to help you prepare for and navigate your trip.

The Foolish bottom line
Amazon's arsenal of strategic weaponry only bolsters the case for the stock. You can read all about why I think the e-tail king is set for continued disruption in this new premium report, written by yours truly, which details Amazon's business, financials, risks, and valuation. Grab your copy today.

Motley Fool Inside Value advisor Joe Magyer owns shares of Amazon.com and Google. The Motley Fool owns shares of, and Motley Fool newsletters have recommended, Apple, Amazon.com, Costco, Google, Netflix, and Starbucks. The Motley Fool has a Prime disclosure policy.


Read/Post Comments (7) | Recommend This Article (36)

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  • Report this Comment On September 05, 2012, at 12:23 AM, jamesreidy wrote:

    For #2 Amazon has a house brand called, "Amazon Basics" for items like HDMI cables. They are inexpensive, good quality and are always Prime 2-Day shipping eligible. I would love to see them branch into other household items.

  • Report this Comment On September 05, 2012, at 7:49 AM, TMFJoeInvestor wrote:

    Thanks, James. My wife and I also saved a boat load by buying the AmazonBasics HDMI cable. The AmazonBasics line is a great extension because they're focused on low-tech, high-margin complementary accessories to bigger ticket items like TVs and digital cameras. No only does Amazon get a nice boost off the line, but it increases the total savings for customers considering between buying their set up from Amazon or, say, Best Buy. A win for Amazon and shoppers.

    I want to dig deeper, specificity into repeat use items. HDMI cables are a great step but I only purchase them once in a blue moon. I buy razor b lades early and often, though, -- my facial hair burns through disposable razors like clockwork -- and items like razors, diapers, and assorted hygiene products would score repeat, high-margin business for Amazon, potentially for many years. That's the beauty of consumer brands -- loyalty can last lifetimes and pattern is hard to break. Incidentally, because they ship you the items and know your buying history, Amazon could tailor marketing and shipments on such products. Personally, I love their Subscribe & Save program.

    But I digress. Thanks again for the comment, and Fool on!

  • Report this Comment On September 05, 2012, at 10:04 AM, dhrtx wrote:

    So what are we to make of the very recent Foolish Best Buy recommendation for Netflix which seems to be getting a swirly this week????

  • Report this Comment On September 05, 2012, at 10:08 AM, penchy1 wrote:

    Hey Joe

    I see now that you picked AMZN you have become their VP in charge of strategic development.

    LOL!

    Good article.

    Thanks.

    Mark

  • Report this Comment On September 05, 2012, at 10:12 AM, TMFJoeInvestor wrote:

    Thanks, Mark!

    And dhrtx, I don't work on Stock Advisor and am probably not the best person to respond to your question. Fortunately, one of the guys on the SA team put up a board for members last night that you may want to check out: http://boards.fool.com/1081/nflx-down-635-some-thoughts-3024...

  • Report this Comment On September 05, 2012, at 8:44 PM, joshisam wrote:

    The title to your article is catchy, Amazon's Weapons of Mass Disruption. I rather call it Amazon's Weapons of Mass Deception!

    Let me explain: Amazon TV, Amazon Browser, Amazon Streaming, Amazon Travel: this sounds like Google to me. Google has a PE of about 20.18, and Amazon has a PE of about 300! If you give Google a PE of 300 then Google stock will be worth about $10,000!

    When it comes to Amazon Stores and Private Label its Costco. Costco has a PE of 27.4.

    If you average the GOOG and COST PE it comes to about say 24, which should the the PE for Amazon, and so the stock price should really be about 20!

    The reason I feel the article should really be titled Amazon's Weapons of Mass Deception is because they announce some thing new so one does not ask them about failures of their last announcement! PE of 300 for no dividends, and now sales taxes!? Really???

  • Report this Comment On September 06, 2012, at 2:22 PM, Borbality wrote:

    CONSUMER FATIGUE.

    Amazon has already disrupted by letting anyone get whatever they want on one site with no hassle.

    So why is every tech company making devices trying to force consumers to use their proprietary software and stick to only their branded, and inferior, services?

    And why should we suggest that Amazon do even more of that with its own branded TVs and streaming services and everything else? Not to mention that it's not all that simple to just create TVs people want or a streaming service to rival netflix.

    People like Apple hardware because the device is the selling point. They can do whatever they want on it for the most part with limited trouble.

    Show me an Amazon TV and I show you one that doesn't come with a Netflix app or Google Play, stuff I use every day, and I show you one I don't want.

    Consumer fatigue is going to be an issue for all these competing issues. Let's not forget that we can all do whatever we need to do on Windows PCs. Any limit is going to be resisted. These guys are getting too greedy when there's probably room for everybody.

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