There seems to be no limit to the number of markets that Amazon.com (AMZN +0.15%) is interested in. Among the biggest we've heard about recently is healthcare, where the company is collaborating with JPMorgan Chase and Berkshire Hathaway via a joint venture in an effort to improve healthcare and reduce the costs that the companies face in taking care of their employees. Amazon acquired online pharmacy PillPack last month as part of its broader healthcare ambitions.
Investors are now catching wind of an entirely different market that Amazon might expand into, one that makes tons of sense: networking hardware.
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Hardware is hard
The Information (subscription required) reports that Amazon Web Services (AWS) is contemplating the massive market for data center networking switches, which is currently dominated by the likes of Cisco Systems and Arista Networks, among others. Shares of Cisco fell as much as 6% on the news -- the "Amazon Effect," as it were.
Amazon is developing its own line of networking switches that could appeal to enterprise customers, according to the report. Networking switches help manage traffic within a network. The company is interested in providing enterprise customers more customization than what incumbents offer, which could allow them to manage their data centers with fewer engineers, resulting in cost savings and efficiency gains.
Convincing enterprise customers to adopt its hardware won't be an easy task, though, as enterprise customers often invest massive budgets into their infrastructure, drastically increasing the switching costs associated with an alternative solution. IT professionals often plan out their infrastructure road maps years in advance, and breakeven calculations are a crucial part of that process. Amazon has been able to get a few customers onboard with testing its new hardware, according to the report.
Networking switches are a vertical integration no-brainer
It's not clear if Amazon will move forward full speed with networking hardware, though. It may launch the hardware more broadly within the next 18 months, but could still choose to abandon the effort, according to the report.
As the biggest cloud infrastructure platform on Earth by far, Amazon has a unique position that it can leverage. Not only could the company benefit from in-sourcing the development of networking hardware for its own AWS operations, it can also sell that hardware to other companies. That's the best of both worlds, and would allow Amazon to maximize the return on its research and development investments.
Considering Amazon's dominance in cloud infrastructure, networking switches are an ideal area where the company can and should vertically integrate.
