Amazon (AMZN 0.38%) is reportedly interested in buying Sprint's (S +0.00%) Boost Mobile prepaid wireless brand, according to Reuters. Sprint and T-Mobile (TMUS 1.40%) previously pledged to sell Boost if their $26 billion merger is approved.
Amazon reportedly wants Boost for its access to T-Mobile and Sprint's combined wireless network over the next six years. It's also interested in buying any wireless spectrum divested from either carrier.
Amazon's ambitions are unclear, but the news torpedoed shares of AT&T (T +0.07%) and Verizon (VZ +0.02%), since it suggested that the tech giant could disrupt the wireless market. However, I highly doubt Amazon plans to go toe-to-toe against those telecom giants for four simple reasons.
Image source: Getty Images.
1. It would cost a lot of money
AT&T, Verizon, T-Mobile, and Sprint dominate the U.S. wireless market. If T-Mobile's merger with Sprint is approved, the market will be split among just three carriers.
If Amazon wants to become the fourth player in this market, it will need to spend a massive amount of cash on building a national network. AT&T and Verizon, for example, will have each spent about $120 billion on wireless capital expenditures and spectrum purchases over the past decade to maintain their market-leading positions.
Investors should recall that Alphabet's Google previously challenged AT&T and Verizon with its Google Fi wireless network. However, Google didn't build its own network -- it merely launched an MVNO (mobile virtual network operator) on top of Sprint and T-Mobile's wireless networks.
It seems more likely that, if Amazon does buy Boost, it will be to launch its own MVNO network instead of becoming a full-fledged wireless carrier.
2. It will likely focus on autonomous drones and vehicles
If Amazon launches its own MVNO, it probably won't focus heavily on the smartphone market. Instead, Boost's access to T-Mobile and Sprint's network -- along with any additional spectrum Amazon might acquire -- could be used to power its autonomous delivery vans, robots, and/or drones.
Amazon hasn't launched any of those technologies on a wide scale yet, but increased use of them could reduce its logistics expenses over the next few years. Running those devices atop its own MVNO instead of a major carrier's network could further reduce those expenses.
3. Lower operating margins than AWS
Amazon supports its lower-margin marketplace business with higher margin revenues from AWS (Amazon Web Services), the biggest cloud platform in the world.
AWS generated an operating margin of 29.1% over the past 12 months, compared with 5.7% for Amazon's North American business and an operating loss for its international unit. Meanwhile, AT&T, Verizon, Sprint, and T-Mobile all have significantly lower operating margins than AWS:
T operating margin (TTM) data by YCharts
Trying to build a nationwide network while competing against those carriers would inevitably weigh down Amazon's total operating margins -- which could cripple its ability to expand its e-commerce ecosystem with loss-leading platforms like Amazon Prime.
4. Regulators would likely block Amazon's move into the market
Lastly, any major move by Amazon into the wireless carrier market would likely be blocked by antitrust regulators, since it already dominates the e-commerce and cloud platform markets and controls significant shares of the online advertising and streaming media markets.
The Washington Post also recently reported that a new partnership between the U.S. Department of Justice and the Federal Trade Commission could spark fresh antitrust probes against tech giants like Amazon and Alphabet. This indicates that it's highly unlikely that Amazon will abruptly declare war on AT&T and Verizon.
The bottom line
The Amazon-Boost story resembles the reports about Amazon and Cisco last year. At the time, various outlets claimed that Amazon would start selling its own white-box networking hardware to compete against Cisco.
However, it turned out Amazon was merely developing some first-party networking hardware to cut its own data center expenses instead of challenging Cisco in the saturated market for routers and switches.
Likewise, Amazon's rumored interest in Boost and wireless spectrum is likely aimed at cutting its own long-term costs and optimizing its operations -- and not disrupting a saturated market with deeply entrenched market leaders.
