Could This Be Amazon's Next Big Business?

Amazon (AMZN -1.65%) is known for its diversified business model and penchant for breaking into industries and seizing market share. In this segment of Backstage Pass, recorded on Nov. 29, Fool contributors Jason Hall, Rachel Warren, and Toby Bordelon discuss the company's latest move as an industry disruptor. 

Jason Hall: Amazon says that they are on track to become the largest delivery service in the United States by early next year or even by the end of this year. There's part of me that's just blown away with that. They're going to be bigger than UPS or FedEx, the U.S. Postal Service. But I'm not sure. The same as the last one, that's just still a little bit of a free-for-all here. Rachel, share your thoughts on it.

Rachel Warren: Yes, I thought this was exciting news, actually, as an Amazon shareholder and also someone who just really loves this business. I think this is also further proof that Amazon continues to be an industry leader and have massive success in whatever industry it chooses to operate in.

Obviously, successful fulfillment is a huge part of Amazon's business. It has these fulfillment centers where its workers fulfill a lot of the orders that come in, whether from its own stores or third-party sellers. Then it has these middlemen, which are sortation centers where these are then processed and then sent out to fulfillment partners like UPS, like FedEx. Things that brought down Amazon's balance sheet in the last quarter, which I think worried some investors, was the supply chain crisis.

I think when you're looking at how Amazon is planning to essentially remove the middleman and take care of it fulfillment network from beginning to end, that is a huge sign of its ability to continue thriving and remain competitive even as you have this changing supply chain environment that could be an issue for a while. I also think that it's interesting if you look at how Amazon could potentially surpass some of these more-traditional delivery services or even something like USPS, the U.S. Postal Service.

Amazon has essentially limitless resources at its disposal, whereas something like the U.S. Postal Service that doesn't receive direct taxpayer funds, but it relies on revenue from service fees and stamps, whereas Amazon has all of these other sources of revenue that it can use to further build up and support its fulfillment network. I don't think it's surprising that this is something that we're seeing. I think this is something that should be exciting to investors as well as the customers in general.

Not only does it mean smoother delivering, ordering processes, but it also enables Amazon to remain competitive because I think more and more shoppers, when you order something, people want that instant gratification of being able to get that package quickly and smoothly and without issues, and that's been more of an issue lately with supply chain struggles.

I could definitely see Amazon being a key player in delivery both in the U.S. as well as outside the U.S. as it expands internationally. All in all, this news very much excited me.

Toby Bordelon: Yeah, I think that's where I am. It's interesting and I like it. I think it's pretty good news. It's not that surprising to me, though, when I really think about it because Amazon has been really investing in their distribution system. What do we got? They have their own air cargo fleet. Just about a couple of years ago, they started buying this. They've got a huge fleet of trucks and delivery vehicles. They got a deal with Rivian to produce electric vans for them. Now, I don't think that deal necessarily justifies Rivian's $100 billion valuation, but that's not Amazon's problem.

Amazon is going to get some of these trucks, and we'll see how well they work. I did not know this, they apparently even have a fleet of cargo ships that they use like Amazon ships to actually move cargo back and forth. They have warehouses everywhere. I do wonder, Jason, if this could one day become another cash-producing business for them.

Could they sell their logistics operations to third parties? Could they directly compete with -- as Rachel noted, they have partnerships with UPS and FedEx -- could they actually start directly competing with them for other third-party customers? Maybe the Postal Service?

I remember a talk a couple of years ago, when we were saying, what should we do with the Postal Service. Maybe sell it to Amazon was [laughs] some ideas out there. Maybe Amazon doesn't need the Postal Service to become dominant in this industry? I don't know. I'm not ready to say, yes, this is going to be the next AWS [Amazon Web Services] in terms of revenue. I don't think it necessarily will be, but it's fascinating where they are already. It's fascinating to me. They've gone so far.

Jason Hall: It's interesting, guys, I think, for the average man or woman on the street, they would be just blown away, gob-smacked that Amazon could be carrying more packages than UPS. But then, just like the rest of us, think about it for a second, and be like, you're right. I guess that makes sense.

It's strange that has happened, but I do think, Toby, Rachel, this has become Amazon's MO. It's like their best, most profitable businesses are things that they built for internal use and became their first best customer.

Amazon Web Services is a clear example for that. They've built this enormous internal infrastructure for their own data, and built these great tools and saw it as something that other companies could really use. Because their existing operations soaked up a massive amount of the operating costs for that asset, they could sell it cheaply and earn a very high profit, and we certainly learned that's the case with Amazon Web Services.

Here's the thing, Toby: They already monetize shipping as part of their Fulfilled by Amazon. I'm not sure the exact breakdown of how it works, but, I think, it's a portion of the selling price of the item. I think you have to pay a flat rate, you have to put a minimum amount of stuff in Amazon's warehouse, and you pay a flat rate. Then there's a percentage you pay of every item that you sell on Amazon's platform, and then Amazon handles all the logistics.

They already make money for that, but every dollar of an item that's on an Amazon plane or an Amazon truck is undoubtedly more profitable than anything that goes on a FedEx, or UPS, or USPS product. Controlling more of those dollars, it makes sense.

Taking like, their pure shipping business to the next step, where they could show up at my house, pick up Toby's Christmas present, take it from Massachusetts to Nevada and deliver it to Toby.

At the same time, they are delivering the stuff that Toby bought from Amazon for his kids, where I'm paying Amazon to be FedEx. That's that same first-best customer practice at work, where the incremental value of those items. They're already coming to my house to drop stuff off. They're already going to Toby's house to drop stuff off.

They're flying from Boston to Nevada. The incremental value of maximizing their capacity could be huge. It's just you started getting more real-world with this versus like the virtual capacity with web services. I'm not sure what the incremental margins would be. I don't think we can count on this being AWS 2.0 for the bottom line. But it could certainly be. They've done it before, why wouldn't they do it again?