Once again, Amazon (AMZN 3.43%) is making waves.
The e-commerce giant plans to roll out a marketplace of services later this year. Amazon hopes to become a middleman between local businesses and consumers on a city-by-city basis. Whether consumers are looking for a best-selling thriller or a plumber, they may soon be able to find both at Amazon.com.
The playing field
The local services mark.et already has several well-established players, most notably Angie's List and Yelp (YELP 2.13%) Additionally, search engine leader Google (GOOG 9.96%) (GOOGL 10.22%) has a local app offering.
Competitive landscape
Specifically, Yelp boasts two unique advantages: more content and a specialized mobile app. Since Yelp was a pioneer in its industry, it has developed more content than most of its competitors with 56.9 million cumulative reviews. Plus, because of the quality of its specialized mobile app, Yelp has been able to compete against Google for search dollars. Analysts from the Fool predict Yelp's earnings will grow an astounding 86% in the next five years while the overall sector grows 17%.
Google may be one of Amazon's largest competitors in the local services market, though. Besides being the world's largest search engine, the company has also launched its Google+ local app, which allows you to find local services and rate them. Google also dominates the mobile search market with 87.1% market share. If looking for local services or shopping for deals, Google is still where most people go, especially if they are mobile users.
Amazon's greatest threat is Alibaba Group, which is preparing for an IPO. The largest, most profitable e-commerce business in the world is now preparing to enter the U.S. The company recently revealed its management structure and its slowing, but still very fast, growth. It is possible that Alibaba could have the largest IPO ever to be on a U.S. stock exchange. In the second quarter of 2013, Alibaba achieved $1.73 billion in revenues. If it continues on its growth trajectory, it may become the first e-commerce company to handle $1 trillion a year in transactions.
So, Alibaba may be able to attack Amazon where it hurts: third-party suppliers. Amazon does not have large revenue diversification because its third-party model is responsible for 40% of the company's revenues. Selling via Amazon is expensive: Suppliers can sacrifice anywhere from 10-50% of its revenues. Alibaba can offer suppliers a deal for only 3.5% of revenues. Amazon may need to secure the interest of its third-party suppliers to remain competitive.
Originally in its bookselling business, Amazon was able to go to a few distributors for a large amount of book titles. In the local services market, though, the company will have to find professionals on an individual level. This micro-focus will be a change for Amazon, but the company could be up for the challenge.
Amazon's Advantage
Since such a large part of Amazon's business comes from small third-party sellers, Amazon may already have many interested professionals willing to offer their services along with their products.
Amazon intends on offering services to consumers based on recent product purchases. For example, if a customer purchases a violin off Amazon, the website may recommend a list of local violin teachers as well. Since Amazon already has an established customer base that keeps returning, the company may already be set up for success.
One of Amazon's strongest competitive advantages is its potential convenience: It can save customers the hassle of probing the Internet for service related deals after they make product purchases. If Amazon penetrates the local services market, it will be the only e-commerce retailer that matches nearby services with recent product purchases.
The takeaway
Amazon is a strong company that has many competitive advantages. There is a very good chance that the company will be able to compete in the local services market, especially considering its existing customer base.
Though Amazon is still working to asses demand for its new venture, risk-tolerant investors may want to add Amazon to their portfolios before the company takes the leap into another growing market.
