Amazon (NASDAQ:AMZN) recently launched Amazon Home Services, an online marketplace for plumbers, electricians, and other professionals. Amazon will offer 700 types of services from licensed professionals across the U.S., although customers in New York, Los Angeles, San Francisco, and Seattle will initially get a wider selection of services.
This move is a direct response to the rise of online service marketplaces like Angie's List (NASDAQ:ANGI), which has over 3 million members and generated $315 million in revenues in 2014. Another similar service, TaskRabbit, integrated its services with Amazon Home Services in the San Francisco Bay Area. Amazon CEO Jeff Bezos is also personally invested in Pro.com, a marketplace for home improvement projects founded by former Amazon executive Matt Williams.
Let's take a closer look at Amazon Home Services' market potential, and how it fits into the company's long-term strategies.
A $400 billion opportunity
Back in 2011, Angie's List estimated that the market for local services worldwide was around $400 billion. Industry observers also believe that the home repair and improvement services market represents a $250 billion opportunity on its own, according to Reuters.
Amazon will monetize Amazon Home Services by taking a cut of the service provider's fee. Amazon's cut will be 20%, 15%, and 10% of fees on standard, custom, and recurring services, respectively. Amazon is likely hoping that after customers buy an item on Amazon, additional installation fees will increase its revenue per sale. According to Amazon, 85 million customers purchased a product which required an installation service over the past year.
By comparison, Angie's List requires customers to pay membership fees to access its trusted business reviews and discounts. But due to the rise of similar sites like Yelp and Groupon, Angie's List's "average" annual membership fees (determined by region) have fallen 57% since 2003 to $12.70 today. Last quarter, 71% of the company's revenue came from advertising from listed providers, which has been criticized as a contradiction of its claim that "companies can't pay to be on Angie's List."
Therefore, Amazon Home Services could be extremely disruptive to Angie's List and other sites with similar business models.
Another piece of Amazon's ecosystem
Amazon Home Services might generate extra revenue for the company, but it's more of an ecosystem play than a financial one.
When Amazon launched the original Kindle in 2007, it found a new way to deliver books instantaneously. With the Kindle Fire in 2011, it expanded that ecosystem to include videos, music, apps, and physical products. Last year, it entered living rooms with the Fire TV and kitchens with the Amazon Dash barcode scanner. It also unveiled Echo, an always-on virtual assistant in a speaker which answers questions and orders products from Amazon. Amazon also crossed swords with Google in a battle over same-day home deliveries.
The common thread which weaves through all these strategies is Amazon Prime, its $99 per year service. Prime members get select discounts, free and reduced price deliveries, video streaming, e-books from the lending library, and other benefits. Last September, RBC Capital estimated that Amazon had 50 million Prime members worldwide, up from 20 million confirmed members last January. Prime members also spend more. According to RBC Capital, Prime Members spend an average of $538 per year -- 68% more than non-subscribers.
With Amazon Home Services, Amazon gives its customers another reason to stay within that ecosystem instead of visiting third-party sites.
The bottom line
Amazon Home Services should be a solid addition to its online store, and could make choosing a home service provider as easy as picking a shipping option. If Amazon adds Prime discounts to those services, it could seriously hurt smaller rivals like Angie's List. Meanwhile, stand-alone services on the marketplace should complement Amazon Local, the company's answer to Groupon, fairly well.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), Google (C shares), and Yelp. The Motley Fool owns shares of Amazon.com, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.