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Amazon.com’s secret retail empire


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http://venturebeat.com/2010/11/08/amazon-com-multibrand-retailer/

 

To me, this is really interesting. Some people have expressed concerns that Amazon might be facing a decline with books and DVDs shifting to digital distribution models -- for books, I think the Kindle is enough to keep Amazon in the game. DVDs, eventually they might get cut out of that business (I think Blu-Ray will keep them in for a few more years, bandwidth is not there yet for most people in the US).

 

But the article points out that Amazon has been acquiring verticals in retail and allowing them to operate in a decentralized manner. I wonder if Amazon is shaping up to be a holding company of different retailers, run in a fairly hands off manner.

 

I am not long the stock or anything like that, I just think the business might be worth studying.

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Amazon is another fantastic company but at what point will they generate 10x cash flows on today's stock price?

 

Maybe 3 - 4 years is my guess but I have no idea.  Don't know if this is a "value" investment.

 

I like Amazon but just playing the other side. 

 

Looking at the 2013 leap - $150 calls trading for under $50.  On a pullback in Amzn's stock price - these may be attractive.  But I'll leave that to smarter people.

 

 

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I posted a message on this very issue on the other Amazon thread and was disappointed not to get any direct push-back there. The question is not only just staying in the game with books and other media, of course, it is how good that business will be relative to the current model. I think I disagree on the speed with which DVDs will disappear, but that's debatable. More importantly is whether under a new model or in new verticals Amazon has competitive advantage and consequently excess profits. Of course, if an acquisition has some sustainable advantage, the question becomes the price you're paying relative the value of that advantage.

 

As for the article, I have never heard of buying up assets to keep them out of rivals' hands ending up as a winning strategy. If everything is loosely integrated that's great, but what is the advantage? Why will the return on capital for acquisitions be excellent? Being the Woolworth's or Sears of the Internet is a questionable goal, and I don't see the edge even if you pull it off in an elegant way with autonomous and creative divisions. For department stores and big box retailers, the advantage has always been more about local presence than buying power. True for Wal-Mart, too, although obviously buying power does matter somewhat there.

 

That advantage is tougher to recreate on the Internet. We have seen fierce and ultra-rapid price competition (competitors matching prices within minutes), most recently with Amazon, drugstore.com and soap.com. When there was one Woolworth's in an area or one Wal-Mart, local advantage as a retailer was much more achievable. So maybe Zappos remains superb, but if everything is fairly loosely integrated I'm not sure how you arrive at having a dozen or more such successes, or why it's productive in the long run if you end up in bidding wars for any promising new competitor or niche operation.

 

Think of it this way - imagine I'm starting Internet Retail Dominance Inc and raise $30 billion to do so. My strategy is to acquire any private well-run Internet retailers focused on particular niches, and to basically try to use good judgment to buy any and every excellent business in this area. Since I have so much capital, I can pay whatever I need to to make VCs and founders take my bid over others'. Where are the excess profits here, and why is it a good plan?

 

 

http://venturebeat.com/2010/11/08/amazon-com-multibrand-retailer/

 

To me, this is really interesting. Some people have expressed concerns that Amazon might be facing a decline with books and DVDs shifting to digital distribution models -- for books, I think the Kindle is enough to keep Amazon in the game. DVDs, eventually they might get cut out of that business (I think Blu-Ray will keep them in for a few more years, bandwidth is not there yet for most people in the US).

 

But the article points out that Amazon has been acquiring verticals in retail and allowing them to operate in a decentralized manner. I wonder if Amazon is shaping up to be a holding company of different retailers, run in a fairly hands off manner.

 

I am not long the stock or anything like that, I just think the business might be worth studying.

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I didn't read the entire post - but the advantage to loose integration, at least in the Buffett model - is harvesting cash, tax free treatment of dividends, and redeployment of that cash to the best possible source.

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mvalue those are good questions.

 

I prefer to look at things from the eye of the CEO. The stock is probably overpriced. The moat is being assaulted due to the digitization of media. Strong competition with Apple, Google, Netflix, Wal-mart, Target. We may win in books but may not. What do I do.

 

Well I could use the overpriced stock to buy other assets in the eretailing space or wait and see how it all works out and when WS realizes the game is up watch my stock collapse. I agree they need some sort of strategy but I think they have one, we just dont know it.

 

I wouldnt own the stock but if I did, I would want him using it to roll up the etailing space vs. sitting around hoping dvds stick around for a bit longer.

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Amazon already "loosely integrates" with hundreds, if not thousands of retailers. Far from everything you buy from Amazon is actually sold by Amazon. Amazon just collects the middleman fee. Target was mentioned on this thread. If you go to Target.com and scroll all the way down, you will see "Powered by Amazon" in tiny print.

 

The point is that the writer of the linked article probably has no idea about the extent of the back-end integration. He may not be able to use his Amazon.com account to login to Zappos.com, but his shoes may still come from an Amazon (not Zappos) warehouse. So, logistics advantages to integration are most likely there or will be at some point, but not necessarily obvious to a consumer. Why? Because it's already done by Amazon for other retailers that they don't own. Check out http://webstore.amazon.com/

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Hey Myth I am with you that Amazon could do a lot with its stock, I just don't think what they are doing so far is along those lines - for example a big cash deal (Quidsi) or stock deals that are probably at very high implied multiples (Zappos)

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I posted a message on this very issue on the other Amazon thread and was disappointed not to get any direct push-back there. The question is not only just staying in the game with books and other media, of course, it is how good that business will be relative to the current model. I think I disagree on the speed with which DVDs will disappear, but that's debatable. More importantly is whether under a new model or in new verticals Amazon has competitive advantage and consequently excess profits. Of course, if an acquisition has some sustainable advantage, the question becomes the price you're paying relative the value of that advantage.

 

As for the article, I have never heard of buying up assets to keep them out of rivals' hands ending up as a winning strategy. If everything is loosely integrated that's great, but what is the advantage? Why will the return on capital for acquisitions be excellent? Being the Woolworth's or Sears of the Internet is a questionable goal, and I don't see the edge even if you pull it off in an elegant way with autonomous and creative divisions. For department stores and big box retailers, the advantage has always been more about local presence than buying power. True for Wal-Mart, too, although obviously buying power does matter somewhat there.

 

That advantage is tougher to recreate on the Internet. We have seen fierce and ultra-rapid price competition (competitors matching prices within minutes), most recently with Amazon, drugstore.com and soap.com. When there was one Woolworth's in an area or one Wal-Mart, local advantage as a retailer was much more achievable. So maybe Zappos remains superb, but if everything is fairly loosely integrated I'm not sure how you arrive at having a dozen or more such successes, or why it's productive in the long run if you end up in bidding wars for any promising new competitor or niche operation.

 

Think of it this way - imagine I'm starting Internet Retail Dominance Inc and raise $30 billion to do so. My strategy is to acquire any private well-run Internet retailers focused on particular niches, and to basically try to use good judgment to buy any and every excellent business in this area. Since I have so much capital, I can pay whatever I need to to make VCs and founders take my bid over others'. Where are the excess profits here, and why is it a good plan?

 

 

http://venturebeat.com/2010/11/08/amazon-com-multibrand-retailer/

 

To me, this is really interesting. Some people have expressed concerns that Amazon might be facing a decline with books and DVDs shifting to digital distribution models -- for books, I think the Kindle is enough to keep Amazon in the game. DVDs, eventually they might get cut out of that business (I think Blu-Ray will keep them in for a few more years, bandwidth is not there yet for most people in the US).

 

But the article points out that Amazon has been acquiring verticals in retail and allowing them to operate in a decentralized manner. I wonder if Amazon is shaping up to be a holding company of different retailers, run in a fairly hands off manner.

 

I am not long the stock or anything like that, I just think the business might be worth studying.

 

You just got my pushback, and here again :P

 

Excellent thoughts on the business model. The two acquisitions delivered only a message that Amazon is not fighting the competition; instead it will buy out the competitors. I think there will be unintended consequences.

 

 

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for books, I think the Kindle is enough to keep Amazon in the game.

 

Kindle is the kind of device that people appreciate more after seeing it in person and holding it in their hands.

 

If someone picks one up for 5 minutes they will be sold inmo.

 

To understand Amazon's advantages/disadvantages, you first of all have to think of obsolescence.  Kindle might be the device of the day -- but market share is already being taken over by other e-ink devices, dedicated LCD readers and multi-use tablets.  A couple years ago Kindle's only competition was Sony.  Flash forward to now and that has changed dramatically.  Market share for the Kindle device will continue to decline.  It would be better to think of the Kindle as the app -- and what the company's strengths/weaknesses are in this respect.

 

Is it helping or hurting his moat if he is selling the Kindle at Target? (same price as Amazon)

 

If you had your choice of Target or Wal-Mart which would you pick?  Wal-Mart has partnered up with Kobo and Nook.  As it stands right now - partnering with Wal-Mart would be preferable --- but as digital reading evolves it will likely become more and more valuable.  Envision a day when people start buying books via QR Codes etc --- the Wal-Mart traffic will bring higher value than Target.  Nothing wrong with having Target as a partner -- I just think I would rather have Walmart.  And not to have anything with making money selling devices -- it's about the money to be made in selling content -- and there is becoming so many ways than just dedicated readers.  

 

Ultimately the goal is to get you to buy your ebooks via Amazon. That's why it even makes sense to have a Kindle app for the iPad.

 

This starts getting to the point of thinking as Kindle as an app -- unfortunately their device strategy is very expensive when compared to a content strategy such as Kobo.  Further to just the iPad though --- think of all the other devices out there and coming -- it is immense.  Kindle figures their strength is in locking their customers to their store.  Yes they have apps for most of the other devices out there and ones coming --- BUT fluid movement, syncing and such are going to become more and more important as we move from device to device  -- not only over the course of time -- but over the course of a day too.

 

 

I know it helps. Almost stopped by target prior to ordering one but took a leap of faith due to the quality of the board. If someone picks one up for 5 minutes they will be sold inmo. Having them at BB and Target can only help.

 

Target was mentioned on this thread. If you go to Target.com and scroll all the way down, you will see "Powered by Amazon" in tiny print.

 

BB's book trade is very minimal (perhaps non-existent?).  So the percentage of people entering the store that are significant readers is likely a lot less than Target or Wal-Mart.  Not saying a BB customer won't buy an ereader on impulse -- it's just that they will tend to buy less books on average (of course Borders, B&N & AMZN's online Customers would be at the highest end of the chart in this respect).  As mentioned Kobo & Nook are building on their relationship with Wal-Mart.  Nook in US only.  Kobo in US and globally.  If given the choice of Target + BB OR Wal-Mart --- where would you rather be?

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Ehh... I don't think the Kobo will achieve much success. I think this market will follow an iPod-like pattern where one device takes the majority of the market share and then the rest of the devices pick up the scraps. The only boasting point I see people make about the Kobo is the size of their selection which does not say much since you can manipulate that figure depending on how many free/public domain books you count.

 

I flew to Boston last month and on the plane the only e-readers I saw were Kindles, same with my trip to NYC in May (also spotted Kindles in the subway).

 

I don't think the point about Walmart says much to be honest. Buying an E-reader is a big up front investment (about 14 books at $10 a pop), so even if they were at Walmart, would they buy? Probably not. I would be willing to bet that E-reader sales at Walmart have been pretty lack luster lately.

 

Buying books via QR codes? I am not sure why you would need this. Most E-readers can access the internet and allow you to connect directly to the store where you can sample and buy books. The idea with either platforms, Kindle, Ipad, or Nook is so you can purchase and download books without leaving your house and without any delay -- that way in the end you are motivated to increase your purchasing volume overall.

 

I think the fixation on books is a bit backwards looking though, my guess is that it would be better to focus on where Amazon is going than where they was and that means paying attention to expansion areas. Like Myth, I think buying businesses with stock is great, especially since the stock is overvalued. I'd rather they do that than use cash.

 

I also have no problem with them acquiring businesses, as long as they do it in a disciplined manner. The lack of real integration yet with the verticals they've picked up means that looking at the metrics of those businesses when purchased is probably a bad idea because you are getting a static picture of what's happened in the past versus what can happen in the future. This is particularly true for Zappos where margins were razor thin but could potentially expand a bit if they can leverage some of Amazon's clout to help on issues like pricing.

 

Again, like I've said before, I don't own the stock but I think Bezos and his crew are worth watching because they've been doubted and ridiculed for much of Amazon's existence and have constantly managed to execute.

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Ehh... I don't think the Kobo will achieve much success.

 

Too much useless Canadian innovation ehh? (haha)  All kidding aside - 'THE' Kobo is primarily a promotional device.  Kobo is a platform -- that not only includes the reading applications but also commerce.  Saying that 'the' Kobo will not achieve much success is akin to saying 'THE' Nexus One would not achieve success.  Well actually one would have been right in saying that as Google's promotion of the Nexus One was short-lived.  The Nexus One existed as a promotional tool in propelling Android forward with further momentum.  While there are similarities -- there are plenty of differences too - in order to 'get it' one needs to understand that 'THE' Kobo is a promotional tool.  This Kobo device may or may not be discontinued sometime in the future -- again, the strategy is THE platform.  

 

I think this market will follow an iPod-like pattern where one device takes the majority of the market share and then the rest of the devices pick up the scraps.

 

If you had said one platform (ie. Kindle app) will take majority following the lines of iTunes, I might accept that as a possibility.  However, to think that the majority of digital reading will be done on one device (ie. 'the' Kindle) following an IPod like pattern -- I find that very unlikely.  In addition to dedicated readers -- digital reading of the future will be done from smartphones, tablets, netbooks, laptops and even desktops.  Ask yourself this: what is stopping a tablet, netbook or laptop from being e-ink?  Nothing really except for the fact that colour e-ink is not ready for primetime at this point.  Whether it be e-ink or something else completely different, when that technology is ready for primetime you will see it in every laptop, netbook, smartphone and tablet.  Amazon would need to have massive R&D and manufacturing departments (perhaps >15-20x the current size of Apple) to be the dominant maker of all these devices.  They would need to own, OR have some sort of monopoly or purchasing power on every new viable display technology including the paper thin game changers of the future.  It will never happen - as it stands Amazon does not even have a lot of purchasing power over PrimeView (the owner of the e-ink display technology).  

 

If anyone is to over take this in similar fashion as Apple did with the music industry -- it won't be device based.  Not this time - things are very different this time around.  First of all you have a massive amount of gadgetry coming down the pipes that can read fairly decently and most keep getting better in that regard.  Then you have a strong group of 5 or 6 dominant publishers -- far stronger than the music industry and with that horrible experience to draw back on.  Something you did not see with the digital music experience was something akin to the Agency Model that most major publishers adopted earlier in the year.  Why did publishers adopt the Agency Model?  Because they hate Amazon's tactics. Amazon is terrible at relationships -- time will tell but they might have their hands tied a little tighter than others that publishers trust.  This powerful group of publishers don't want the 'Winner Take All' attitude that Apple and Amazon are accustomed to -- they will be a lot more receptive to the 'Win Win' type attitude.  

 

The only boasting point I see people make about the Kobo is the size of their selection which does not say much since you can manipulate that figure depending on how many free/public domain books you count.

 

No question about that - but Kobo's library has increased tremendously in a short amount of time.  It is likely the fastest growing library of significance.  Not only this, but they are working globally in figuring out all the complicated copy-right and associated geographical restrictions.  This is a complicated web and not one that is undone through AMZN's typical bullying practice.  There is an opportunity to create one's own niche via strong and trusting win-win relations.

 

I flew to Boston last month and on the plane the only e-readers I saw were Kindles, same with my trip to NYC in May (also spotted Kindles in the subway).

 

Does not surprise me much.  The Kindle has been out a long time.  I don't even know if the Kobo device was on pre-order yet in the States in May.  And a much more receptive wireless version has just now been made available.  Will you see more Kobo's or Nooks in your travels next year?  In actual fact you will likely start seeing people reading from so many other devices than just e-ink.  Kobo may never be the most popular platform in the States -- perhaps AMZN will always own that title.... but for reasons previously mentioned the majority will eventually need to come through the Kindle platform.   Incidentally, if you were to travel to Canada -- I think you would see a very opposite dedicated device pattern emerging whereby you see mostly Kobos (perhaps some Sonys - the very odd Kindle).  The same pattern also seems to be emerging in Australia where Kobo has really beat Kindle to the punch there.  Who cares about Canada eh?  And Australia is even a slight bit smaller of a prize?  But all these piddly developed parts of the globe add up to an opportunity as large as the U.S.  And then what about China and India?  As I understand it the only Kindles that have made it into China are through the black market.  I have no idea if Kobo can get a chunk of this -- but being partnered with Li-ka-shing's empire can't hurt?

 

One other point on what one might see during future trips in future years.  Digital print has barely begun it's evolution.  At some point digital media will be wrapped in with digital text.  When the camera was invented, a new breed of physical books, newspapers and magazines were not far behind.  If a picture is worth a thousand words -- then a short video clip must be worth at least a million -- expect a new breed to emerge that incorporates video... it's already happening with newspapers and will no doubt enter the world of other digital print.  E-ink devices are ill-equipped for this advancement.

 

I don't think the point about Walmart says much to be honest. Buying an E-reader is a big up front investment (about 14 books at $10 a pop), so even if they were at Walmart, would they buy? Probably not. I would be willing to bet that E-reader sales at Walmart have been pretty lack luster lately.

 

Kobo and Nook are just now being stocked at Wal-Mart in the States.  When Kobo was first being stocked at Wal-Mart here -- I made a few store trips to see what was in stock.  Whenever I would ask, I was told their last shipment was gone in an hour or two.  This was a few months back, well before any sort of Christmas demand.... and also before the more popular wireless version.  With the popularity of the Amazon Kindle in the States, perhaps you are right maybe sales are lackluster.  Maybe the Samsung Galaxy tablet (which the Kobo app is exclusively pre-packaged for) won't reach their target (of 1 million units in the first month) either.  

 

Buying books via QR codes?  I am not sure why you would need this. Most E-readers can access the internet and allow you to connect directly to the store where you can sample and buy books. The idea with either platforms, Kindle, Ipad, or Nook is so you can purchase and download books without leaving your house and without any delay -- that way in the end you are motivated to increase your purchasing volume overall.

 

The use of QR codes is merely a thought I have been thinking about that could flip the digital world on it's head and gain some control back to physical stores.  It's about the impulse.  Whereby a store is say out of an item .... or has some kind of advertising partnership going on with an online retailer and such.  With a physical item there is less of an impulse as you cannot have the item right now; however, if a popular book quickly sells out -- no problem just put up the QR code along with the 'out of stock' sign.  Sound far fetched for the retailer to receive a commission for such a sale?  I don't think so -- of course the QR code would be scanned with a smartphone and almost all of these are now equipped with GPS -- all that is required is integrating the commerce part of the transaction.  Yes, the shopper could look up the item on their device or buy it on their dedicated ereader they have at home - but what if they forget or change their mind?  Why not do what retailers do -- and facilitate that impulse.  

 

 

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