The Amazon Phone
Moustafa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon (NASDAQ: AMZN) recently announced plans to enter the handset market, definitely a difficult market to crack even for companies that have been in it for years. Just ask Nokia (NYSE: NOK) who has had their market value disappear and at this point seems to be completely running on fumes. Even with a strong cash balance the company has very little to get people excited about and that spells death in the competitive handset market. Amazon though, has made a business of entering nonexistent, competitive and low margin businesses and dominating them. Amazon started out as an online book retailer and has become a retailer of everything from pots and pans to web hosting. For most companies an announcement like this could spell disaster, as many companies have been destroyed attempting to enter businesses they are not familiar with.
Amazon, though, seems like the company that could pull it off, looking at their Kindle Fire tablet as an example of how the company can make good hardware. Amazon is a true tech conglomerate similar to the old Ford Motor Company at the turn of the 20th century. At the time, it controlled every aspect of its business from the rubber trees down to the sale of the automobiles. As companies realized that specialization and focus were important in business and that often times outsourcing could be more cost effective then actually producing it themselves, most companies chose to focus only on their core competencies. As technology continues to advance, this model has come under fire as companies are moving back towards owning and controlling most aspects of their business. Apple (NASDAQ: AAPL) has handsets, computers, apps, iTunes and they tie it together with their Cloud services so you can have all your applications on one eco system. This model works for Google (NASDAQ: GOOG) which has created a slew of services geared to keep users on their Cloud. They have the Google docs, maps, gmail and their main search engine. They have even gone one step closer to entering the social media market with their Google+ service; combine that with YouTube and users can do almost anything through Google.
Amazon has done something similar to this but in the online retail space. Amazon allows customers to purchase goods new or used, allows sellers to set up web stores and even hosts other companies’ websites on their servers. They have new and used books for sale that can be delivered straight to the Kindle and read on their Kindle fire tablet or directly on a smartphone that has downloaded the Kindle app. As Google has become the online gateway for people looking for stuff on the net, Amazon wants to and has been successful in becoming the first stop for those looking to purchase almost anything online. Their announced entry into the handset market may seem out of place but ties in well with their core business. If you are using an Amazon phone that is optimized to search their online store, read their online books and download their burgeoning music business, it only compliments their overall ecosystem. Amazon has put many different brick and mortar stores either in bankruptcy or very close; their culture of cost savings and innovation, spearheaded by Jeff Bezos, has allowed Amazon to succeed in each market and business it enters.
Amazon is very richly valued with a P/E ratio clocking in at 286, and the market closely watches any missteps by the company, real or imagined. Many companies have lost their shirts in the competitive handset market, so Amazon will have to continue to make smart moves when planning its entry. The sky high P/E, though, is a metric of the market's belief that it will continue to improve from a profit standpoint. As we have seen with Apple, which has made one of the most incredible corporate comebacks using their innovate hardware, there is profit to be made if you have an exciting product tied into exciting services and apps. I think a well timed purchase of an existing handset maker or a partnership could be the way to go for Amazon. I think if it was done right, RIM could be a very exiting purchase or merger for Amazon, as RIM has its own OS and a network that could help expand Amazon’s reach worldwide. Either way Amazon is making a big step, but it could be very rewarding for the company that has continued to prove the naysayers wrong ever since the first dot=com bubble burst.
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