“The Amazon project”, part two
I’ve been looking over Sean Keyes’s shoulder lately.
He sits just behind me here at Agora Financial UK. And for the last few weeks, I can see he’s been working on an important new project.
Sean Is Agora Financial’s small cap expert (these are the tiny but fast growing companies that offer much bigger gains potential than the familiar names of the FTSE). His bread and butter is publishing research on the most exciting small caps on the market.
But Sean’s new project is related to a company at the other end of the scale… the fifth biggest publicly traded company on Earth… amazon.com.
Basically, Sean’s found a way to invest in Amazon for just a couple of quid. Like investing in Amazon stock back in 1997, before it shot up by 80-odd thousand percent.
So yesterday, I sat down with him to hear about what he’s been working on. (I ran the first part of that interview in yesterday’s DR – you can read it here.)
Today I’m publishing the second part of that interview.
Let’s get to it…
BT: OK, so this project of yours. Tell us more about it
SK: OK, well the first thing to say it’s free to sign up to [Ed note: you can sign up here]. And it’s all about what I’m calling The Amazon Era. Because that’s where we’re going next, it’s already started.
Amazon wants to be a platform for everything else that goes on in the world. So it has third-parties selling stuff on Amazon.com, and Amazon takes a cut.
It has people using AWS, Amazon Web Services, to build tech start-ups that rely on Amazon’s servers that run in the cloud. And Amazon takes a cut.
Its warehouses are a platform – other companies can use make use of its fulfilment centres to distribute their own products, and Amazon takes a cut.
Basically, Amazon’s future, and it’s already doing it, is to be a middleman between all customers on the one hand and all commerce on the other, and basically take a tax from everything.
That’s going to be bad news for some industries and companies but also great news for others. So what I’ve been looking at, and what I want to share with readers, is the areas they need to avoid in the Amazon Era, but also where the big opportunities are. Because there are some exciting growth companies that Amazon is enabling to do great things, and this is your chance to get in right at the start.
BT: OK, so who will be the losers in the Amazon era?
SK: Differentiated retailers will be big losers. That’s companies that compete on quality, say, rather than price. The ones where you pay a bit more for their products because they have a brand name, they differentiate themselves from the hoi polloi, they’re premium.
BT: And those guys are going to suffer?
SK: Big time. Because Amazon will be so big, you have to be on there. If you’re not, Amazon, or the third-party retailers who sell through its site, will find a way to get hold of your product, new or used, and sell it a discount. And all the other places that sell your product, whoever’s still around, they’ll pressure you for discounts so they can compete.
So you go onto Amazon, and then it’s a relentless world of price wars and margin compression and paying a tithe to Jeff Bezos. And if you go on there as a third party and try to undercut them, Amazon’s pricing bots see you’re doing it almost immediately and cut their prices too.
So it’ll be a pretty miserable life for differentiated retailers.
BT: That’s the most depressing thing I’ve heard today. Cheer me up, Sean, who’s going to do well in the Amazon Era?
SK: OK, well there are a few areas here. One of them relates to AWS, which is Amazon’s huge cloud computing business.
The basic idea of AWS is that companies pay Amazon to handle their computing for them. It’s a good deal for the companies – it’s cheaper and more flexible than doing it yourself. Which is why AWS is bringing in $12bn in revenue per year for Amazon on its own.
But AWS has a blind spot.
To get set up on AWS, you need to physically send your data to Amazon. They send out big trucks with hard drives on them – what they call the “snowball”.
Now, the snowball works just fine in 80% of cases. But there’s a group for whom the snowball method just doesn’t work – companies whose databases are constantly being updated, who can’t simply turn their servers off for a couple of days while Amazon uploads the data onto AWS.
For those companies – think banks, whose databases of client account are constantly changing – it’s simply not possible to transfer to AWS.
There’s only one way to do it – and that’s to partner up with a tiny UK company which has patented the technology for moving active databases onto the cloud.
This company has cut deals with the biggest companies in the cloud computing business – companies like IBM, Oracle and Google.
Amazon hasn’t made a deal with them yet because they can’t agree terms. And Amazon is a notoriously stingy negotiator.
BT: But surely Amazon will fix this. I mean, Bezos is probably shouting at someone in Seattle right now to get on with doing this?
SK: Oh, absolutely, but one of the ways they could solve it, which they’ve done in the past, is simply by buying the upstart.
BT: So this could be an acquisition target?
SK: Yeah. I think there’ll come a point where Amazon will have to get serious, and buy out this company.
There’s simply no other way around this problem from Amazon’s perspective. Either they partner with this company, buy this company, or do without the big bank’s business when it comes to AWS.
BT: OK, so aside from cloud computing for banks, what other opportunities do you see?
SK: Well, Amazon’s already huge, but it’s trying to get huger. So it’s advertising like crazy, especially on mobile. So I see mobile advertising as a great place to invest. Companies that can effectively target ads at the right customer, Amazon will happily pay for those services as it’s going to help it grow.
Another area is companies that make content for Amazon’s digital devices, like the Kindle. Amazon can’t sell devices unless there’s stuff to do with them, whether it’s books to read, TV shows to watch or games to play. So it’s happy to partner with companies that can provide the content, and happy for them to take a decent slice of the pie without squeezing them out because they’re helping to improve Amazon’s ecosystem and the customer experience. It’s win-win.
BT: Final question: is there any way to stop this dystopian behemoth?
SK: Ha ha, no! You have to decide whether you’re going to back winners or losers. The Amazon Era’s happening, so you need to get ready whether you like it or not.