Do you need another reason to buy stock in Amazon.com, Inc. (NASDAQ:AMZN)? After all, there are already many that you know about.
You know about Amazon’s power as a merchant, and Amazon Prime shipping. You know about the power of its Amazon cloud, with Amazon Web Services dominating the market for cloud infrastructure. You probably know how Amazon is even able to compete directly with customers, providing fulfillment services to merchants and giving Netflix Inc. (NASDAQ:NFLX) the platform for delivering its content.
You may even know about its global expansion, like its move into India.
But you may still be underestimating this company, despite its $361 billion market cap driving what should be over $130 billion in sales this calendar year, because there is an element to the AMZN stock story you may not fully appreciate.
That element is the power of its ecosystem — the company’s ability to use equipment to sell services.
Amazon Echo’s Uh-Oh
Amazon delivered a big “uh-oh” to Pandora Media Inc (NYSE:P), to privately held Spotify, and even to Apple Inc. (NASDAQ:AAPL) this week by announcing its streaming service may cost just $5/month when customers use AMZN hardware to access it.
People could still pay the $10/month they pay for services like Apple Music, Google Music from Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Spotify, or they can run the service strictly from the Amazon Echo speaker system, powered by its Alexa voice interface, for half that price.
Besides undercutting its rivals’ price by 50%, Amazon also gets room to dramatically improve Echo’s music quality (a huge market for better speakers) and delivers value that will get customers using Alexa, which can also be used to order goods from Amazon’s online store, and could then be used to power a host of home automation products and services that are yet to arrive.
This is not material to Amazon’s results, but they demonstrate an important point.
All About the Ecosystem for AMZN Stock
Technology companies have always gone back and forth on the question of locking people into their ecosystems or expanding their services into the wider market.
The whole point of Microsoft Corporation‘s (NASDAQ:MSFT) Windows, back in the 1990s, was that it was an “open” system, as opposed to the more closed system of the Apple Macintosh. The whole point of the Linux operating system, on which systems like Google’s Android are based, is that it is open source, open to innovation, giving freedom to the user.
Ecosystem companies like Apple, by contrast, seek to lock customers into using their services exclusively. This can be wildly profitable, but it can also lead big holes in the market that other, more open vendors can barrel into.
What Amazon is seeking is the best of both worlds. You can buy its service, at the same price others charge. You can buy its Prime Video service separately from its Prime shopping. Or, for a discount, you can go all-in with Amazon. (Prime members get both the music and video services for one annual fee.)
The services-through-hardware sale is something Amazon has done for years with its Kindle e-book readers and Fire tablets. You can get the tablet for as little as $50, if you don’t mind looking at an Amazon ad each time you open it. Amazon’s shopping services are also built into each device. When this happens, Amazon becomes a default when seeking media or hard goods.
The same thing will be true here, Amazon hopes, with Echo and Alexa. You can buy the products and use other services with them, or you can get the same services, for less, with Amazon, go all-in and make Amazon the center of your life.
The Bottom Line
Amazon is not alone here. An ecosystem sale has always been a big goal for many tech companies, just as stores like Wal-Mart Stores, Inc. (NYSE:WMT) try to get all of a customer’s shopping cart.
Microsoft just signed a deal with Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) to install its Office, Skype and OneDrive software onto Lenovo phones, in lieu of making it pay to license Linux, on which it claims patent rights.
Apple is an ecosystem customers can use for all their computing and entertainment needs, with tablets, phones, music and TV. Google has long sought to build out an ecosystem with software and buying services attached to its Android phones.
But AMZN stock is doing this one better. Tying hardware to software, and commerce, can capture far more of a customer’s wallet than these other tech companies ever dreamed of having.
It’s one reason some people still consider Amazon — despite a price-to-earnings multiple of 190, despite its Walmart-like margins of just 2% of sales dropping to the bottom line — a bargain stock.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, GOOGL, MSFT, and AAPL.