Amazon's Reward Could Be Worth The Risks

| About:, Inc. (AMZN)

A report from Clear, a brand consultancy firm which is part of M&C Saatchi, shows that, for the second consecutive year, (NASDAQ:AMZN) headed the list of the most desirable brands. The ranking was based on proprietary metrics which measured, among other things, "rational, emotional and behavioral responses" to brands by consumers. Amazon's success was attributed to the success of the Kindle Fire HD, the benefits for Amazon Prime members, focus on Prime Instant Video and continuous meaningful innovations such as Amazon Lockers. The firm said that:

Amazon has truly transformed from a marketplace for shopping to a digital hub for consumers to manage their lives.

The other piece of good news for the company was the report from IDC on the global tablet market in the first quarter of 2013. IDC reported that Amazon came in fourth behind Apple, Samsung and Asus with a market share of 3.7% and year over year growth of 157%.

The AmazonFresh initiative

This same day grocery delivery business is expanding and could be available in as many as 40 new markets this year. For years, people have expressed the opinion that Amazon is building so many new warehouses so that it can offer same day shipping on a wide range of products and take brick and mortar shops head on. This opens up a market estimated at $850 billion In the United States alone. However, no existing company has been able to acquire any kind of significant market share, but Amazon has several advantages. It has a flexible cost structure which enables it to operate on very thin margins, and there is reason to believe it would be prepared to lose money if the end result is market domination.

It has the warehouse and logistics infrastructure to support its delivery promises and a huge membership base which can be leveraged into future customers. It also has enormous credibility among millions of consumers. The grocery business is a logical fit in the company's relentless drive to add to its menu of products and services. Moreover, it has the ability to generate economies of scale which will enable it to extract the most favorable terms from large suppliers.

The content initiative

The company has finalized the highest ever streaming content contract by buying the rights to stream more than 4,000 episodes of TV shows from Viacom (NYSE:VIA). Presently, Netflix (NASDAQ:NFLX) is the leader in the video streaming business, but is not generating enough cash to buy all the expensive content that it would like to stream. Amazon is showing that it means business by moving to acquire exclusive rights to the children's programming produced by Viacom. Amazon Prime already has plenty of programming for adults who may be tempted to subscribe to the service if it has programming for their kids. It is more than likely that streaming costs for Amazon could be low because it has its own cloud computing infrastructure. Even though it does not generate huge amounts of cash, it certainly has the resources to bid for exclusive programming deals.

Amazon Prime

Many people find this an extremely useful service because, for a subscription of $79 every year, members are offered free 2 day shipping and limited access to the streaming of thousands of TV shows and movies. Current members are reported to be extremely enthusiastic, and it hasn't taken long for the service to become popular. It is widely regarded as one of the most innovative customer loyalty schemes, not only in e-commerce, but possibly the entire retail business as well. The program encourages spending, and members spend almost twice as much as non-members. So strong is the loyalty that a survey found that 92% of current members plan to renew their membership. Membership is projected to grow from 10 million now to 25 million by 2017.

The bottom line

Many investors are apprehensive that the company is taking on too much, at the same time, placing a strain on its resources both financial and managerial. However, in all fairness, it must be said that many of these new initiatives make sense and could pay off big in the future. People also tend to forget that in addition to the online businesses, the company is also set to become a major presence in the cloud computing business, and its Amazon Web Services should generate almost $4 billion in revenues this year. This is a higher risk investment than what is offered by many established companies, but the returns could well be worth the risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.