Is Amazon Local Register About More Than Mobile Point-Of-Sale?

Aug.22.14 | About: Amazon.com, Inc. (AMZN)

Summary

Why Amazon Local Register probably isn't the end game.

Offline and online analytics may provide another source of revenue for the online retail giant.

Amazon may have a much bigger reason for mobile point-of-sale, with offline retailers being the prize.

There's been a lot of interest generated by Amazon Inc. (NASDAQ:AMZN) concerning its new Amazon Local Register, which allows businesses to incorporate a mobile payment service into their operations.

Most of the talk has been concerning the amount of potential Amazon has in regard to taking market share from competitors in the space, including current market leader Square. To penetrate the market quickly, Amazon is offering a super deal to prospective clients, with those signing up by October 2014 getting a transaction rate of 1.75% through January 2016. For any retailer doing significant sales of any kind, that is a huge deal, against the 2.75% Square charges per transaction.

It will also underwrite the $10 cost of the device by crediting the first $10 in transaction fees back to the business, essentially removing any perceived cost of the service. After January 2016, the transaction fee will jump to 2.5%, still below the current costs from its major competitors in the segment.

What the device does is plug in to a mobile device via a headset jack which can then be swiped with a credit or debit card.

(click to enlarge) source: StockCharts.comClick to enlarge

First the Obvious

We'll begin with the very obvious, which is Amazon eventually taking significant market share in this segment and generating some decent revenue once it ups its fee to 2.5% in January 2016.

But the size of Amazon makes one wonder if it's worth the comparatively small revenue to be expected from this type of service. It would be a consistent revenue stream, but not one that will be a game-changer for the company.

Now, when combined with the seemingly endless number of new products or services offered by Amazon, it is important as being one piece in a very large puzzle. Each piece is important and adds up for Amazon.

That's the obvious. My thought is with Amazon under pressure to produce better results, and shareholders tiring of products and services offering very thin margins, the company is likely up to something else here, something that has a lot of upside potential.

Another thought is why Amazon has chosen this moment to enter the market. Market leader Square, which was founded by Twitter co-founder Jack Dorsey, launched five years ago, generating the obvious question of why Amazon didn't enter the market soon afterward.

In that regard it seems to be Amazon decided to do this at an opportune time with mobile point-of-sales, as it took time for the industry to build out. The scale of Amazon allows it to immediately compete in this industry at a time when it will add revenue and earnings to the company, in and of itself.

The reason is Amazon may be a last mover rather than a first mover - meaning it's coming in at a time when Square is struggling and is vulnerable because it's in a commodity business it has done little to change - is because it in fact has a plan in place to take mobile point-of-sales beyond a commodity business.

Adding Value with Analytics

Staying within the parameters of point-of-sale for a moment, another value-added service Amazon could add would be analytics, which could combine analytics from online and offline transactions.

Not only would that be a huge positive and differentiator in the short term, but once it increases its market share and fee, it could set it up to boost fees even higher, or to add another service which requires a separate payment.

You can see how entering the mobile point-of-sale market provides ancillary opportunities itself. There are better opportunities in my opinion, and they are most likely the impetus behind the move.

Before I get into that, I want to say I'm not trying to give the impression this business, as a standalone business, won't make money. I'm just saying I believe the timing of it in a fast-growing market, combined with other factors, makes it much more likely to be a winner for Amazon, assuming I'm correct in my analysis and projections, and it is able to execute a strategy concerning this potentially extremely lucrative market beyond mobile point-of-sales.

The Real Potential Behind the Initiative

With the existing merchant base Amazon already has relationships with, it's not a stretch to see how this will not only bolster the existing base, but add to the base with the promotional fee price.

That aside, it's the retail base that has the real potential I've mentioned, and there is a growing possibility Amazon may eventually operate as a type of wholesaler for retail shops looking to lower inventory by offering Amazon products for sale.

How it would generally work would be the retailer would provide a showcase of products available from Amazon which would be for customers to get a hands-on look at, and from there order from the store directly to Amazon, which would take care of the logistics and delivery.

That would lower inventory and labor costs, along with the need to get rid of inventory at the end of the year at bargain prices for tax purposes. It would be a win for everyone, although it would again raise the question of margin for Amazon. Also think of how much a business would save by the huge reduction in theft because of far less inventory and most of that being floor models.

Why this type of retail model, or something like it, has so much potential, is approximately 94% of all retail sales is still conducted offline, with most retailers still operating primarily offline.

If Amazon were to capture even a small percentage of those retailers, it would result in gigantic revenue and earnings boosts.

The bottom line is I believe this is a first step by Amazon to enhance its relationship with businesses and over time build the trust to the point it can enter into partnerships similar to the one I just mentioned in order to penetrate the very lucrative offline retail market.

Another option would be for Amazon to work it out to send customers to an existing local retail location for pickup by a customer, eventually working its way into being a wholesaler of choice for many retailers.

In other words, Amazon could send a retailer customers which buy its goods from them as wholesale, with most of their work being holding the package until it is picked up. That is the type of power inherent in this overall thrust by Amazon. It's definitely an attack on the offline retail market, and one I believe Amazon could take some significant market share from.

Conclusion

Even if Amazon were to only enter the mobile point-of-sales business, I think it would be a decent addition to its portfolio, but one that wouldn't do much to move the needle. It's the potential associated with business-to-business relationships that is the driver here, and if it succeeds in significantly penetrating that market, it's extraordinary as to where the company could go with it.

The potential to add value via analytics, as mentioned, is an ancillary service, one which should add pricing power. It would be a surprise if analytics were to be offered free as part of the mobile point-of-sale package, which would again, bring up the margin and earnings issue.

Whether or not Amazon becomes a new type of wholesaler for retailers remains to be seen, but the opportunity to take a piece of market share from offline retailers is just too big to me to let pass. It may not be in the form I outlined above, but I think it will be something like that, if Amazon, in the future, decides to go that route.

As it is today, this is interesting but not that big of a deal on the mobile side. It would get interesting if Amazon were to take more share than expected, which would result in a decent new revenue stream.

What I'm looking for over time though is another move or two from Amazon, which has the potential to generate some serious long-term revenue and earnings. Since it is pushing out till 2016 before it raises fees on its mobile point-of-sales devices, I would think we're looking at minimum at a five-year plan to use this initiative to build out at least a couple more revenue streams. That is where I see the real reason for entering this market now, and if it is able to execute as it has in the past, and convince retailers they would do better with them, it could be the game-changer Amazon and shareholders are looking for.

These moves are almost guaranteed to come within the business-to-business relationships it is building on, transforming mobile point-of-sales into something that has a powerful moat that can be defended.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.