Amazon Assaults the Competition in the Air, On the Ground, And From the Cloud

by: SA Editor Rocco Pendola

I must proudly and openly state the following: If anybody can mute my love of Steve Jobs, it's Jeff Bezos. The (NASDAQ:AMZN) CEO clearly considers taking on competitors in just one sector child's play.

In this article, I will review the areas where Bezos and Amazon have taken the offensive. Instead of simply reacting to trends, Amazon either sets them or executes land grabs so strong it effectively replaces the previous trendsetter.

Content Delivery and the Cloud

Amazon's latest salvo against its competition comes as it gets one step up on Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) in the race to the cloud. Because it's been well-publicized, I will just note in summary that Amazon's Cloud Drive gives users the ability to store music and other digital files on the company's servers. Amazon gives you 5GB free and charges what I view as a nominal cost for space over 5GB. MP3 downloads from Amazon's site do not count against the quota. Amazon supports the file types of 1,853 songs in my collection, which equals about 10.5GB. To secure the additional 5.5GB necessary plus some cushion, I would have to pay $20 per year for a total of 20GB of storage on Amazon's cloud. Amazon's Cloud Player represents an upgrade to its web-based and Android MP3 downloader.

Observers are overlooking one key victory Amazon scores by getting to the cloud ahead of Apple and Google. In his letter to Amazon users posted at the company's website, Bezos uses the term "cloud" to describe this seemingly mythical place where you can keep your music collection and other digital items, such as photos. For many consumers, this might be the first time they have heard the term. Although, it's part of most tech and Internet junkies' lingo, it has yet to enter the mainstream. Given Amazon's reach, it takes brand ownership of a term that could very well come to define content storage and delivery for decades.

This news comes on the heels of Amazon's body blow to Netflix (NASDAQ:NFLX). It beats the feeble Coinstar (NASDAQ:CSTR) to the punch by offering streaming entertainment to Amazon Prime customers. For $79 a year, Amazon offers customers free two-day shipping plus access to 5,000 movies and television shows at no extra charge.

Seeking Alpha contributor Larry Dignan speculates that these moves, particularly the cloud announcement, have tablet written all over them. Tablet or no tablet, Amazon wins. As Dignan points out, without a tablet, Amazon puts "itself at the center of the Android ecosystem." With a tablet, Amazon could wallow in a vague mediocrity like Research in Motion's (RIMM) upcoming PlayBook probably will, but I suspect otherwise.

It would make sense -- and be very much like Bezos -- to make a call to people who "get it" as much as he does ahead of an Amazon tablet launch. For instance, I have developed an admiration for Melinda Witmer, Time Warner Cable's (NYSE:TWX) Cheif Programming Officer. People like Witmer are in the process of blowing the doors off of the old guard's change-resistant protective media castles. Bezos should race to ink deals with people like Witmer before they sign on with Apple, or steal more money that Netflix doesn't have. Amazon can offer content creators and providers something Netflix, Google, most Apple imitators, and even Apple cannot -- a meaningful part of its all-encompassing platform.

Imagine a situation where Time Warner (TWC), Viacom (NYSE:VIA), News Corp (NASDAQ:NWSA), or similar companies see their content offerings and even "physical" products such as newspapers and magazines receive top billing at as part of some type of partnership involving Amazon's cloud and tablet. Amazon could even help companies like Rodale and Hearst step into 2011 and stave off old guard-induced death. Amazon's possibilities are virtually endless; unfortunately, the space I have to detail them is not.

Retail and Consumer Staples

The way Amazon has gone about building its platform can really only be rivaled by the likes of Disney (NYSE:DIS) and Apple. You can watch a Disney movie or Disney's TV or radio programming and translate that excitement into a purchase at a Disney store and a trip to a Disney theme park. The company provides for the same type of logical trajectory throughout its slate of offerings. For instance, ESPN-TV and Radio to an ESPN Zone Restaurant to ESPN-branded items. And everybody's been touched in one way or another by Apple's halo effect. I don't think I speak too soon when I contend that Amazon has crafted a stronger and much more sustainable platform.

Amazon users can move through the company's platform with greater ease than they can Disney's, or even Apple's, for example. In fact, you really don't have to do much more than lift a finger to have multiple Amazon cooks enter your kitchen.

Consider a likely trajectory: A college student starts purchasing textbooks through Amazon because they are cheaper than she can get them for at the school bookstore. She also realizes she can get a bookcase, beanbag, plastic chairs, and a stereo system to outfit her dorm room for less at Amazon than she can at Ikea or Best Buy (NYSE:BBY). While she's at it, she notices she might as well save herself money and trips to the grocery store by loading up on Pop Tarts and frozen pizza delivered to her door by Amazon. Because she shops so much at Amazon and uses the same grocery items regularly, Prime and Subscribe & Save start to make sense. And while she's there, she ought to get on this cool new "cloud thing" that Amazon thought of. If only Bezos could find a way to sell beer, wine, and spirits, he'd be golden.

You can imagine similar avenues being taken by the homemaker, the busy professional, or the person responsible for buying everything from paper cups to printer cartridges at a small business. This incredible and unparalleled synergy spells death, or at least stiff competition and pressure on the bottom line, for everybody from Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST) to retailers such as Best Buy; Bed, Bath, and Beyond (NASDAQ:BBBY); and Cost Plus World Market (NASDAQ:CPWM).

How to Play It

According to its most recent annual report, sales of "electronics and other general merchandise" grew faster and accounted for more of Amazon's revenue than "media," which basically includes books and DVDs. While I still think they hold value as investments, this does not bode well for brick and mortar retailers like Wal-Mart and Target (TGT). In the future, I hope to see Amazon further break down the "electronics and other general merchandise" category, so we can see just how well they are doing with consumer staples segment, for example.

Amazon also noted during its last earnings call that it's plowing more money back into its business to facilitate future growth. This did not sit well with investors. During the call, Amazon CFO Thomas Szkutak noted that part of that cash went towards "technology infrastructure." It's clear, with the benefit of a rearview mirror, what he meant-- at least in part. And, as Szkutak pointed out, if Amazon has to spend more of its cash hoard in 2011, it will generate a strong return as it spends from a position of strength. While some investors don't like this, the concern provides long-term investors with excellent buying opportunities.

Despite, the bump AMZN received from the cloud news, I would not surprised to see a pullback here or there, particularly if operating expenses increase, margins get squeezed, or the market takes a bit of a nose dive. When it comes to large buys of AMZN, I would jump at any price under $170. As I do in several situations and with many other stocks, I like two other strategies, one for the investor with a limited bankroll and another for somebody with more money to spend.

You can simply take what you can afford each month and dollar-cost-average into Amazon stock. You can take a slightly more complex approach, but not put out as much capital as you would by buying AMZN shares outright, through the use of call options. LEAPS options, in particular, allow investors to take a longer view than what comes with many options trades.

As of Tuesday's close, AMZN January 2013 $160 call options, for example, trade for $38.50 apiece. Each contract would cost you approximately $3,850, a fraction of the approximate $17,500 it would cost you buy 100 shares of Amazon stock. Instead of waiting to exercise your option to buy 100 shares of AMZN at $160, you could sell to close your LEAPS contracts for a profit, assuming AMZN shares appreciate considerably over the next 12 to 18 months.

Disclosure: I am long AAPL.