Short Sellers As Short-Sighted As Amazon's Competition

Dec.19.11 | About: Amazon.com, Inc. (AMZN)

I always enjoy reading articles written by TechCrunch's Jordan Crook. From time to time, they'll pop up on Seeking Alpha. Today, in Crook's Brick-And-Mortar Retailers Want You To Boycott Amazon, he discusses the outrage competitors feel toward not only Amazon.com's (NASDAQ:AMZN) price-check app but its plan to dominate the world, apparently all because of its low prices. Here's Crook:

While I agree with Crook's endpoint that local businesses and national chains need to get creative to stave off the Amazon threat, I think he, probably minus the intention, falls into a similar trap that confuses AMZN bears.

If Amazon's formula to success was simply the competition's inability to "compete with Amazon's discounted prices," Overstock.com (NASDAQ:OSTK) would be a rousing success, not an unmitigated disaster. Because it sets lower prices (though, not always), Amazon, undoubtedly, enjoys a competitive advantage. But that is not the reason why Amazon is as ubiquitous as it is. Correlation does not equal causation.

If you're looking for a causal relationship, you'll find it in the dozens of other things Amazon does alongside its apparent pricing advantage.

You might recall that Best Buy (NYSE:BBY) purchased Napster for a cool $121 million in 2008. In 2010, Wal-Mart (NYSE:WMT) bought online video streamer VUDU. Neither Best Buy or Wal-Mart have ever been able to leverage those investments into anything Amazon-like. In fact, the Best Buy deal was a complete failure. And you can hardly call VUDU a meaningful player in the streaming wars nearly two years after Wal-Mart acquired it.

The reason why Best Buy and Wal-Mart cannot turn new media assets into major Amazon-style successes comes down to innovation, or lack thereof. Best Buy bought Napster. Wal-Mart bought VUDU. That's where the stories end, however. While Wal-Mart still has a chance, both companies failed miserably to integrate these businesses into their brick-and-mortar and online platforms. Clearly, a workable, coherent strategy for synergy never existed. Best Buy and Wal-Mart got into these areas because they are the hot places to be. For better or worse, riding the coattails of somebody else's great idea tends not to work as a business model.

If you follow the Amazon story, you can read and vision it like a road map. When Amazon makes an acquisition, enters a new space or develops a new product, you can clearly see where the move fits in a much bigger, longer-term and sensible narrative. Similar moves by companies like Best Buy and Wal-Mart appear isolated, if not downright fleeting, chaotic and misguided. Simply put, you're not sure where they'll go with them. Sadly, for investors, it usually ends up being nowhere.

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Amazon was not handed its competitive advantage(s). It seized them. Jeff Bezos saw the future and acted in its image. Everything Amazon does connects back to its e-commerce core with sound logic. It has built an omnipresent scale that makes it a winner. Its ability to price low represents just one ingredient in a much more sophisticated and nuanced recipe. One-trick ponies do not sell a million Kindles a week or build $1 billion "side" businesses like Amazon Web Services that most everyday consumers have never even heard of.

Just because online retailers like Overstock and brick-and-mortar outlets like Best Buy and Wal-Mart cannot find a way to beat Amazon does not mean that a way does not exist. Instead of painting inferior competition as victims, we should laud Amazon as a company in the same class as Apple (NASDAQ:AAPL).

Best Buy, Wal-Mart and other retailers with primarily physical presences could have waxed prophetic years ago by shrinking the amount of real estate they occupy. Best Buy has only just gotten around to that, but it's not a shift that illustrates a forward-looking mindset. Rather, Best Buy downsizes as a wholly desperate and reactionary move to having its hind end handed to it by Amazon.

A competitive advantage exists in being able to invite consumers into your store, show them your product and stimulate their senses and emotions. It's hardly Amazon's fault that the likes of Best Buy and Wal-Mart have been woefully unable to harness that advantage by making profound and wholesale changes to the brick-and-mortar retail shopping experience. We should not punish - legislatively or in the court of public opinion - Amazon because Best Buy and Wal-Mart cannot conceive creative ways to keep people in their showrooms.

Judging by the success of Apple and other retailers who shun discounts, offer quality products and build more than mere physical stores, but a true sense of place, it can be done. Thus far, Apple appears to be one of the few to have figured out the formula that allows it to render Amazon a formidable, but still distant, second.

While I am extremely bullish on Amazon's long-term story, I have noted recently that now is not the time to buy the stock (or Apple's for that matter). Here's what I wrote on December 7th when I unloaded long positions in each in the $10,000 portfolio:

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Both short-term adjustments turned out to make sense. Since that day, AMZN has traded down from $195.32 to its current level of roughly $181. AAPL is off a bit less, from around $389 to about $382. The time will come to get back into both. Granted, that time might be sooner for Apple ahead of what will most likely be a blow-out quarter.

That said, if you're short AMZN, good work, but take your money off of the table. It's not Netflix (NASDAQ:NFLX) or Research In Motion (RIMM). Not even close.

Disclosure: I am long AAPL.

Additional disclosure: I am long NFLX June 2012 $40 put options.