Book publisher Tim O'Reilly is one of the smartest people I know.
For 2012, he's scared. Specifically he's scared of Amazon.com (AMZN). He's afraid they're about to destroy his business, and that of every other publisher.
I'll go further than that, because Amazon has already become a book publisher. But Amazon's next trick is plain to see. It's going to become a content company.
The clear strategy of Amazon.com has, from the beginning, to use the cash flow of online retailing to enter higher-margin businesses. It invested ahead of its computing needs to become the big dog in cloud computing. It used its distribution might to become a consumer products company with the Kindle and, now, Kindle Fire, selling 4 million units in December alone.
It only makes sense it would next seek to both expand use of its cloud resources and fill the demand pipeline created by the Kindle line and become a content player.
The best news about all this is that it's not news. In books, for instance, Amazon needs merely to execute on, and expand, efforts already underway, the kind that have O'Reilly fuming. By working directly with authors Amazon brings more to their bottom lines than other publishers can. Just by expanding its stable of authors, and providing paid support in the form of editors and advertising, Amazon can destroy publishers as it once destroyed book stores.
In other areas of content Amazon also has a model waiting for exploitation. Third party sales. While some brick-and-mortar merchants complain of shoppers coming in, comparing their prices to Amazon, then ordering online, others are benefiting by selling directly through Amazon, leveraging its low-cost logistical services. Channel Advisor says third party sales through Amazon were up 53% year-over-year.
But if you can use Amazon's store channel to sell third-party sweaters, why not use its Kindle channel to sell other types of content? If Louis CK can bring in $1 million in 12 days with a comedy special, doing all his own publicity, building his own channel, what can other artists do using Amazon's channel?
This is why I don't worry, as Goldman Sachs worries, about a possible short-term “shortfall” in numbers, the kind that sent shares tumbling today. It's why many saw the tumble as a buying opportunity and bid the stock back up over $4 from its pre-market low.
In short, this is not Netflix (NFLX).
Sure, Amazon may be speculative, still, with a PE of 90. But it's a long-term speculation with a long-tail and better prospects than any start-up. Because it continues to execute on a long-term strategy, one that enables it to grow quickly in an increasing number of areas without becoming so powerful in any one (retailing, cloud computing, consumer devices, content) that it would draw the attention of the government.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours.
