Yesterday's Microsoft (MSFT) Windows 8 consumer preview again drove home the realization that something is changing in the online retailing of digital goods (books, videos, music, software, apps, etc). A huge paradigm shift is taking place.
Let me explain. Traditionally digital goods were sold online through websites; the customer pointed his browser at the website, logged in and made his purchase. He then downloaded or streamed the content.
But Apple (AAPL) started changing that with iOS. Apple made sure that the iOS devices (iPhone, iPod, iPad) were integrated with a store it controlled. This way, when the user wanted new content he had to buy it from that store, where Apple earned a commission from the sellers. This became the only means to buy apps, and increasingly did the same for music, with video not far behind.
Following in Apple's footsteps, Google (GOOG) did the same with the Android app store (even if it is still possible to open parallel stores in Android). Although it has taken some time to expand to other digital goods, Google is now starting to do the same with books and music. Obviously with Google controlling Youtube it won't be long before they apply the recipe to video as well.
This is where yesterday's Microsoft presentation comes in. Outside the mobile world, Microsoft controls the operating system on around 90% of the PCs and portables out there, and that isn't expected to change much with Windows 8. It happens that Microsoft, too, will be incorporating a Windows store into the operating system! So, it's easy to see that pretty soon the most convenient way to get digital content into the PC will be through that store. It will certainly start with Metro apps, but there's no reason for it not to expand to desktop software, video, music … the works.
And where does all this leave Amazon.com (AMZN)? It leaves it with a huge problem in its hands. Already, the mobile revolution is eroding media revenues' growth, as described in my article "3 Elephants In The Amazon Room", but if the whole PC base is also going the same route, it won't just be the revenue growth that's under threat, it will be the revenues themselves. This must worry Amazon, considering that the media segment represented 37% of its 2011 revenues (source: AMZN 10-K), is supposed to be the most profitable segment, and if Amazon loses it the company would turn into little more than an online electronics retailer.
The buying of digital goods is moving from a browser-based experience into stores integrated with the underlying operating systems. This trend is highly unfavorable for Amazon.com and is starting to slowly show in the media segment growth rate. With the launch of Window 8, the unfavorable trend might gain strength as it, too, will have an integrated digital goods store.
Needless to say, I consider Amazon.com to be a sell/short even without this development. Amazon.com trades at 137 times estimated 2012 earnings, on declining earnings and estimates. Amazon.com's earnings are back to where they were in 2004, and the stock makes no sense at the levels it trades at.
Disclosure: I am short AMZN.