Is Amazon a Threat or a Failure? (AAPL, AMZN, GOOG, LOOK, MSFT, NFLX, YHOO)

by: David Jackson

Amazon's (Alexa's) announcement that it will provide search as a web service has generated great excitement in the tech community. But investors don't have the luxury of getting excited about technology; they need to predict revenues, profits and the impact on stock prices.

Earlier today the Internet Stock Blog carried one of the first reactions from the financial community. The Stalwart drew two stock related conclusions:

  • On GOOG: This "show[s] that the search game isn’t necessarily over, and that investors in Google, who operate under very optimistic visions may need to rethink."
  • On MSFT: "it’s incredible how much more daring and interesting this idea is than Microsoft’s latest grumblings, that they will pay users to search via MSN. Quite a contrast. One thing brilliant about Google’s model is that, because they sell their inventory in an auction, they’re impossible to undercut."

Michael Parekh, ex-Goldan Sachs Internet analyst, also wrote that "Amazon is on a roll...".

But I'm less sure that Amazon is a threat to Google. First, the threat to Google and Yahoo from Amazon/Alexa's "outsourced search" intiative depends on the success of vertical search engines. But it's not clear that vertical search will succeed.

Until now, vertical (niche-specific) search engines have gained relatively little traction. Consider the attack on LookSmart's vertical search strategy from its ex-CTO, for example. Instead, Google and Yahoo are incorporating domain-specific data directly into their general search engines, such as stock charts and movie data. I've also argued that Google Blog Search, far from being the launch of a vertical search engine, is a precursor to better treatment of time-sensitive search in Google's core search. Bottom line: It's too early to be optimistic about niche search engines.

Second, Amazon itself is a conundrum. On the one hand, Amazon seems to be losing current market share and future markets. Current market share -- because Wal-Mart, Home Depot and other offline retailers are growing their online sales faster than Amazon is. Future markets -- because the digital future of Amazon's book, music and video businesses look as though they're going to book publishers (via Google) and Apple's iTunes music and video store, not to Amazon (and not to Netflix).

On the other hand, Amazon is now spending more on R&D than ever before, is investing in search, and is a leader in web services.

All of which makes Amazon's stock a tough call.


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