Amazon (AMZN) should discontinue all its non-profitable segments. Instead, it ought to focus solely on what it knows best: providing cloud services and software-as-a-service (SaaS) through its Amazon Web Services (AWS) segment. Putting more effort on Internet of Things (IoT), public and private cloud and artificial intelligence (AI) software could provide major possibilities for Amazon.
Cloud is becoming more widespread nowadays and it might not be that clear for everyone why. The reason behind this is actually very simple. In the good old days, when a company was in the need for more hardware capacity, it first had to purchase dedicated servers, network equipment and storage. This kind of a process had several issues. The first issue was that any kind of state of the art hardware is nowadays very expensive to purchase and especially in large corporations this means a long procurement time.
The second issue was that once the hardware was available, it took a long time to install and configure it to the point that it could be used. This usually increased fixed costs as specialized personnel was required to perform these tasks. The third issue with this approach was that it did not scale very well. In other words, it was not possible to scale up or down IT resources quickly with a changing demand. The worst situation was encountered when demand for IT resources started to decrease permanently but the company was still left with its expensive hardware and IT personnel. In addition, there was no point to match a short demand spike.
Nowadays, as cloud is becoming more widespread, it is much faster and cheaper to adjust IT resources to match with your demand. For instance, with AWS it only requires a few minutes, it does not require additional people to set up the hardware and you can order the service for as short of a period as you like. The IT world is slowly but surely moving towards a subscription-based model where you only rent services or hardware for a specified amount of time.
This kind of a model is much more agile both for small and large companies. In the end, this increases productivity as time-to-market becomes increasingly faster. The other major benefit with cloud services is the automatic configuration and provisioning of all required resources, which only takes a few minutes.
When everything is automated, there is no longer need to worry about errors, which were common when the job was done manually. In short, cloud makes enterprises more agile and productive and it lets them to focus solely on their core expertise. After all, why would Nike for instance need to know anything about data center technologies?
When looking at companies such as Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon and Facebook (NASDAQ:FB), one could say that their biggest competitive advantage is the in-house knowledge about data center technology. The thing is, the technology these companies have developed in recent years is not available for anyone else in the market. You simply just cannot purchase it. Even though majority of data center components are off-the-shelf vanilla hardware, it is the resource orchestration and the ability to replace hardware in a plug-n-play fashion in a data center that gives these companies a massive advantage.
Anyone can purchase compute and storage hardware from e.g. Dell, Fujitsu or HP (NYSE:HP) and networking resources from e.g. Cisco (NASDAQ:CSCO) but creating a highly scalable network architecture and being able to provide an automatic provisioning of resources for customers using your cloud is the key differentiator. Many companies have tried this but not managed to succeed.
Cloud is already happening at a rapid pace and Amazon is executing quite well with it, so what next? IoT and AI are the answer. Several research firms are already expecting strong growth rates for the IoT industry and see AI as the next major technology. What is the purpose with these technologies and how can companies benefit from these? Imagine you are a vending machine operator. Previously you had to send on a constant basis personnel to fill the machines and maintain them even though there was no need or when it was already too late.
This either resulted in increased costs or loss of sales. Usually both. IoT, cloud and AI will massively boost the vending operators' margins. The operator could now install sensors in the vending machine, which collect information about inventory status, failures and usage statistics. The IoT devices send this information in a constant manner to the cloud where this information can be stored in a database and further processed by an AI software.
The only thing missing is a front-end application maintained and used by the vending operator so that it could see live information about its vending machine empire. This is a major productivity boost and a must for every single corporation. The above was a very simple example but it can be extended to pretty much every industry out there.
Amazon already provides various IoT and AI-related products as a SaaS. However, they could do more. When it comes to IoT adoption, there are three different issues to solve before widespread adoption could take place. These are low price, small size and low power consumption. Amazon does not have the technological expertise to tackle the last two issues. However, the first one is not an issue for it.
The company is already making a major loss with its delivery services. All it would take for Amazon is to either purchase a company specializing in IoT device manufacturing or to partner with one. In either case, Amazon could then start selling these devices (at a loss) to customers.
If Amazon could offer a full end-to-end solution (from an IoT device to cloud platform to AI processing and finally to north-bound API offering for front-end applications) for all customers alike, Amazon could dominate the world. The world is getting more and more digitalized and IoT can bring massive amount of benefits to companies.
The ironic thing about AI, cloud and IoT is that once they have become a standard, all companies must take them into use or fall behind. How I see this evolving is towards a recurring subscription-based service where Amazon could reap all the benefits. All that would be left for a customer, would be to create a front-end application where all this information is represented in a visual format.
The IoT market is expected to grow to a $470 billion market already in 2020 out of which $60 billion could be pure profit. If Amazon could capture even a 10% market share, it could significantly boost its bottom line since this market can be considered as much more lucrative than general retail. This would actual transform Amazon from an online retailer to a software company.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.