In March, Amazon.com acquired Goodreads, the world’s largest online book reading community, for an undisclosed amount. This move made perfect sense given Goodread’s strong tie-in with Amazon’s core book business.
Amazon is no stranger to acquisitions. In fact, the company has acquired 42 companies since its first acquisition in 1998, and has invested in several more.
Today, Amazon is sitting on almost $8 billion in cash and short-term investments and its stock is near an all-time high. This gives Amazon currency with which to grow by acquisition or investment. The question is, who might they acquire next? Take a look at a few contenders below and take our poll.
Acquiring Staples gives Amazon an inroad into the lucrative—and massive—business market, an area where, by design, Amazon has never gained much traction. And it would instantly increase Amazon’s annual revenues by 39 percent, from $61 billion to $85 billion.This may surprise you, but Staples is the No. 2 e-tailer in the United States, right below Amazon. According to Internet Retailer, Staples sold over $10.3 billion of merchandise online in 2012, or almost half of Staples’ $24 billion in annual revenue. The majority of this isn’t being sold to consumers, however—it’s purchased by businesses replenishing their inventories of office supplies.
Broadly defined, the category of “office supplies” is vast and includes school supplies, office furniture, shipping supplies, office automation equipment and more. It’s a large, high-volume, high-margin category that Amazon would love to dominate.
But the primary reason Amazon might be interested in acquiring Staples is for its real estate. Amazon has already started placing its “lockers” in Staples stores to enable faster and more convenient consumer delivery. It makes sense: big-box stores like Staples have plenty of room to hold inventory, and typically have big parking lots or are located in urban cores within walking distance of customers. Acquiring Staples would ensure that Amazon has hundreds of convenient points for buyers to pick up whatever merchandise they ordered online, and could also lead customers to impulse-buy office supplies.
In addition, Amazon could eventually use Staples stores for service and return logistics. One thing holding back some consumers from purchasing expensive products like big-screen TVs online is that these items can’t be easily returned if they arrive damaged or broken (or the customer simply finds them unsatisfactory), and there’s no obvious place to get them serviced. Ownership of a chain of brick-and-mortar locations could provide an easy and effective solution.
With a market cap of only $350 million, Amazon could purchase RadioShack’s 4,000 outlets for chump change, or in trade for its stock. Purely on a cost-per-store basis, this makes it a far more attractive option than Staples, which has a market cap of $10.2 billion and only 1,575 stores (though in fairness, RadioShack stores are much smaller than those of Staples).RadioShack offers Amazon the same benefits as Staples—a place for Amazon to put its lockers (some stores already have them), convenient locations and a facility for returns and repairs. But, as Gina Chon convincingly argued, Radio Shack has one key advantage over Staples: the company would be an incredibly cheap acquisition.
Of course, RadioShack is cheap for a reason: the chain has been failing for some time, and it’s unlikely to survive much longer—its stock has plunged 57 percent in the past year. Amazon would most likely have to rebrand the stores under its own name and turn them into a mix of Amazon showrooms, customer pick-up points and service centers. It would also likely close many of the stores in less affluent areas.
Even so, like Staples or RadioShack, acquiring a brick-and-mortar retailer gives Amazon the aforementioned benefits of customer pick-up and service, and Best Buy also offers Amazon a few unique benefits.Last year, Herb Greenberg wrote a piece on the merits of Amazon acquiring Best Buy. His principal argument: if a large percentage of consumers are using Best Buy as a showroom for products they’ll later buy on Amazon, Amazon might as well just buy the showroom. But Amazon wouldn’t need to. Why buy the cow if you can get the milk for free?
One is that consumers already perceive Best Buy as similar to Amazon, or at least an alternative to it. Interestingly, Best Buy still dwarfs Amazon in the consumer electronics category. According to Wired, Best Buy sold about $50 billion worth of consumer electronics in 2012, dwarfing Amazon, which only sold about $14 billion. While only around $3 billion of that $50 billion was sold online, this figure still ranks Best Buy respectably as the 11th largest e-commerce site in terms of revenue.
If Amazon wants to reach $100 billion in total annual revenues quickly, acquiring Best Buy is the fastest way to do it.
Another unique advantage is that Best Buy’s stores are already “Amazon ready.” The stores are laid out to sell the very products Amazon would want to sell in them, and the sales staff—though ridiculed by some—is arguably more skilled at demonstrating electronics than the staff of Staples or even RadioShack. Best Buy is also ready to service products with its GeekSquad staff and facilities.
This readiness makes it easier to imagine Amazon using Best Buy stores as more than merely a physical locus to sell and service merchandise. I imagine Amazon turning Best Buy into a sort of “showroom on steroids.”
For example, Amazon could conduct workshops in the stores on how to self-publish a book on its Kindle platform. Or, for the IT crowd, imagine a workshop on getting the most out of Amazon Web Services (and while you’re there, being able to pick up some networking gear). In this way, Amazon could take a page from Starbucks’ playbook and make the stores as much about community-building (read: loyalty) as they are about selling products.
But let’s face it: Amazon lags in every metric versus Netflix. Its content library and subscriber base are much smaller, and its recommendation engine and user interfaces are, to be polite, “behind.”Amazon has made it clear that its Instant Video service, which enables users to stream movie and TV content, is a key pillar of growth for the company. To that end, Amazon has been investing heavily in purchasing content from major studios and networks and offering it for free to its Prime members.
Even so, content is king, but therein lies the rub: content is expensive. Amazon’s recent deal with Viacom for certain TV shows is rumored to have cost Amazon about $200 million. And Netflix wants all the same content, which is fueling a bidding war and dividing the two customer bases.
The obvious solution: if Amazon took a controlling stake in Netflix, it would end the competition (at least for movies; Hulu would still compete for TV shows).
Granted, acquiring Netflix would be tricky. First, Netflix is expensive, with a market cap of $12 billion—far more than Amazon could afford to pay in cash. But Amazon could potentially pay for Netflix by issuing debt or in trade for its stock.
Another potential issue: Netflix subscribers seem incredibly loyal and thus may balk at the idea of being an Amazon customer—even though it’s likely they already are in another product area. To motivate most of these Netflix subscribers to stick around, Amazon could offer them the same deal it offers its Prime customers: free two-day shipping on anything purchased from Amazon, plus unlimited free video streaming for $79 per year. That’s equivalent to $6.58 per month, or a bit less than the $7.99 Netflix charges for streaming video alone.
On the distribution side, acquiring Lionsgate guarantees Amazon a vast library of content. The company currently owns 15,000 titles, including the massively successful Hunger Games and Twilight franchises, as well as critically-acclaimed TV series like Mad Men and Weeds. (Amazon currently offers these titles on-demand, though it’s unclear what they paid. As a reference, Netflix allegedly paid $1 million for each episode of Mad Men.)Rather than buy Netflix, Amazon could spend billions less and instead acquire Lionsgate—the seventh largest film production company in the United States, and the only one that’s independently owned. The company is both a distributor of movies and TV shows as well as a studio, giving Amazon an edge in two highly profitable markets.
But the movie production side of the business might be even more lucrative. The best way around paying hefty price tags to acquire content is to produce your own. While this may be more expensive initially, owning the content exclusively in perpetuity helps ensure a return on investment. To that end, Amazon, following Netflix’s lead in launching its own production house, recently launched Amazon Studios. Thus far, Amazon has given the green light to five comedy and children’s TV shows.
The obvious challenge here is that Amazon isn’t in the production business, so output quantity and quality may be slow to build. Acquiring Lionsgate would give Amazon a jump start—the capacity to produce more shows and feature-length movies of a very high quality.
Today, Lionsgate’s market cap is just under $4 billion. That seems like a heck of a value for Amazon.
One way Amazon can strengthen its position in the music category is to encourage more “discovery,” which makes acquiring Songza a good choice here. Unlike other music services that base their playlists off what bands or songs you or your friends like, Songza creates playlists based what you’re currently doing or are in the mood for, such as “classical music for studying” or “music to boost your energy.”We all know digital music is a big category—all you have to do is look to the success of companies like Spotify or Pandora. To that end, Amazon has invested heavily in its MP3 store and Cloud Player software. Even so, most people still buy their MP3s through iTunes, even though Amazon offers a host of advantages, such as higher bitrate downloads and frequently lower prices.
Songza’s “music concierge” model is a powerful way to introduce you to music you might not otherwise find. And there’s a compelling, straightforward tie-in to Amazon: if you like a song you hear, click once to buy the Amazon MP3 or CD and have it instantly accessible in Cloud Player. This would fuel Amazon’s sales immediately while gradually boosting consumer preference for purchasing music from Amazon instead of Apple.
Amazon is probably already thinking along these lines. Songza has raised $3.8 million from several investors, including Amazon. But this begs the question: why hasn’t Amazon invested more, or simply acquired the entire company already? With Songza’s user base only projected to grow over time, the cost of acquiring the startup will certainly increase.
This market has attracted the attention of major retailers—Wal-Mart and other large grocery chains have been experimenting with online delivery services—so Amazon would need to move quickly to beat these big players to market. But the market today is dominated by mainly regional firms. If Amazon wants to expand into grocery delivery quickly, it’s fastest path to success would be to acquire the leaders in key markets.Amazon recently confirmed that it will launch a grocery delivery service in Los Angeles, after rumors surfaced earlier this month that the company ultimately intends to roll out grocery delivery services nationwide. While delivering perishable items seems far afield for Amazon, national grocery sales totaled $568 billion last year, so it’s easy to comprehend why Amazon might want a piece of the action.
Peapod, the largest grocery delivery business in the US, with over 350,000 customers, is an obvious choice. The company delivers to major markets like Chicago, New York City, Philadelphia and the D.C. metro area.
Another alternative would be a smaller regional player like Greenling, which currently serves Austin, Houston, Dallas and San Antonio—the four most populous cities in Texas, none of which are served by Peapod.
For more clues, look at where Amazon has or plans to build fulfillment centers. Any grocery delivery business in these areas might be good acquisition candidates, as they all need a local warehouse to store the food.
The opportunity here for Amazon is straightforward: Pinterest could allow its users to attach an Amazon affiliate link to pictures they post (today, Pinterest automatically removes all affiliate links). If someone clicks the link and buys the product on Amazon, the Pinterest member receives a commission.Amazon knows a thing or two about affiliate networks. Its Associates program, which pays sales commissions to members who advertise Amazon products, is one of the largest in the world. And Pinterest is the world’s largest untapped affiliate marketing network, with over 48 million users.
Of course, this will only work for photos of merchandise that Amazon actually sells, which would exclude all of the one-of-a-kind craft pieces you often see on Pinterest that are sold out of someone’s home (if they’re even for sale). But the availability of an easy way to generate income might entice more hobbyists to become sellers and generate product sales through Amazon.
Pinterest would be expensive to acquire. The company’s latest funding round of $200 million in February 2013 puts its valuation at $2.5 billion. The key question is whether enough Pinterest users will actually buy what they discover—versus just look—to justify that level of investment by Amazon.
The jury is out on this. A survey conducted by PriceGrabber found that 21 percent of Pinterest users reported purchasing a product after seeing its picture on the site. But another study found that conversion rates and average order sizes from traffic sourced by Pinterest weren’t all that impressive relative to other sources, such as Twitter.
And a final challenge: Japanese e-commerce conglomerate Rakuten—which led a $100 million funding round for Pinterest last year—is unlikely to let Pinterest go to Amazon without a fight. Rakuten owns LinkShare, one of the two largest affiliate networks in the world (Commission Junction is the other), and the company wants to do something similar with Pinterest to what I’m suggesting Amazon could. Of course, whether they can realistically execute on that remains to be seen, but Rakuten’s desire to monetize Pinterest will certainly drive its price tag way up.
What Do You Think?
These companies represent just a small sampling of possibilities. Who do you think Amazon is most likely to acquire, if any of these? Please take our poll above, or add your own suggestions or thoughts on this article in the Comments section below.