Credit: We found out yesterday that rivals Amazon (AMZN) and Best Buy (BBY) are cooperating, or some might say colluding, to sell certain types of TVs. “Collusion” is a word with which we have become all too familiar recently, thanks to today's media environment. While "collusion" has a sinister feel to it and may be too strong of a word to use, the unmentioned potential implications of this cooperation are momentous enough to make it feel as if it is the right word here.
The news flew a little under the radar, as Amazon watchers yesterday were focused on Jeff Bezos’ annual letter to shareholders, and in particular the news contained therein that Amazon Prime now has over 100 million members. That is notable, but only confirms what I already knew, both as somebody who writes about the stock and as a Prime member. Prime is a great service for the consumer who uses Amazon regularly, which is to say most of us, and offers excellent value.
It is also, however, a genius marketing strategy. The utility and value that Prime offers makes it a no-brainer for most consumers, but what we pay for the service is hardly the point. Prime sucks us ever further into the Amazon ecosystem and increases brand loyalty across their broad product base, from books to TV programming to groceries.
Somewhere in that mix is consumer electronics, so why would Amazon, or for that matter Best Buy, enter into an agreement and cooperate with their biggest rival in that area?
First, and most obviously, they are not the only players in that space and there is competitive advantage to be had. Both Walmart (WMT) and Target (TGT) have decent retail sales, along with some private, regional firms such as P.C. Richard, but other traditional competitors in electronics have either gone under, as in the case of Radio Shack and Circuit City or are struggling in other ways, such as the once-dominant department stores.
The current agreement is about one particular type of TV only, but the idea of cooperation between Amazon and Best Buy has, I’m sure, all the other players quaking in their boots.
Because it involves two massive players in a consumer market there is, in the overall bouquet of the deal, just a subtle hint of cartel. Not an overpowering smell, but still enough to make collusion a tempting word to describe the deal. There is also an element of danger for both sides that reinforces that temptation.
From Amazon's perspective, the danger is to the deal itself. Amazon, presumably because founder and CEO Jeff Bezos also owns the Washington Post, has been a target of the Tweeter in Chief recently. As I pointed out a couple of weeks ago, that made AMZN a great buy on the resulting dip, but Trump’s public animosity and subsequent humiliation by stock price must make it likely that Commerce, Justice and whoever else that he can convince to look into and oppose the deal will be doing so.
For Best Buy, the risk is along the lines of “Come into my parlor, said the spider to the fly.” Just a few years ago, a lot of smart people were predicting that Best Buy would be going the way of Circuit City and the rest.
“Death by Amazon” is a horrible way to go for a retailer, and the job that Best Buy’s management has done to this point of avoiding that fate is admirable. At the risk of mixing metaphors however, this looks as though they have outrun the cheetah only to lay down with it to recover.
Maybe I am just a cynic, but it seems to me that there can be only one winner in this deal. Amazon holds all the cards here. They can deepen this cooperation over time and then at some point in the future do one of two things: either pull the rug out from under BBY when they become dependent on it, or simply buy them out at any point. The prospect of the latter is of course most appealing to Best Buy stockholders, but the jump in BBY yesterday suggests that the market is ignoring the risk inherent in the former.
That is understandable though, as AMZN’s recent MO makes a buyout look distinctly possible. If buying Whole Food Market made strategic sense for Amazon, then buying Best Buy to achieve the same in electronics and appliances does too. Admittedly, following so close behind the Whole Food deal and with BBY having a market cap of $21.3 billion it would be a bit of a stretch, but with Amazon having over $30 billion of cash in hand, interest rates on the rise, and Bezos’ record of taking risk and prioritizing growth, it would also not really be a surprise.
There was a time when the most likely outcome for a business that got close to Amazon was that they were chewed up and spat out. Now there is also the possibility of being swallowed whole, although I am not sure that is any better. Whatever the eventual outcome of this deal though, investors are better off betting on it being a long-term win for AMZN than anything else.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
