Amazon Exploring Services For Smart Homes; What Is The Upside?

In recent months, Amazon (NASDAQ:AMZN) has made headlines as the company continues to expand its e-commerce retail business across different verticals ranging from transportation & logistics, to grocery stores & physical stores. In an interesting development, Recode reported that Amazon has ventured into the home appliance services space, which could compete with Best Buy‘s (NYSE:BBY) Geek Squad.

The news led to an unfavorable reaction by Best Buy’s shareholders, with its stock price falling by 7% on Monday to $54, wiping out around $1 billion from its market capitalization. We have a $50 price estimate for Best Buy’s stock, implying a market cap of just over $16 billion. On the other hand Amazon’s stock rallied 2% on Monday to just under $1,000 per share from $980 on Friday. We have an $890 price estimate for Amazon’s stock, which is around 10% lower than the current market price.

In the first part of this two-part article series, we explore Amazon’s presence in the home improvement and smart home market and how this can help Amazon gain a strong foothold in the space. In the second part, we take a look at how Best Buy stands to lose from this development and how much it can be impacted.

See our complete analysis for Amazon | Best Buy

Amazon Targets Smart Homes Via Intelligent Speaker

The Intelligent Home Speaker Market is a nascent market at the moment, but serves as a gateway to smart homes by allowing users to connect with and control smart home apps and devices through voice rather than through pressing buttons on a smartphone. Amazon entered this market segment when it launched the Echo back in 2014. At the time, the company listed Echo as a speaker with just a few in-built smart commands rather than selling it as a voice assistant. The Amazon Echo (priced at $180) competes with other similar products such as Google‘s (NASDAQ: GOOG) Home (priced at $130) and Apple‘s (NASDAQ:AAPL) HomePod (recently launched at $350).

Amazon’s voice assistant Alexa competes with Apple’s Siri, Google Assistant and Microsoft‘s (NASDAQ:MSFT) Cortana. Over the last couple of years, Echo-Alexa users realized the add-on capabilities of the technology or “skills“, such as using voice commands to post tweets, book an Uber, track a misplaced phone or integrate a car system with Alexa. In addition, Amazon has seamlessly integrated its core retail platform which can be used for making purchases on Amazon’s platform using Alexa, showcasing the extent of Amazon’s ecosystem. Subsequently, Alexa has reportedly leapfrogged over competing voice assistants due to its high quality and wide range of offerings. According to Forrester Research, Amazon sold roughly 6 million Echo devices in 2016. Although this number is significantly lower than the total number of iPhone users or the total number of Android-based smartphone users that are the potential users of Siri of Google Assistant, Alexa’s reach is massive.

Why Echo-Alexa Is Relevant To Best Buy

Amazon is simultaneously competing with top companies across sectors, potentially disrupting various markets. Amazon’s e-commerce business competes with retail chains such as Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST) and Target (NYSE:TGT). With strong growth in e-commerce and increasing sales, Amazon has expanded its shipping segment to a full-fledged logistics giant with independent airplanes and ocean freight under its belt. This segment can potentially compete with UPS (NYSE:UPS) and FedEx (NYSE: FDX). More recently, Amazon announced its intent to acquire Whole Foods, now placing it in competition with grocery chains such as Kroger. Not only is Amazon venturing into different markets, the company is seemingly offering more products or services at lower costs than most existing market leaders.

One key market segment in retail which Amazon can now disrupt is consumer electronics. Best Buy has been one of the largest consumer electronics retailers in the U.S, with a market share of over 22% in 2015. One of Best Buy’s key selling points is its Geek Squad offering, which allows customers to try out products or consult with experts before buying them, and the Geek Squad can also install various consumer electronics products and integrate them with each other. This can be a particularly helpful service for many consumers, given the increasing complexity in integrating their personal devices with other household devices such as routers, television sets or other smart home devices.

Over the last few months, Amazon has hired a team of technology experts to primarily offer Alexa consultation, product implementation and pairing with smart home devices. Amazon has also been beefing up its services segment to other experts for services such as home improvement, setting up home theaters, house cleaning and furniture assembly. This could take away a key advantage Best Buy had over Amazon when it comes to electronics.

The Impact

It is interesting to note that even without the aforementioned service offerings, Best Buy was losing share to Amazon in the consumer electronics retail market. In this decade, Best Buy’s share in the consumer electronics market has fallen from over 25% in 2010 to just over 20% by 2016, while Amazon’s share has expanded from around 8% to around 20% by 2016. With Amazon beginning to venture into installation and consultation services, it could be a difficult market for Best Buy to thrive in.

After Amazon’s entry in this market was made public, Best Buy released a statement mentioning that they have roughly 20,000 Geek Squad agents serving tens of millions of customers annually. So it looks like it could be a while before Amazon matches up with those numbers in the near term. However, in the long run, Best Buy could be deeply impacted by the massive ecosystem created by Amazon, with minimal incremental value added from its own services. For Amazon, adding services to its retail offerings and integrating its voice assistant with yet another “skill”, the company could further cement its place as the dominant ecosystem in the consumer space.

Read part 2 to see the detailed analysis on where Best Buy stands and how this can impact the company in the long run.

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