Jeff Bezos May Have Found Amazon's Latest Money Pit

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The New York Times recently wrote about Amazon's recent expansion into the realm of services by creating various local marketplaces for its customers to find plumbers or handymen to do a variety of services that the retailer will standardize in some way. The retail monolith, the Times concluded, will succeed at dominating the local service markets as thoroughly as it does the book and toy market.

Color me doubtful. While expanding into services may seem like the next logical move for the retail monolith, Amazon's core strengths that have allowed it to dominate the internet retail market bestow it few advantages in a service marketplace. In short, this may not end well for them.

Amazon has made some smart management decisions on its way to its current status as a retail behemoth. Its move to expand beyond books into toys, clothes and a plethora of other goods succeeded wildly, namely because it exploited what the company became very good at: logistics and exploiting economies of scale. Its great web site and unmatched ability to inexpensively buy, sell and transport books lent itself perfectly to selling other goods as well.

But these core strengths have nothing to do with helping people shop for a plumber in Peoria. The jobs these professionals do resist standardization and most households maintain a relationship with a plumber or handyman that they are loath to jettison. Amazon is also entering this marketplace late: Angie's list has been around in some form for over a decade and Silicon valley startup Thumbtack has been at this for five years. It's not clear what inherent advantage Amazon's extant business brings to this market other than a deep pocket and the fact that consumers are accustomed to shopping at Amazon already. Those aren't minor advantages, but they may not be enough for it to dominate the market, and anything less would presumably be judged a failure by all involved.

At the moment it's not entirely clear that anyone can make money at this: While Angie's List recently made news when it announced that it would delay an expansion in Indiana to protest the state's recent legislation, the company's dismal financial performance the last few quarters suggest that this expansion may not happen even if the legislature changes its mind. Thumbtack, a San Francisco startup, recently secured another round of funding, leading some analysts to conclude that it may have actually cracked this nut. but it is hard to see what tools Amazon brings to this market that would threaten its profits. Big warehouses across the country filled with robots won't give them a leg up.

The Economist suggested that it could still make sense for Amazon to enter the local service marketplace even if it loses money doing so because all these people will buy things from Amazon. Perhaps, but at the moment people aren't accustomed to ordering kitchen cabinets, garbage disposals and the brickabracks of home improvement and repair over the internet: that may change if it manages to get people to use its marketplace, but there's a bigger experiential aspect to major goods purchased infrequently, and it's hard to see Amazon changing that. It's not as if the big home improvement companies have seen customers whittled away by the internet of late, after all.

Amazon is extremely good at selling things that are commoditized, inexpensive, and can be easily shipped, and it has leveraged this expertise in practically every conceivable market where it makes sense. Selling large, expensive, and complicated goods or services that cannot be commoditized is a stretch. Perhaps their management structure is so good that they will excel at something quite different than what they've been doing, but the annals of American business history is littered with the detritus of ill-conceived conglomerates that tried to be too many things for too many people. Amazon is already on this list, having failed spectacularly with the Amazon cellphone.

Jeff Bezos has been a brilliant business leader and he employs some very smart men and women but they don't have a monopoly on intelligence. While his track record suggests that his shareholders should give him the benefit of the doubt, it's hard to see why this new effort will end up being anything other than another money pit for the company.


Ike Brannon is the President of Capital Policy Analytics. He is currently a visiting Senior Fellow at the Cato Institute specializing in fiscal policy, tax reform, and regulatory issues and the head of the Savings and Retirement Foundation and the Prosperity Caucus.

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