Thursday, June 6, 2019

Amazon Prime Mobile would be the carriers worst nightmare

There has recently been speculation in the press that Amazon is preparing to enter the US wireless market, either as a MVNO or as a fourth carrier, buying the forced divestitures of a theoretical T-Mobile/Sprint merger.

On the face of it, this looks to be just another one of many companies trying their luck at the wireless market, where few succeed and many exit with bruised egos and empty wallets.

Amazon would be different and could pose a significant challenge to all the existing carriers as well as MVNOs. The main difference has to do with two things, margins and valuations and how they work together. Let me explain.

The US consumers pay some of the highest prices in the industrialized world for their wireless service. The reasons for this are many and complex but can be brutally generalized into this.
New entrants, and even some of the existing carriers like Sprint and T-Mobile look at the massive margins enjoyed by especially Verizon Wireless and AT&T and think that they too can achieve similar margins, and even if it ends up being half of that, that's still pretty good. 

This means that these entrants and T-Mobile and Sprint are very constrained in what kind of competitive pressure they can exert on the market. Their investors have placed a value on their companies, to a large extent based on massive margins. This value needs to be upheld or preferably increased or the CEO loses his or her job.

Amazon is different. Amazon is very comfortable (and so are their investors) entering relatively high-margin sectors and decide to operate a decidedly low-margin business, very efficiently, and bleed the competition do death. Then they innovate new business cases on top of what they already have.

If Amazon replicates their strategy in the US wireless market, it may look something like this:

They secure a decent, long-term, deal with for example the New T-Mobile for network access and purchase Boost Mobile as part of the conditions surrounding a Sprint/T-Mobile merger.

Amazon introduces Prime Mobile which includes four lines of unlimited texting, 1Gb data/month and 1000 off-Prime minutes/month (unlimited Prime minutes) for each of the lines, free for all Amazon Prime members. Free. More data and minutes could be accessed, in tiers up to unlimited, by small monthly fees or by subscribing to additional Amazon services.

A few months later Amazon introduces Amazon Wireless As A Service towards the corporate market. Amazon has, based on their AWS service, created a back-end which supports companies completely managing their wireless service themselves including complete PBX integration and managing each subscriber service. All on tap, just like AWS.

It would just go on and on with Amazon building new business cases on top of the wireless service they already have and combining it with existing services like Kindle etc.

The difference between how Amazon operates and the carriers operate couldn't be more pronounced. The carriers strive to maximize margins and then work as hard as they can to increase market share as much as is possible within the constraints that the margin (influenced by the valuations put on the carriers) puts on their abilities.

Amazon is happy to go into a new market and say, we can do this with a 2% margin but instead try and capture ALL of the market.

If this happens, you would see capital destruction (from the shredded carrier valuations on the stock market) that you have not seen in a long time.

If you think this is an impossibility, look at what happened to the French wireless market after Free entered or the Indian market after Jio entered. Amazon would be vastly more powerful than either of those entrants. 

Amazon, a wireless consumer's dream and a carrier's worst nightmare

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