Amazon (AMZN 1.21%) rose to prominence on the back of its now sprawling e-commerce business, which has become not only the largest digital retailer in the U.S., but also the world.
Yet one of the biggest hallmarks of the company's success has been its willingness to expand into other areas of business, with its cloud computing and digital advertising businesses as prime examples. While not all of its ventures have been successful, Amazon's track record has been sufficient to strike fear into the hearts of those it might rival. Oftentimes, stocks will fall at the mere prospect of having to compete with the company — a well-documented phenomenon known as “the Amazon effect.”
Now, it seems Amazon has its sights on the wireless industry, which could spell trouble for the likes of AT&T (T -3.79%), Verizon Communications (VZ -3.19%), and T-Mobile (TMUS -5.56%).
Can you hear me now?
Reports emerged Friday that Amazon has been in discussions with a number of wireless providers in a bid to offer mobile service to Prime customers at a lower cost or even for free, according to a report by Bloomberg. The company has in negotiations with several of the most widely used mobile phone companies, including Verizon, T-Mobile, Dish Network (DISH 16.24%), and AT&T among others.
The e-commerce giant is trying to secure lower prices that it would then offer as an additional benefit to customers that subscribe to its Prime loyalty program. Amazon was hoping to provide wireless service to subscribers at a price of $10 per month or potentially for free, according to the report, which cited “people familiar with the situation.”
Amazon attempted to downplay the reports. “We are always exploring adding even more benefits for Prime members, but don't have plans to add wireless at this time,” Amazon spokesperson Maggie Sivon wrote in a statement.
A Prime opportunity
Amazon has historically kept metrics regarding its Prime subscribers close to the vest, occasionally releasing a new benchmark figure. The last big reveal came in early 2021, when then-CEO Jeff Bezos said Prime rolls had climbed to more than 200 million worldwide. While Amazon has never provided a breakdown, estimates suggest the company has roughly 167 million Prime members in the U.S., according to data provided by Consumer Intelligence Research Partners. If that number is even close to correct, it covers roughly half of the U.S. population of 334 million.
Given the magnitude of Amazon's reach, its easy to see how a foray into wireless could spell trouble for the largest U.S. carriers. There's little question that some wireless subscribers would abandon the most lucrative and profitable plans offered by Verizon, AT&T, and others in favor of a lower cost plan offered by Amazon. Such a move would no doubt cut into profit margins already squeezed by intense competition.
A rock and a hard place
If Amazon is, in fact, looking to offer cheap wireless service to subscribers, it would help make the program even stickier. This is an important consideration because these are Amazon's most lucrative customers. Prime members tend to spend $1,400 per year, on average, compared to just $600 per year for non-members, so Amazon has a vested interest in providing benefits to keep subscribers from cancelling. Once they pay the annual fee of $139, members want to get their money's worth, which helps keep spending levels higher.
At the same time, such an offer would be a no-win situation for wireless carriers. If they refuse to participate in the discussions, Amazon will just make a deal with a rival in the space. Dish Network, for example, has been struggling and a deal with Amazon would be a no-brainer. One the other hand, if the wireless carriers do reach an agreement with Amazon, it will ultimately take a toll on their respective businesses, particularly their bottom lines.
So, while any such deal is great news for Amazon investors, it will likely spell trouble for most of the major wireless providers.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.