Retailers are well aware of the “Amazon effect,” Amazon.com Inc.’s (AMZN) incessant disruption of both online and traditional retail spaces, but as Amazon continues to infiltrate new markets from drugs to groceries, it appears as though no industry or business is safe. The latest victims are businesses that sell network-switching devices. Cisco Systems Inc. (CSCO), Juniper Networks Inc. (JNPR), Arista Networks Inc. (ANET), and F5 Networks Inc. (FFIV) all saw their shares hammered on Friday following a report that Amazon Web Services (AWS) is considering selling its own switching devices, according to CNBC. The result for these companies was that their market values tumbled by billions of dollars.
Cisco’s stock was down 4% on Friday while Juniper was down over 2%, Arista down more than 4% and F5 Networks down less than 1%. These stocks recouped part of their losses as of 1:00 p.m. EDT in daily trading. However, if Amazon follows through on its plan, more downside may be in store for these stocks.
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The Amazon Switch
A network switch, also known as a switching or bridging hub, connects separate devices, such as computers, printers, phones, and servers, together on a single computer network. Such switches allow these various devices to communicate with each other, facilitating the sharing of information, which can increase productivity and bolster the bottom line.
Amazon is already the market leader in cloud-computing infrastructure with its AWS maintaining a dominant global market share of around 33% over the past three years, even as the market has nearly tripled in size over that same time period. By selling network-switching devices to its business customers, Amazon would be able to more easily connect the data of those customers to the cloud-computing services provided by AWS. (To read more, see: Why Amazon’s Stock Can Rise 45%.)
The report, published by The Information, indicated that Amazon would undercut competitor prices by as much as 70% to 80% by selling no-name brand switching devices, or so-called “white-box” switches, with open-source software, according to Barron’s. The challenge for Amazon is to convince customers to abandon their current networking vendors, which are already well entrenched in corporate data centers. The cost of switching would not be insignificant.
More of the Same
That Amazon is attempting to enter a new market is not surprising considering its track record. When Amazon purchased Whole Foods for $13.7 billion last year, the market cap of twenty S&P 500 retail- and food-sector stocks were decimated by $37.7 billion, according to a separate article by CNBC. (To read more, see: Why Amazon’s Stock Will Rise 15% Even Amid Grocery Price Wars.)
Even food companies that supply products to grocery stores saw their shares get slammed, as Amazon’s reputation for its disruption of the retail space suggests that there is no safe place in the food space, if anywhere.