Why Amazon covets RadioShack

So Amazon has been in talks with RadioShack to buy some stores from the troubled electronics retailer, which could soon file for bankruptcy protection.

Yes, Amazon, the company that built an ultralucrative and humongously disruptive business by eschewing - and destroying - the brick-and-mortar retail model, is thinking about picking up a bunch of brick-and-mortar stores.

Amazon watchers should note that these talks about acquiring real-world stores are happening, in part, to generate online sales. What might seem discordant makes sense when you take a step back and look at Amazon as a whole, and not just as Amazon the company that sells you things over the Internet.

Amazon has so far proved that it can do one thing really well: sell a lot of cheap consumer goods online. Some might argue that it sells a lot of cheap cloud computing services really well, too (it’s the company’s fastest growing division), but Amazon’s success or failure is still deeply rooted in online retail.

Electronics and general merchandise sales account for almost $61 billion of the company’s $89 billion in annual revenue. The cash that this division throws off funds sexy new businesses such as a TV show production unit, a 3-D printed products store and a yet-to-be-launched drone delivery service.

Amazon has discovered that there are two things that seem to boost retail sales growth: its loyalty program, Amazon Prime, and Amazon hardware like the Kindle tablet. Reports have shown that Prime members buy about $1,500 worth of products a year from Amazon, versus the $625 that nonmembers spend. Kindle owners spend about $1,450 per year at Amazon, versus $725 per year for non-Kindle owners.

Prime is doing incredibly well. Global membership rose 53 percent last year, despite a price increase from $79 to $99, and analysts say they think the program has about 40 million members. The hardware stuff, on the other hand, has never produced a runaway success. IDC says the company shipped about 1.7 million Fire tablets in the fourth quarter of 2014, versus 21.4 million Apple iPads and 11 million Samsung Galaxy tablets in the same time frame.

The Fire phone has so far been a failure, and the company has taken a $170 million inventory write-down on it. The Fire TV hasn’t been able to distinguish itself in a crowded streaming television market. No one knows if customers will ever embrace the Echo speaker or the Dash scanner.

Now Amazon is thinking about showcasing its hardware in stores, a strategy that Apple pioneered and Microsoft aped. Samsung, too, is still mulling plans to create standalone retail locations akin to the Apple stores, having hired a senior Apple store designer, Tim Gudgel, and a former director of retail at Apple, Michael Forrest, to work on the initiative.

The retail push is happening as brands rely more on marketing to make their wares stand out in a sea of commoditized hardware. Amazon could use the RadioShack locations to showcase phones, speakers and other products. It has also thought about using the sites as pick-up and drop-off centers for online customers who currently go to places like UPS.

Any deal would depend greatly on how the RadioShack bankruptcy case proceeds. RadioShack would likely want Amazon, or any buyer, to assume liabilities like lease obligations. And Amazon would be competing with Sprint - another interested RadioShack bidder - for prime locations.

I’m not particularly bullish on this strategy. Amazon knows how to sell cheap and fast better than almost anyone else, but creating a retail presence that draws in and delights customers is a very different challenge. It takes a long, long time to ramp up a retail presence. (Just ask Samsung.) And retail failure is really expensive. (Just ask RadioShack.)

Even so, when all of this settles, we may see the premier digital retailer tiptoeing into the ancient world of brick-and-mortar storefronts.

*The author is a Bloomberg View columnist who writes about technology, innovation, and the cult and culture of Silicon Valley.

by Katie Benner