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Will Amazon’s Transportation Fleet Bring Down Hammer On FedEx, UPS?

It’s an ambitious plan by Amazon ( AMZN ), to procure a fleet of 40 airline freighters and lessen its dependence on FedEx ( FDX ) and United Parcel Service ( UPS ). The 40 aircraft that Amazon plans to have fully operational by 2018 will enable it to bring as much as 30% of its current delivery volume in-house, according to a research report Monday by Moody’s Investors Service analyst Jonathan Root. In terms of short- and medium-haul aircraft, Amazon’s fleet would be 21% the size of UPS’ and 14% the size of FedEx’s, says Root. In terms of payload capacity, Amazon’s fleet would be 26% the size of UPS’ and 17% of FedEx’s, excluding their largest freighters that fly mostly long-haul routes for those companies, Root wrote. “As significant as that sounds, the business that UPS and FedEx will lose may not be as bad as it sounds,” Root wrote. “Revenue and average daily volumes at UPS and FedEx will be hurt, but there’s plenty of opportunity for them to replace that lost business with growing volumes from higher-yielding customers” and growth in e-commerce. Root also says that Amazon is one of the least profitable customers for UPS and FedEx, because Amazon’s size enables it to negotiate considerable discounts. “The extent to which UPS and FedEx can offset volume declines from Amazon with new business from other customers will determine how beneficial or detrimental Amazon’s plan will be to the companies’ segment operating margins,” Root wrote. Amazon stock was down a fraction, near 700, in afternoon trading in the stock market today , after touching a record high above 722 on May 12. It’s an IBD Leaderboard stock. UPS stock was down a fraction, while FedEx was up a fraction. The threat would grow if other large retailers follow Amazon’s lead, which he says is possible. “We understand that Wal-Mart Stores ( WMT ) is investing to improve its e-commerce positioning by building eight e-commerce warehouses,” Root wrote. Wal-Mart already offers free shipping on orders of more than $50, and it might broadly offer an e-commerce membership that includes free shipping, as Amazon does with its Amazon Prime membership service. Still, it’s not clear how deeply Amazon will dive into transportation services. “We estimate that Amazon could build a competing U.S. ground network for between $8 billion and $15 billion,” Root wrote. “We believe the company has the financial capacity to continue adding fulfillment centers, pickup locations and local and regional delivery operations, it if chooses to do so.” More than that, Amazon could offer its delivery services to the many third-party sellers on its site. “Such an offering would be more problematic for UPS’ and FedEx’s longer-term financial performance,” Root wrote.

Amazon Will Continue To Spend Big To Improve Deliveries: Analyst

In 2010,  Amazon.com ( AMZN ) had 26 fulfillment centers in North America. By 2017, it will have 88, according to Cowen analyst John Blackledge. In a research report Monday, Blackledge said Amazon’s rapid and massive delivery-system expansion — costing the company more than $10 billion in capital expenditures — is likely to continue for the foreseeable future and will not be matched by rivals such as Wal-Mart ( WMT ). Doubling down on the fulfillment business has meant continuing to innovate, especially in Amazon’s “sortation” centers, he says. These centers facilitate last-mile delivery — a notorious problem for any logistics company — and, in conjunction with increased United States Postal Service shipments, improvements here could drive down the cost of shipping to $1.85 per order from $4 to $5, the analyst says. Though spending big bucks has depressed earnings, generating  ire among investors , the strategy is sticking close to the philosophy Jeff Bezos laid out in his 1997 letter to shareholders, that the company will put customers before profits. Amazon stock was up a fraction in afternoon trading on the stock market today , near 624. The company has an IBD Composite Rating of 77, where 99 is the highest. After a low-volume breakout, Amazon is still in buy range from a 603.34 cup-with-handle buy point. Amazon is an IBD Leaderboard stock. The company, meanwhile, also is expanding its FedEx ( FDX ) and UPS ( UPS )-like services. The company has acknowledged a widely circulated rumor that it was launching a fleet of jets — which it is leasing and operating out of Wilmington, Ohio. Blackledge says this program has the potential to make every Amazon item deliverable within a day. The e-commerce leader is set to report Q1 earnings after the close Thursday. Wedbush analyst Michael Pachter wrote in a research note last week that the company will miss EPS expectations but beat sales estimates.

Microsoft, Inphi Plan To Leave Amazon, Apple In Digital Drone Dust

Tech giant Microsoft ( MSFT ) and chipmaker Inphi ( IPHI ) plan to leave Apple ( AAPL ), Amazon.com ( AMZN ) and Alphabet ( GOOGL ) in their drone dust come Q3 … digitally speaking. Early Tuesday, the companies introduced a 100-gigabit platform capable of digitally tying multiple data centers within 80 kilometers (about 50 miles). Previously, that breakneck 100G speed was possible only in cross-country networks. Linking data centers to amass cloud size — and speed — will become more necessary as cloud users like  Facebook ( FB ), Alibaba ( BABA ), Yahoo ( YHOO ) and others expand their online footprint, says Jeff Cox, Microsoft senior director of network architecture. Microsoft realized as much in 2012, but the industry’s “long-haul solution” for cross-country information transit was too hefty for use in metropolitan areas, Cox says. It would be the travel equivalent of launching a Boeing 777 to go from John Wayne Airport near Anaheim, Calif., to Los Angeles International Airport 20 miles away. “You’d take a cab, not a 777,” he told IBD. “For those distances across town, we want these large quantities, but that’s the wrong approach.” Trains, Planes, Trucks … And Drones In 2013, Microsoft and Inphi teamed up to solve the problem. Inphi moves data in the same way FedEx ( FDX ) transports packages — by trains, planes and trucks, Inphi CEO Ford Tamer told IBD. The Microsoft-Inphi solution is a 100G “drone.” Inphi also has a 100G long-haul solution under its Coherent platform. But the Coherent platform is more power-consumptive, expensive and requires space to allow excess heat to dissipate, Cox says. He estimates the Coherent platform uses 20 times more power than the new Inphi-Microsoft platform. “Using the Coherent technology would blow your entire power budget,” he said. “It’s fairly impractical at this scale.” Enter Colorz. Microsoft and Inphi’s partnership will be borne out in the Colorz platform — faster than the industry’s current 10G drones and less costly than 100G long-hauls, Tamer says. The 100G drones are capable of moving the digital equivalent of the Library of Congress multiple times in one second. “We do not believe there is any other solution that can achieve what we’ve done in the power and cost envelope,” Tamer said. “For that type of power and that type of performance and that distance, we do believe it’s an industry first.” Who Needs 640KB RAM? Three years ago, Microsoft met brick walls as it sought to reach 100G inside city limits, Cox said. He referenced tech lore when, in 1981, company co-founder Bill Gates asked who would need more than 640 kilobytes, in defense of IBM ‘s ( IBM ) newest PC, based on an Intel ( INTC ) processor. “Almost kind of like 10 years ago, when people asked, ‘Who needs more than 640KB of RAM (computer memory, where 4GB is now standard)?’ ” Cox said. “Then it was, ‘Who needs more than 100G in a metro?’ I think it was hard for people to wrap their heads around it.” Since then, he says, bandwidth needs have multiplied. Cloud providers are leasing or buying data center spaces across the world as their needs outgrow those of traditional consumers like IT and Internet providers. Data center is the industry’s new buzzword, and chipmakers especially are making a hard run for a piece of this market. Over the past year, Intel, Qualcomm ( QCOM ), Broadcom ( AVGO ), Nvidia ( NVDA ) and Integrated Device Technology ( IDTI ) have redoubled their data center efforts in a bid to gain share. “I think now when we talk about Microsoft, Google, Amazon and Facebook, everyone is building these infrastructures,” Cox said. “And the scale of these infrastructures is surprising everyone in the industry.” He added: “There isn’t so much disbelief any longer. I think we’ve proven we weren’t kidding. In fact, I think we underestimated a little.”