NEW YORK (Reuters Breakingviews) - Amazon is purchasing a cheap, curious trinket. The $400 billion Seattle-based online retailer is paying less than $1 billion for Souq.com, a Middle Eastern e-commerce upstart. Amazon gets a low-cost toehold in a region that’s hard to conquer. That said, overseas buyers have a history of regretting purchases of shiny objects in this labyrinthine market.
Amazon founder Jeff Bezos has always focused on long-term potential. That’s a description that matches the Middle East. The region’s population is expanding, mobile devices are omnipresent, and there are pockets of huge wealth – yet e-commerce is underdeveloped.
Picking winners, however, is not easy. Yahoo paid over $160 million in 2009 for portal Maktoob, and later shut down essentially all operations in the Middle East. Yahoo also didn’t acquire what may have been the best parts of Maktoob – one excluded property being Souq.com.
The region’s many legal and economic jurisdictions, and a tendency to favor red tape and entrenched cartels, make it hard for even powerful newcomers like Uber to break in. At least anecdotally, delivery logistics can also be unreliable in many countries.
Souq has raised $425 million in funding since its founding in 2005, according to CrunchBase, with the last round valuing it at around $1 billion. The sale to Amazon, at between $650 million and $750 million according to the Financial Times, shows how investor optimism can be checked by reality.
Bezos is not afraid of complex endeavors, though. E-commerce remains a tough business, getting payments and tax levies right can be convoluted, and no company has found a simple solution to the problem of delivering packages to all the people who want them. The extreme conditions of Souq’s territory may mean the purchase will never really make financial sense. On the other hand, the outlay is pocket change for Amazon and could prove a useful testing ground for the giant’s global ambitions.
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