Issue 18: It's Amazon's world — we're all just living in it

August 9, 2019

This week, we're diving into Amazon. We'll be taking a close look at how the company evolved from a humble bookseller into an industry-altering giant in the modern economy.

Finally, we're going to see what some of the world's foremost minds discussed at Aspen Ideas Festival this year, consider who's best-suited to leading a company's digital transformation, and consider what Netflix really is.


Focus: Amazon

At its most basic, fundamental level, Amazon is an online retailer and cloud provider. However, as we'll prove today, it's so much more than that. Andreessen Horowitz's Benedict Evans argues that Amazon is, in fact, the largest-scale retail experiment of our time. Evans observes, "Amazon is systematically going through every branch of the idea tree around what retail is, and doing it without any pride," trying quite literally everything, with varying degrees of success.

KILL YOUR DARLINGS — GROWTH AND MARKET SHARE AT ALL COSTS

Amazon's tremendous impact on the modern shopping ecosystem is the product of two key corporate attitudes: 1) a legendarily aggressive pricing strategy that's only matched by 2) an equally ambitious pursuit of continuous growth into (and subsequent domination of) new products, markets and categories.

For the average shopper, Amazon's value proposition is simple: low-priced products delivered speedily. Keeping prices low is therefore a key pillar of Amazon's business model — which means it aggressively squeezes sellers on prices. In fact, Amazon's pricing is so aggressive, then-Yale Law School student Lina Khan accessed the company of predatory pricing in an instantly viral Yale Law Journal article.

Khan's article sums up Amazon's amazing breadth: "In addition to being a retailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space."

Today, Amazon's willingness to sacrifice short-term profits for long-term growth is legendary. In 2014, Horowitz published a now-infamous graph tracking Amazon's revenue and net income:

Source: Benedict Evans

Source: Benedict Evans

In addition to its aggressive pricing strategy, Amazon is also always looking to expand into new categories. These are just a few categories Amazon is making major investments in right now: D2C clothing retail, renewable energy, and high speed internet. Thanks to Alexa and the integration of more IoT support into Amazon Web Services (AWS), Amazon is also becoming a force in the IoT space.

Once it's in a category, the company uses its scale and aggressive pricing strategy to crush the competition: a strategy that's paid off well for Amazon Web Services (AWS) and its cloud computing division in particular.Visual Capitalist explains AWS' dominance via a few key statistics:

Source: Visual Capitalist

Source: Visual Capitalist

The success of Amazon's business model is evident in its sales figures for 2018:

Source: Bloomberg

Source: Bloomberg

As well as its domination across e-commerce categories:

Source: Bloomberg

Source: Bloomberg

FASTER IS ALWAYS BETTER

Fast Prime shipping is one of Amazon's key competitive advantages today. It's not an exaggeration to say that this was a game-changer for not only Amazon, but online retail in general. Recode's fantastic oral history of Prime's inceptionoffers a fascinating glimpse into how Bezos views Prime as a key leverage point for the company.

Today, Prime is immensely popular. As of September 2018, there were 90 million Prime members (versus 25 million members in December 2013; a CAGR of 29.2%). This is great news for Amazon, as Prime customers order on Amazon more frequently than non-Prime customers:

Source: Vjeran Pavic / The Verge

Source: Vjeran Pavic / The Verge

Importantly for future growth, Amazon isn't resting on its laurels when it comes to fast shipping. The company is now offering two-hour grocery delivery, pursuing one-day shipping, experimenting with shipping drones, andbringing logistics in-house to tighten the ship on order fulfillment.

A TALL TREE WEATHERS MUCH WIND

Unsurprisingly, Amazon's rise hasn't been without controversy. Accusations that it's a monopoly (an accusation that's also been leveraged against Facebook and Google) have prompted criticism by both consumer advocacy groups and lawmakers. Elizabeth Warren has even proposed legislation to break up Amazon, Facebook and Google. Earlier this year, she even bought a billboard in the middle of San Francisco (at 4th and Townsend, where many of the city's tech workers hop on the Caltrain to their respective tech industry jobs) to amplify this message:

Source: Vjeran Pavic / The Verge

Source: Vjeran Pavic / The Verge

Amazon has also been accused of mistreating workers in both its warehousesand corporate offices. To mark this year's Prime Day, 100 workers in Minnesota and thousands of workers in Germany, Poland, and Spain went on strike with the slogan "No more discounts on our incomes."

Competitors have also accused Amazon of anticompetitive practices. In a lawsuit in California this month, EBay is suing it for racketeering and anti-competitive practices. EBay alleges that three specific Amazon managers conspired to lure successful sellers on its platform away to Amazon.

Regardless of where you land on these issues, Amazon's outsized importance in today's economy is indisputable. For our part, we're excited to see how this innovative company will continue pushing new ideas that change our daily lives.


Extended Reading

Don't Put a Digital Expert in Charge of Your Digital Transformation

Counterintuitive as it may seem, it turns out that digital experts aren't the best leaders for digital transformations. INSEAD professor Nathan Furr explains why and makes the case for picking insiders with little digital experience at the head of digital initiatives.

Netflix is not a tech company

Benedict Evans (you could argue that today's newsletter is a Benedict Evans appreciation missive) makes the case that Netflix isn't a tech company at all: rather, it's a TV company that's used technology as a "crowbar to build a new TV business."

A festival of ideas, shaped by McKinsey insight

This year's Aspen Ideas Festival brought some of the world's foremost thinkers together to discuss the biggest issues shaping our times — including the future of work, climate change and tech policy. McKinsey — which was again the event's Knowledge Partner — recaps some of the event's highlights on its blog.

Competing on Imagination

The BCG Henderson Institute makes the case for using imagination in corporate settings. It also provides step-by-step instructions for putting imagination into practice.

Source: BCG Henderson Institute

Source: BCG Henderson Institute