Video home security, Coke’s struggles and the unbundling of retail

What does a start-up that provides a home security solution have to do with the unbundling of retail?

Quite a lot, it turns out.

Techcrunch covered Lighthouse’s emergence out of stealth mode with the following description of what it does —

“Once the Lighthouse device is out of the box and set up, it can monitor a room within your home and send the feed to your smartphone remotely. From within the mobile app, you can then search for events within historical footage. And if you want to set up a notification, you can arrange to be alerted when a key event occurs, like your kids coming home from school.”

While I wish the Lighthouse team good luck on their journey, the fact that we’re even seeing such a product tells us a lot about the world today.

Technology’s march toward greater intimacy
Technology has played a more intimate role in our lives over time.

Radios and telephones made it in our living rooms. The occasional television made it to the bed room. But, mobile phones broke the barrier and were rarely anywhere but the bedroom when we went to bed. And, wearables like the Fitbit and the Apple Watch are often on the bed, sleeping with us.

So, we’ve reached a world where a piece of technology taking a video of us and processing it on the cloud has now become a possibility. Of course, I’m not just talking about Lighthouse. There’s also the small matter of the Echo Look.

The Echo Look doesn’t just take photos and videos of you. But, it also sends these images to Amazon’s servers and returns recommendations for looks that might suit you.

And, if you like the suggestions, you can, of course, purchase the apparel on Amazon.

Power Law Distributions — Consequences of Networks
Network effects are the phenomenon whereby a product or service gains additional value as more people use it. When we think of network effects, we tend to think about social media businesses (Facebook, Snap, etc.) whose strength comes from network effects.

But, every business on the internet today experiences network effects. That’s because the most important asset of an internet business is data. And, the more people use an internet service, the more data it accumulates. This enables it to have better machine learning algorithms that help it predict demand, churn and improve efficiency. Additionally, the nature of the internet allows for businesses to serve the entire planet. It is this global nature of the internet that has destroyed local and, even, national newspapers. Today, The New York Times regularly competes with The Straits Times (Singapore) and The Economist for subscriptions.

The biggest consequence of such networks is that they enable power law distributions. With power law distributions, you see benefits accrue to a few members within the network.

You’ve seen power law distributions in action on Instagram or Twitter where a small number of users have a disproportionate number of followers.

These power law distributions are why network based businesses are often winner-take-most businesses. There is space for consumer internet businesses outside of Facebook in its current form. But, not too many. Similarly, unless Uber implodes, you could envision Lyft or its many competitors getting their hands on second place. But, there isn’t going to be place for many more.

The fight to be the global e-commerce platform
Bloomberg, in an excellent article, profiles Wal-Mart’s attempts to fight Amazon in e-commerce (all links below) — 
“In August, Wal-Mart Stores Inc. announced it would acquire Jet.com for $3.3 billion in cash and stock. It was an extraordinary sum for a 15-month-old, purple-hued website that was struggling to retain customers and is still far from making a profit. Even more astonishing, Lore and his management team in Hoboken, N.J., were put in charge of Wal-Mart’s entire domestic e-commerce operation, overseeing more than 15,000 employees in Silicon Valley, Boston, Omaha, and its home office in Arkansas. They were assigned perhaps the most urgent rescue mission in business today: Repurpose Wal-Mart’s historically underachieving internet operation to compete in the age of Amazon.”

Wal-Mart.com has somewhat belatedly realized that the fight with Amazon is existential. And global. Quick side note: the world, effectively, has two global networks — the internet we think of and the Chinese internet. While Amazon is the clear leader in the internet we think of, Alibaba is the dominant force on the Chinese internet.

Amazon’s business is a classic example of the power of network effects. As more people shop on Amazon, it becomes smarter and more personalized. There’s an interesting anecdote about Marc Lore (Former CEO of Diapers.com/Quidsi, then Jet’s com’s CEO and now Wal-Mart.com’s CEO).

He also spends time on customer-pleasing contrivances that, in the parlance of Silicon Valley, do not scale. He recently devoted a 12-hour day to recording a thousand variations of a video greeting for new Jet customers. Now when customers sign up, Lore welcomes them by their first name.

Would Marc still do this if Wal-Mart’s algorithms were able to personalize the shopping experience on Wal-Mart.com?

The unbundling of retail and Coca Cola’s struggles
Retail in the US is in crisis. More stores are going to be shut down in 2017 than were shut in 2008.

This is, of course, in complete contrast with the economy. The Dow Jones Industrial Average has been moving up and to the right all this time.

And, while we think of retailers in crisis, global behemoths like Coca Cola are suffering too. From another Bloomberg article about Coke’s struggles in a digital world —

When shoppers skip trips to the local mall and get their clothes at Amazon, they also forgo buying Coke at a vending machine or food court. So while the decline of retailers has mostly focused on bankrupt apparel chains and shuttered storefronts, a brand like Coca-Cola is suffering as well.

As James Quincey, Coke’s CEO, eloquently put it, “Unless you’re adapting to the secondary effect, you can find — all of a sudden — weird and surprising changes happening to you,” Quincey said.

The retail crisis of 2017 is a consequence of the great unbundling. The internet has unbundled a collection of industries in the past two decades. It is now retail’s turn.

Amazon’s platform strategy
Amazon is the best exponent of the tax business model on the planet. There’s the AWS platform tax, the kindle platform tax, the fulfillment by Amazon platform tax among others. And, in the future, we’re likely to see a delivery-by-Amazon tax (beware UPS, Fedex) in addition to a few more.

For a company whose expertise lies in building platforms, Amazon was understandably disappointed to miss out on the phone. Apple and Google won those wars and the Fire phone crashed and burned.

I’ve written about how e-commerce is more efficient than traditional retail due to the absence of intermediaries.

This was especially true on the web as the browser is a neutral platform. In mobile devices, however, there’s a powerful intermediary in the Google/Apple app store.

But, the strengths of a giant in a previous wave are typically a weakness in the next.

The failure of the phone as the sun in the solar system model
The bet that Google and Apple made was that the phone was the sun in the solar system (hat tip: Ben Evans). So, smart home devices and the “internet of things” would all be controlled from the phone.

However, that led to a blind spot around how convenient it is to use voice to talk to a device. And, that led to the Amazon Echo and Alexa (Amazon’s virtual assistant). Amazon has approached Alexa in a way you’d expect Amazon to — by investing in Alexa being the default voice platform.

From the Techcrunch article on Amazon’s Alexa strategy-

But while Echoes will likely continue to see for some time, thanks in part to regular refreshes of the line, Amazon is working on its own planned obsolescence. The more the functionality is baked into third-party products, the less need users will have for their own standalone Echo devices. And that’s perfectly fine for Amazon.

Amazon has done the hard work of getting Alexa out into the world. The next couple of years, the burden of follow through will be on the many hardware partners looking to the cash in on Alexa’s success. And on Apple and Google, who have a lot of catching up to do.

The power of the Echo Show
This is why the Echo Show is a big deal. If it succeeds, and it is becoming increasingly hard to bet against it, it will solidify Amazon’s status as the winner of the home digital assistant. The war is far from over. Google, Apple and Microsoft are all sure to find ways to compete. But, Amazon has found a strong, early lead.

All this brings us back to the start of today’s note. Technology’s role in our life has become increasingly intimate. The Echo Show, for example, can have some users place calls automatically, i.e., you don’t even need to pick up your parents’ call. It’ll just automatically connect.

All this is why Wal-Mart.com has a long road ahead to catch up. The game a decade ago was to win customer loyalty based on price, delivery and personalization. Amazon has done a stellar job in winning that. Seeking Alpha points out that Amazon Prime subscriptions in the US are closing in on Costco memberships. Costco, to me, is among the few retailers poised to prevent complete domination by Amazon as things stand. But, even they must feel threatened.

While the likes of Wal-Mart.com are working to build their e-commerce muscle, Amazon has surged ahead in changing the nature of e-commerce in itself. Marc Lore may be welcoming customers with personalized videos on Wal-Mart.com. But, it is unlikely that’s going to help in a world where people are just ordering diapers by talking to Alexa on their Echo Show.

Jim Barksdale once said — “There’s only two ways I know of to make money: bundling and unbundling.” Retail is on its way to being unbundled and it looks like Amazon is leading the way in creating the new technology-led bundle.

But, just as this note is bearish about the likes of Wal-Mart and bullish about Amazon, it is important we cast our eyes beyond these firms and think of the consequences. There are plenty of second order consequences — for example, retailers are massive advertising spenders and this’ll hasten the shift to digital advertising. Advertising agencies are in for a tough few years.

But, far more important is the effect on employment — while populist politicians are focused on manufacturing jobs, retail jobs are far greater in number.

As the Economist calls out — “Given the number of workers involved — retail jobs in America are 30% more numerous than those in manufacturing — some of those who lose their positions will still need to be caught by the safety net of the welfare state. But much more can be done to smooth the transitions that millions of retail workers face. Policymakers have shown a woeful lack of ambition in facing up to the impact of technological change on jobs. The carnage in retail will require a far bolder response.”

Amen to that.

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Links for additional reading


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