It’s Always Day 1: Why Amazon Will Win the Future
There’s an interesting and underlying seismic shift that’s going on at the highest levels of Corporate America today: the Fortune 500 is breaking and it’s happening quicker than ever.
The makeup of the Fortune 500 has been historically notorious for its longevity and consistency. In 1966, the average tenure for a company in this famed group was about ~35 years. That expectation promises to drop by two-fold over the next decade down to ~15 years, leading to mass fallout from the existing cohort and new entry from emerging companies.
So which types of companies are going to be in this club? Historically the fold was composed of energy conglomerates, financial services firms and big box retailers, but all of these players have seen their market caps dwarfed by large tech in recent years. In 2016, for the first time ever, the 5 largest companies by market cap were all from the tech industry: Apple, Alphabet, Microsoft, Amazon and Facebook.
It’s becoming clearer now more than ever that the future is going to belong to tech companies. There are many underlying reasons for this. Tech companies are riding favorable macroeconomic trends (increased market sizes and capital efficiency), are attracting the world’s best talent, and are in a position to apply new, advanced technologies like machine learning internally in core operations and externally in the form of new products.
In addition to the above, there’s a deeper and more fundamental reason why tech companies will win in the future. Unlike sleepy incumbents of the past, large tech companies today are constantly disrupting themselves and have become quite sophisticated at it — they’re operating from first principles and proactively shaping their future trajectory as opposed to being reactionary.
Google has successfully folded moonshot projects into its day-to-day by shifting its corporate structure to Alphabet. Facebook has done something similar by keeping its major acquisitions separate and rigorously accountable; WhatsApp, Instagram and Oculus have not been integrated into the legacy Facebook application to create a “suite-like” product.
Of the great tech companies today, I think Amazon is the most exciting and is best positioned to win the future. Bezos’ 2016 Letter to Shareholders went viral this past week and with good reason; he clearly articulated the depth of how Amazon will systematically protect itself from irrelevance (cue Innovator’s Dilemma). What does the tangible application of this philosophy result in? A company that is in a unique position of having a product stack that spans the entire value chain. Amazon is successfully blending software, hardware, e-commerce and brick and mortar together and it’s all just starting to form the perfect storm. Over the next 10 years, I think Amazon will be the world’s most valuable company and it won’t even be close.
Let’s take a look at the data: first off, check out Amazon vs. the top 5 brick and mortar retailers today.
This graphic only paints a sliver of the picture; while its relevant that Amazon has eclipsed the size of these retailers, it’s even more impressive when taking into account Amazon’s market cap growth rate compared to the big box co’s over the last decade.
So now the conversation becomes — what happens over the next decade? The skeptics point to Walmart’s advantages/Amazon’s shortcomings (typically some combination of leveraged physical assets, enormous revenue scale, and merchandising DNA).
I think this misses the point entirely and relates to the systematic challenge society has in predicting disruptive innovation: it’s really hard to underscore the impact of future advantages; no matter how big you think the impact of disruptive innovation is going to be, it’s always bigger. Case in point, the biggest byproduct innovation of automobiles going mainstream in America was something nobody at the time conceptually wrapped their head around: the supermarket. Undoubtedly, there will be byproduct advantages at scale that only a strong technology organization like Amazon will be in a position to leverage and take advantage of.
So how is Amazon going to do it and what is the foundation its setting to leverage these unknown, but inevitable byproduct advantages? Prime and Alexa. Prime has quickly become the defacto operating system for shipping in the US. Prime grew its user base from 6 million people in 2012 to ~65 million people in 2016. Let that sink in — Prime managed to cover 40% of US households in 4 years.
Match this with Alexa’s rapid intelligence growth.
What this results in is a company putting together all the integral pieces to prime themselves (pun intended) to enter into and dominate multiple massive markets. The perfect application of all this is the recently announced, Store of the Future: Amazon Go.
Amazon will completely disrupt the way we order groceries, both at home (via a Prime Membership, Alexa voice interface, and Amazon supply chain) and in store — quick pop up shops that will be intelligently stacked with the right inventory and will give a completely different experience to shopping.
Like all disruptive innovation, at first people will scoff and say this type of store is “a toy” or “this type of store can only exist in a few neighborhoods in the country.” Basic economics dictates that we shouldn’t fall for critiques of this sort. As the concept works upstream, Amazon will quickly push downstream. Remember: Uber started out as a black car service and Tesla’s first model was a $120,000 roadster. High end products subsidize development for mass market products.
When Amazon moves down stream it’ll be a game changer. On the front end, new use cases will develop and purchasing will be curated. On the back end, significant cost efficiency will come in the form of sophisticated inventory management and supply chain. A historically low margin business will suddenly print serious cash.
We’ve been here with Amazon before and they have consistently outperformed — in five short years, Amazon has created AWS, a cloud infrastructure business, that alone is large enough to be in the top 250 of the Fortune 500. They have laid the foundation for significantly disrupting a number of massive and highly valuable markets. Imagine “5 minute delivery” (bye bye UPS and FedEx). What about Prime Video (we’re coming for you Netflix). You thought you were safe in the grocery store? (selling organic at 50% of today’s cost is not something Whole Foods or Trader Joe’s can compete with). Package all this with the raw talent the company is picking up (the top 20 tech companies spent ~$650m recruiting AI talent in 2016 and Amazon spent ~$200m+ of that), and this is just the beginning; none of this accounts for the countless additional derivative applications that machine learning, augmented reality and virtual reality will bring.
Amazon started out as an online bookstore in 1994 and in 20 years has evolved to become one of the world’s most valuable companies. Buckle up if you’re long Amazon, because the next 10 years are going to be an even more fun ride.