The virtuous cycle at the center of Amazon spiraled up into one of the world’s most highly valued companies

Stowe Boyd
Jul 24 · 8 min read

I was inspired by Esme González Pillardo in Between the lines of Bezos’ 2018 Letter to Shareholders, in which she points out that Bezos doesn’t mention the term ‘platform’ although his letter details in a step-by-step fashion the platform thinking behind Amazon’s ascent. As Pillardo states,

The success has been driven by a sophisticated and intuitive balance between vision, curiosity and passion; and a continuous process of experimentation and iteration. He makes it sound that by implementing a mix of agile and design thinking anyone could be on the track of exponential growth if only we had the technology and means.

And in fact, Amazon seems intent on building technologies to support other companies creating new ecosystems relying on the same technologies that Amazon is using. Bezos adds to that mix an operating manual for doing that, and a peek into the mindset needed to balance incremental and revolutionary innovation, customer obsession and radical vision, and relentless experimentation and a willingness to fail big. And of course, building a culture around ‘builders’, and allowing them room to grow, and thereby grow the business.

The platforming series is typically oriented toward what various consulting firms have to say about competing and succeeding in the platform ecosystem economy, but Bezos has a great deal to tell us. Bezos is perhaps the poster child for platform innovation, and along with a few other figures — including a diverse group, such as Zhang Ruimin at Haier, Alibaba’s Jack Ma, the Paypal mafia, and Jennifer Hyman of Rent The Runway, to mention a few — personifies the state of the present and future of platforms. They all follow a similar playbook to that embedded in Bezos’ shareholders’ letter.

Grow the Ecosystem, and It Will Grow You

Bezos starts his letter with a table, and writes,

The percentages represent the share of physical gross merchandise sales sold on Amazon by independent third-party sellers — mostly small- and medium-sized businesses — as opposed to Amazon retail’s own first-party sales.

Third-party sales have grown from 3% of the total to 58%. To put it bluntly:

Third-party sellers are kicking our first party butt. Badly.

And it’s a high bar too because our first-party business has grown dramatically over that period, from $1.6 billion in 1999 to $117 billion this past year. The compound annual growth rate for our first-party business in that time period is 25%. But in that same time, third-party sales have grown from $0.1 billion to $160 billion — a compound annual growth rate of 52%. To provide an external benchmark, eBay’s gross merchandise sales in that period have grown at a compound rate of 20%, from $2.8 billion to $95 billion.

Why did independent sellers do so much better selling on Amazon than they did on eBay? And why were independent sellers able to grow so much faster than Amazon’s own highly organized first-party sales organization? There isn’t one answer, but we do know one extremely important part of the answer:

We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.

Bezos realized, perhaps from the very start, that providing an ecosystem platform to others — based on the innovations he pioneered for Amazon’s own commerce business — would allow Amazon to grow exponentially faster than if he poured all the company’s energy and capital into simply growing a larger ecommerce business. He understood that in a long tail world the ecosystem of millions of small vendors would expand to occupy much more of the market than Amazon could do on its own. And the interchange and innovation with those vendors — making the tools better, sharing analytic and marketing tools — would increase the competitive advantage of Amazon significantly faster than going it alone.

And the virtuous cycle at the center of it all — better support for third-party vendors leads to a broader selection of offerings and more competitive pricing, which attracts more customers, which leads to more sales, which attracts more vendors — spiraled up into one of the world’s most highly valued companies. And in parallel: everyone in the ecosystem is learning. Learning about their customers, the market competition, and how to operate in an ecosystem economy.

Incremental versus Revolutionary Innovation

Bezos makes a clear distinction between customer-driven innovation, which is generally incremental, and revolutionary breakthroughs, which come from an idealized vision. Referring to Amazon Web Services, he states,

Much of what we build at AWS is based on listening to customers. It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

AWS itself — as a whole — is an example. No one asked for AWS. No one. Turns out the world was in fact ready and hungry for an offering like AWS but didn’t know it. We had a hunch, followed our curiosity, took the necessary financial risks, and began building — reworking, experimenting, and iterating countless times as we proceeded.

I recall the example of Sony’s co-founder, Masaru Ibuka, who created the Sony Walkman. Market research determined basically zero customer demand for the product, but Ibuka brought it to market and it created a new category: the personal music player. This is the textbook case of visionary innovation.

The same is true with Amazon Echo and Alexa. These were driven by a vision — or wandering in Bezos speak — and not customer demand:

The vision for Echo and Alexa was inspired by the Star Trek computer. The idea also had origins in two other arenas where we’d been building and wandering for years: machine learning and the cloud. From Amazon’s early days, machine learning was an essential part of our product recommendations, and AWS gave us a front row seat to the capabilities of the cloud. After many years of development, Echo debuted in 2014, powered by Alexa, who lives in the AWS cloud.

No customer was asking for Echo. This was definitely us wandering. Market research doesn’t help. If you had gone to a customer in 2013 and said “Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?” I guarantee you they’d have looked at you strangely and said “No, thank you.”

Here’s his description of wandering:

Sometimes (often actually) in business, you do know where you’re going, and when you do, you can be efficient. Put in place a plan and execute. In contrast, wandering in business is not efficient … but it’s also not random. It’s guided — by hunch, gut, intuition, curiosity, and powered by a deep conviction that the prize for customers is big enough that it’s worth being a little messy and tangential to find our way there. Wandering is an essential counter-balance to efficiency. You need to employ both. The outsized discoveries — the “non-linear” ones — are highly likely to require wandering.

I am reminded of the Tolkien saying,

All who wander are not lost.

And perhaps the best example of being guided by vision is Amazon Web Services, or AWS:

AWS’s millions of customers range from startups to large enterprises, government entities to nonprofits, each looking to build better solutions for their end users. We spend a lot of time thinking about what those organizations want and what the people inside them — developers, dev managers, ops managers, CIOs, chief digital officers, chief information security officers, etc. — want.

Much of what we build at AWS is based on listening to customers. It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for. We must invent on their behalf. We have to tap into our own inner imagination about what’s possible.

AWS itself — as a whole — is an example. No one asked for AWS. No one. Turns out the world was in fact ready and hungry for an offering like AWS but didn’t know it. We had a hunch, followed our curiosity, took the necessary financial risks, and began building — reworking, experimenting, and iterating countless times as we proceeded.

Failure Needs to Scale Too

Bezos more than acknowledges failed offerings, like the Fire phone. But his argument is that is you only make small bets, you’ll never win big:

As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.

Development of the Fire phone and Echo was started around the same time. While the Fire phone was a failure, we were able to take our learnings (as well as the developers) and accelerate our efforts building Echo and Alexa.

Invest in and Empower Your People

Jeff Bezos is well known for his concept of the two-pizza rule: no team should grow so large that two pizzas won’t feed the group at a lunch meeting. But the deeper meaning is manifested by supporting small, independent teams, who are allowed to make their own decisions regarding their project. Behind all the discussion of various bets, experiments, visions, and listening to customers is a culture of builders:

From very early on in Amazon’s life, we knew we wanted to create a culture of builders — people who are curious, explorers. They like to invent. Even when they’re experts, they are “fresh” with a beginner’s mind. They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight.

Bezos emphasizes that Amazon’s employees are encouraged to think like owners:

As I said in the first shareholder letter more than 20 years ago, our focus is on hiring and retaining versatile and talented employees who can think like owners. Achieving that requires investing in our employees, and, as with so many other things at Amazon, we use not just analysis but also intuition and heart to find our way forward.

Bezos has recently announced major investments in upskilling Amazon workers, raising the minimum wage, and educational programs as he mentioned in the letter. A new initiative has just recently been announced where Amazon will be investing up to $700 million to train 100,000 workers for higher skilled jobs over the next ten years. This will target workers across the company, including warehouse workers.

That’s making another big bet, but a smart one, I believe.

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On The Horizon

the economics, structure, and behavior of platform ecosystems

Stowe Boyd

Written by

Founder, Work Futures. Editor, GigaOm. My obsession is the ecology of work, and the anthropology of the future.

On The Horizon

the economics, structure, and behavior of platform ecosystems

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