Why is Amazon a big deal?
Amazon is voted as the Fast Company’s World’s Most Innovative Companies in 2017, ahead of Google, Facebook, and Apple, and it is not by accident. The announcement yesterday on Amazon’s six new gadgets for the Echo product line got me thinking, how has it been growing so rapidly — from a online book retailer to an e-commerce giant?
It is now the world’s fifth-largest company by value with worth over $400 billion. But the company’s CEO and founder, Jeff Bezos’ vision does not stop here. From its recent $13.7 billion acquisition of Whole Food Market and the announcement of a smart speaker with screen, Echo Show, to its ambitious Indian expansion, Amazon is placing big bets and it seems to be winning. To understand why is Amazon growing so fast and fearlessly, w have to understand how Amazon works.
Amazon’s Business Model
Amazon has two types of customers: Prime and non-Prime customers. Prime is so valuable for both Amazon and its customers. To the customers, Prime provides a long list of member-only benefits including Prime Now, Prime Reading, Amazon Video, Amazon Music, and the list goes on. To Amazon, it is a key revenue driver.
In Why Alexa is a big deal?, an article on Amazon’s business strategy:
Estimates suggest that there are around 80 million Prime customers in the US and the numbers are growing at a healthy pace. Prime customers are extremely valuable to Amazon because they spend twice as much as non-prime members which means Amazon is constantly trying to convert non-primers to prime. An average prime customer is likely to spend $63,000 on Amazon over his/her lifetime.
Therefore, Amazon is and will focus its effort on strengthening the Prime membership so as to convert more customers from non-prime to prime. Its investment in developing a strong and flexible logistics network (Prime Air, Prime Hub, Amazon Flex), its endeavor to expand Prime services (Prime Video, Prime Now, etc.), and the intelligent digital assistant Alexa are all part of a greater mission to make Prime and Amazon stronger than ever.
Prime is the King
If you take a closer look at all Prime services, they are all backed by other lines of business and operations of Amazon. And you would be amazed by Bezos’ ability to connect so many dots together. Amazon’s investment in cloud computing, gaming, video streaming and its acquisition of seemingly unrelated companies all make sense if you take a step back and look at the broader picture with Prime in the center.
In Why Alexa is a big deal?, an article on Amazon’s business strategy:
They’re doing so many different things, but there are common threads that tie them all together. Amazon Prime. The Cloud. Etc. But Amazon is one of the only companies that seems able to tie such wide-ranging areas together in such a cohesive package that not only makes sense, but sets a standard for efficiency and execution.
As Amazon expands, its list of current and possible competitors is getting longer, ranging from retailers, search engines, to video and music streaming providers, logistics, and even advertising firms. Yet, it is not without reason why investors as well as I believe in Amazon’s ability to strike through all the competitions and grow stronger on a long-term basis.
Virtuous Circles of Growth
As the Economist recently noted:
In e-commerce, the more shoppers Amazon lures, the more retailers and manufacturers want to sell their goods on Amazon. That gives Amazon more cash for new services — such as two-hour shipping and streaming video and music — which entice more shoppers. Similarly, the more customers use AWS, the more Amazon can invest in new services, which attract more customers. A third virtuous circle is starting to whirl around Alexa, the firm’s voice-activated assistant: as developers build services for Alexa, it becomes more useful to consumers, giving developers reason to create yet more services.
I agree mostly with the Economist, more customers means more retailers and more cash for Prime. And Alexa is definitely a game-changer that connects customers and Amazon in a brand new way. I would argue that Amazon Web Services is a supporting service that powers the whole Amazon online business and Alexa, and the last circle should be Amazon’s logistics network — let’s take a dive into the circles.
1. Prime and online store
This is the single most important circle, and the main pillar that sustains Amazon’s business. Since Prime is launched in 2005, it is aimed to get customers to spend more which it did. From 2011 onwards, Amazon has been expanding Prime to other regions while adding more member-only benefits. It has 2.4x its Prime members in the US since the end of 2013.
With increased number of customers, Amazon is able to attract more companies to sell their products/services on Amazon either as a vendor (first-party) or a seller (third-party). The more customers and more sellers are on Amazon, the more revenue it will gain from either sales or advertisements from the Amazon Media Group (Yes, it is an advertising giant too). This in turns enables Amazon to invest more in Prime which will attract even more customers and increase their interactions with Amazon.
2. Alexa and Echo
Amazon has made a genius move to open up Alexa for developers. The Alexa development kit is made free for developers. It is easy to integrate innovations with Echo and Amazon is investing $100 million to fuel voice technology innovation. The more developers are inventing new Alexa skills, the more useful Alexa will be. More customers will purchase or use Alexa, and that not only attracts more developers, but also more revenue for Amazon both from Echo sales and online sales made via Echo.
3. Logistic Network
Amazon’s strong logistics network is often overlooked. It is what made two-day or even two-hour shipping possible. Thanks to Bezos, Amazon really thinks and acts long-term.
Amazon has been working steadily on improving last-mile deliveries using everything from bikes to subway trains to car owners (Amazon Flex, like Uber for package delivery) while discovering new means to deliver. Since 2003, Amazon has been working on Prime Air, a delivery system designed to safely get packages to customers in 30 minutes or less using drones. Despite the early struggle, the first proof-of-concept finally happened at the end of 2016 in the UK. In the Prime Now Fulfilment Hub, anticipatory shipping is used to ship products even before customers check out. Last year, Amazon also signed a lease deal last year for 40 Prime Air cargo planes in an effort to build a centralized cargo hub in Kentucky.
With a stronger logistics network, Prime again will become more attractive with a faster delivery available for more products. This is especially critical for fresh food delivery, a tricky challenge for the e-commerce giant. Amazon Fresh has yet to take off as compared to its book and media businesses, and one of the challenges is to convince the customers that food can be delivered fresh and on-time. It is believed that Amazon’s acquisition of Whole Foods is to step up its game in fresh food delivery and a rapidly growing logistics network definitely provides Amazon with more leverage in this particular area, let alone other product categories as a whole.
And, there are more…
We should never forget that all of these are also backed by Amazon Web Services, an on-demand cloud computing platforms and lots of data. AWS made the constantly-learning Alexa and the ever-growing amazon.com possible. With more customers and sellers on Amazon, interacting with different parts of Amazon’s business, Amazon is further differentiating itself from all its competitors. It knows its customer well, spanning from what customers want, listen, watch, purchase, read, and more. These insights have made Amazon extremely powerful, and even more in the future.
As the Reed Hastings, co-founder and CEO of Netflix noted:
I feel like we’re competing with an unusual person.
Because Jeff’s there, it’s kind of scary.
Amazon is going big — it is thinking long-term and growing rapidly in the right direction. It is scary. And it is really exciting. It has been expanding for years and years, but I believe it is just the beginning. Next week, I will reimagine the future of Amazon. The food business will be turned around. Echo will have a little twist in design. Cross-selling with data analytics will expand across all Amazon’s prime services. Stay tuned.
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