Amazon’s Formula to Success

For a while now, Amazon have been doing the unprecedented: growing rapidly in a huge variety of industries all at the same time. At this point, they're beginning to look suspiciously like Buy'N'Large from Pixar's Wall-E.

A lot of this is because investors now value a company’s potential for growth over its current profitability. As a result, their share price is more than four times what it was in July 2012. Their current market capitalisation is expected by some experts to double by 2020 to become the first company ever to be valued at $1 trillion.

To get here, they’ve done a number of things in a number of markets to dominate the space in the front of consumer’s minds. When people think of Voice technology, they now think of Alexa; Amazon Prime Video is now one of the fastest growing media companies in the world; and Amazon Web Services alone is estimated to create revenues of $13bn in 2017.

What we thought we’d do is dissect exactly what makes them so successful, where it’s all headed and the real-time effects Amazon are having on marketplaces.

Alexa/Amazon Echo

In the US, the Echo made up more than 70% of the estimated 35.6 million “smart speaker” sales in 2016 versus Google Home’s 23%. Consumers and brands alike are enthused by it across the world. The deal struck this week with Domino’s in the UK to allow customers to order their pizza through Alexa was yet another credential added to the portfolio.

In many ways, Alexa is helping to speed up the pace of the trend for consumers to now search by categories, benefits or ingredients rather than specific brands. By removing visuals when purchasing through Alexa, Amazon can push own-brand products to the front of the queue. As consumers are less exposed to a choice between brands, Amazon fills in the gaps themselves or removes the gaps (other brands) entirely.

On Google or Amazon’s site, brands can normally adapt to this trend by optimising their products for key search terms on this basis. But with Alexa, they need to pay up to be mentioned as a purchase option.

Amazon Go

This is one arm of Amazon that is still to be proven a success. They have yet to release any further expansion information since the launch of their zero-checkout beta store in January. Presuming it goes ahead it could revolutionise the retail industry. It will be one of the biggest ever projects to link up customer data and use it in a meaningful way in other areas. If expanded, they will learn so much about purchasing behaviour that can be fed into the rest of their business. It will inform product offerings on search results, programmatic ads, data sold to third-parties and so much more.

One masterstroke that may speed up the expansion of Go is the acquisition of US supermarket chain Whole Foods. Its buyout was essentially free as after the announcement, Amazon’s stock rose by more than the $13.5bn price tag. What this gives Amazon is a pre-existing food logistics network to play with. What is likely to happen is the use of this network to trial Amazon Go, perhaps as an in-store sub-section.

This also allows them to drive further association in consumers’ minds between Amazon and grocery delivery, which currently only sits on a 1.4% penetration rate in the USA (6.9% in the UK). The point where industries become more and more disrupted by this is generally around a 20% penetration. One can expect the 1.4% figure to rise exponentially, particularly in metropolitan areas, in the next few years. Amazon may also look either to bring Whole Foods across the Atlantic or find a similar brand to absorb either in the UK or mainland Europe.

Amazon Web Services

Amazon’s data storage and cloud computing division is by far its most profitable. It grew 47% in just the final quarter of 2016, making it 10 times the size of its next 14 competitors combined. It is now expected to rake in around $13 billion in revenue for 2017.

There is a rather nefarious strategy at play here, and it links into Amazon Go. Should Go expand, become successful and inevitably disrupt grocery retail, it has a worldwide retail industry worth more than $25 trillion to tap into. That’s fashion, electricals, furniture, all of it. And with disruption comes the reaction. When competitors are forced to act against the Amazon onslaught on their industry, they will need to generate and manage vast quantities of information in order to make the step up.

And who, I hear you ask, manages and hosts all that data for them? Amazon Web Services. They’re the market leaders for a reason. They’re good.

Prime Video

Amazon Prime video is one of the fastest-growing media businesses in the world today. Why? Partly because they’re prepared to invest in content, having made $4.5 billion available for original content production on shows like 'American Gods', 'The Grand Tour' and 'The Man in the High Castle'. Not only that, pretty soon they’re going to start snapping up major sports franchises that TV companies have been clinging to for dear life in order to stave off the mass migration to digital platforms for years.

But above all, Prime Video is one of the most expensive introductory features ever. Really, it is an attraction for people to sign-up for their main Prime service which also includes free shipping, Kindle & music services. What Amazon want is for Prime viewers to transition into Prime members who do the vast majority of their shopping with them.

The Break-Up?

With all this growth, and in particular the prediction of a $1 trillion market capitalisation, some have suggested that this leaves Amazon open to attacks from anti-trust groups and competition commissions. This could inevitably lead to Amazon eventually being broken up for fairness and to keep markets competitive.

With regards to the current US government under a traditionally pro-free market Republican control, it is unlikely for this to be an issue in the States as long as they stick to the line that domestic jobs take precedent. This may be seen differently if Amazon implement more and more automated processes into their expanding logistics networks, which could reduce the number of jobs required.

On the flip side, the European Union may be slightly more inclined to intervene if they feel any Amazon monopoly (namely Amazon Web Services at this point) is negatively impacting on a particular market.

The current answer is a resounding ‘probably not’, but changing governments and any increased media perception of automation replacing human jobs could easily turn that tide in the short-to-medium-term.

 

Written by Andrew Thomson