The “primitives” model modularized Amazon’s infrastructure, effectively transforming raw data center components into storage, computing, databases, etc. which could be used on an ad-hoc basis not only by Amazon’s internal teams but also outside developers. (…)
This AWS layer in the middle has several key characteristics:
AWS has massive fixed costs but benefits tremendously from economies of scale
The cost to build AWS was justified because the first and best customer is Amazon’s e-commerce business
AWS’s focus on “primitives” meant it could be sold as is to developers beyond Amazon, increasing the returns to scale and, by extension, deepening AWS’ moat.
Amazon Prime and Marketplace:
The “tax” analogy extends beyond Prime; for example, Amazon is taking a portion of these 3rd-party sales, and a greater portion of goods they sale directly. The effect, though, is consistent: Amazon is collecting a “tax” on a massive industry and no one minds because Amazon’s scale ensures the best prices and the best experience.
Well, start with the fact that Amazon itself would be this logistic network’s first-and-best customer, just as was the case with AWS. This justifies the massive expenditure necessary to build out a logistics network that competes with UPS, Fedex, et al, and most outlets are framing these moves as a way for Amazon to reign in shipping costs and improve reliability, especially around the holidays.
However, I think it is a mistake to think that Amazon will stop there: just as they have with AWS and e-commerce distribution I expect the company to offer its logistics network to 3rd-parties, which will increase the returns to scale, and, by extension, deepen Amazon’s eventual moat.
And the Echo:
The much-buzzed about Echo fits this model too: all of the usual suspects can build out the various pieces of the connected home; Amazon will simply provide the linchpin, the Echo’s cost a “tax” on the connected home.
With all the talk of platform companies in the tech sector it is easily and quite often overlooked that actually Amazon, an online retailer at heart, is the ultimate platform company in many ways1:
- Organizational (separate units with separate P&Ls etc. operating on a common tech/user faced platform)
- Architecture: AWS
- The Amazon Marketplace (Marketplaces are a subset of platforms.)
- Fire TV, Fire Tablets, Echo – ‘classic’ platforms in the way most technology experts would define them
- Self-publishing at Kindle, Kindle Worlds etc.
Steven Sinofsky is fond of noting that organizations tend to ship their org chart, and while I began by suggesting Amazon was duplicating the AWS model, it turns out that the AWS model was in many respects a representation of Amazon itself (just as the iPhone in many respects reflects Apple’s unitary organization): create a bunch of primitives, get out of the way, and take a nice skim off the top.
A very good analysis of Amazon’s culture and its future.
- No, AWS will not be spun out as a separate company
- From AWS IoT Button to Launchpad Amazon Is Increasing Its Options
- Amazon’s AWS advantage
- Post-PC Online Retail: Why and How Amazon is Building the Alexa Voice Platform
- How Amazon is Expanding its Uber-Like Delivery Service Amazon Flex
- Amazon’s Logistics Moves Hint At Future As Infrastructure Provider To Online Retail
- “Global Supply Chain by Amazon”: Disintermediation Will be the Name of the Game
- Bloomberg: “Global Supply Chain by Amazon” Planned To Start This Year, To Compete With UPS, DHL
- Far more than, say, Apple for example. ↩