We all harp on about Amazon and the death of Big Box retail blah blah blah. What’s really interesting though is the ‘quiet part’ of the Amazon business…the bit less people really understand – Amazon Web Services (aka. AWS).
I want to talk about AWS because it’ll help me explain why Amazon isn’t a retailer but a platform. So here goes:
AWS is the single most profitable part of the Amazon business. It generated $3.1B in profit in 2016, and $12.2B in sales. It represents 9% of Amazons total sales and it’s growing at 55% y.o.y (12 months to 31/12). It’s also worthwhile stating here a lot of analysts are giving Amazon flack because at 55% yoy that’s a ‘slow down’ in growth..from 70% in 2015.
Of course it’s first customer was Amazon – the pure play retailer (or once was a pure play retailer – see Amazon Go and Bookstore). AWS was Amazon’s back-end technology, which went live officially as ‘Amazon Web Services’ in July 2006. So why did Jeff Bezos (founder and CEO of Amazon) decide to open up Amazon’s back-end to competitors or maybe more importantly what’s the big picture for Bezos at the end of the day?
It’s a really interesting question and one that goes to the heart of why Amazon is so successful today…and will, by the looks of their open source approach, be successful into the near/long term.
As a side note and good context for the next part of this article Jeff Bezos is a notorious micro-manager. To quote a previous employee ‘He just makes ordinary control freaks look like stoned hippies’. Ok, so now you get a sense of the culture.
According to an ex-employee at Amazon, Bezos ordered a mandate around 2001, that stated:
(n.b anything in parenthesis is my commentary)
- All teams must expose their data and functionality through service interfaces;
- Teams must communicate with each other through these interfaces (aka don’t go running to ad sales when you need something – build the interface to get it);
- There will be no other form of interprocess communication allowed – no direct linking, no direct read of another teams data store, no shared memory model, no back-doors whatsoever. The only communication allowed is via service interface calls over the network;
- It doesn’t matter what technology they use – http, customer protocols etc;
- All service interfaces, without exception, must be designed from the ground up to be externalizable (that’s important right there). The team must plan and design to be able to expose the interfaces to developers in the outside world. (This is an important point – Bezos is looking at the future of the company as open-system not closed like Apple. aka. allowing external parties to use their goods);
- Anyone who doesn’t do this all be fired (Yep! would expect no less from a control freak)
So what happened?
Well Amazon started to transform itself into a service-oriented architecture. Ok, there are thousands of problems and issues that sat behind this move but in short Amazon started to think of everything as a service….not as a product they owned. Amazon became a platform (or Paas – platform as a service).
And that is the fundamental issue most news (particularly retail) misses when they talk about the ‘threat of amazon’. It’s not about it being a retailer or creating a sexy store..so what; it’s a freaking platform and retail is one part of that. Have you seen what they’re doing with Alexa with Volkswagen, Whirlpool, Ford etc. Not just talking to your customers…but being essential to their lives at home.
Ok back to AWS, well apparently AWS was the first example of this transformation. Bezos realised that the backend they had built for selling/shipping books from Amazon.com could be repurposed for other businesses. So eventually Amazon Web Services was born – or officially born in 2006. This is a service that hosts some of the most successful global and Australian companies – AirBnB, Expedia, SunCorp, Vodafone, Dow Jones, Comcast, Spotify, FDA, Berkely, Reddit, BMW, GE, Conde Nast, Lyft, Nordstrom, Qantas, Slack, Tat, Motors, Time Inc, Unilever, Pinterest, Adobe, Netflix (who as a side note generate 35% of all traffic in the US…all of which go through AWS)…to name a few.
Another side note, up until recently they hosted Target.com – their direct competitor! Another interesting fact Amazon’s market value is double that of Target.
Here’s the nice thing about AWS, for investors and maybe this was the reason that Bezos pushed so hard into platforms – margin. At the time AWS came into existence Amazon’s margin was evaporating. Bezos took their technology and monetised it. Nice one!
Ok so a couple of points to finish aka. What does all this mean for retail?
- Start with the platform, to quote ex-employee Steve Yegge ‘A product is useless without a platform’;
- Don’t delay – it’ll be 10 x more work and 10 x more expensive;
- “Eat your own dogfood” I love this saying and it comes from Yegge too. Basically the whole business has to use the platform, make sure it’s good enough for you and your customers…if you want to be PaaS.
This platform thinking has created ‘Fulfilment by Amazon’ (outsourced logistics – which delivered 2B units on behalf of sellers in 2016), Alexa (voice control – integrated into LG, Huawei, Volkswagen, Ford, Whirlpool etc), Amazon Prime, Amazon Studios (which produced the award winning Manchester by the Sea – up for 7 Oscar Nominations), Amazon Music, Echo, Fire, Amazon Wind Farms etc.
Ok that’s a wrap…at least for now on Amazon. There’s some other important point to note about their culture that influence what I’ve spoken about above but i’ll save that for the next post.