Amazon’s relentless expansion is upending the rules of business. Will the company take over the world? Or is Jeff Bezos over-extending?

The Amazon Spheres in Seattle; (photo from Wikipedia)
Brian Dumaine
Simon & Schuster, 2020

The Soviet experiment of a centrally planned economy ended in dismal failure. But was the project inevitably doomed to fail or could the Gosplan have succeeded with better information technology? Leonid Kantorovich, one of the Soviet Union’s economic masterminds & recipient of the 1975 Nobel Memorial Prize in Economic Sciences, seemed to believe that the undertaking was not hopeless. In his prize lecture Kantorovich said that: “The difficulties of modelling & data creation can be overcome like similar difficulties were overcome in the natural & technical sciences… A significant progress is now being made in the development of computer hard- and software & their mastering.” Basically, if only the central planner had better data, the economy could be optimised.

Obviously, the difficulties were not overcome in the lifetimes of Kantorovich or the Soviet Union. But in the Capitalist west there has now appeared an institution that looks set to succeed where Gos­plan failed. That institution is Amazon – “The Everything Store”. Yes, there are notable differences. For one Amazon is a private corporation driven by – at least in theory – the profit motive. But there are also conceptual similarities between the way Amazon is planning for the long run & attempting to maximise value for its customers by taking complete control over the entire value chain & the way the Soviet Union attempted to optimise resource allocation by central command under the framework of the now ridiculed 5-year plan. Though Amazon’s apparatchiks have access to way better data than Gosplan ever had.

The One Store to Rule Them All

Jeff Bezos started Amazon as a pure online bookseller, but his ambitions went much wider already from Day One – every day is Day One at Amazon. Originally, he wanted to name the site, which might have been a fitting description for Bezos’ personality, although an awful name for a bookstore. Indeed, Amazon’s ambitions know no limits. That’s what separates Amazon from most private corporations, which typically tend to be specialised in one or at most a few domains. Specialisation through the division of labour has been a basic tenet of Capitalism for centuries & in the past non­-specialised firms have tended to fail against more specialised competitors. Managements making big bets on vertical &/or horizontal expansion are always accused by sceptical share­holders of losing sight of the business’ core competencies – or of hubris. Shares of highly diversified conglomerates typically trade at a discount to more razor-focused rivals. Yet, nothing has deterred Bezos from launching an ever-widening array of products & services or from insourcing every step of the value chain.

That’s why drawing an analogy to Gosplan may be relevant. Can Amazon really provide everything from books & diapers, TV series & web hosting to home delivery & health insurance more efficiently than specialised providers could do separately? Economic theory says adamantly no. Reality seems to suggest yes. If so, economic “science” would be turned on its head.

One of the defining features of modern “Surveillance Capitalism” is that the big technology giants like Amazon have a tremendous information advantage over smaller rivals, who may be more nimble but to little avail up against scale. Therefore, it cannot be conclusively ruled out that Kantorovich was right after all: that the problem was not necessarily central planning per se, but simply a data problem – which Amazon as opposed to Gosplan has solved.

The Orwellian information-gathering capabilities that Amazon has developed are frighteningly impressive. Not only does Amazon gather troves of data from the e-tailer’s more than 300 million customers worldwide – of which more than 150 million are Amazon Prime subscribers. It also & perhaps more sinisterly has privileged access to the data of the more than 2 million third-party sellers that rely on Amazon’s Marketplace platform to sell their goods, (with the constant risk of Amazon launching their own label rival if they spot that sales are going well).

In addition, there is Amazon Web Services. The company’s cash cow, which has grown serendipitously to become the number one provider of cloud computing services. AWS hosts data from more than a million businesses. Even if AWS isn’t spying on the data of their customers, they easily see which businesses are growing fast and which are not. Yet, the Amazon technology most resembling Airstrip One’s Telescreens – which Kantorovich could only have dreamed of – is Amazon’s Virtual Assistant Alexa. Alexa has been installed in more than 100 million devices, eavesdropping on everything & everybody within hearing distance. It is telling that of Amazon’s gargantuan 29bUSD R&D budget as much as one tenth is believed to be directed to voice recognition technology alone. 10.000 Amazon employees work solely on voice recognition. In spite of obvious privacy concerns Amazon obviously believes that the future of shopping will happen by voice rather than click.

Bezos’ Flywheel

In “Bezonomics” Fortune journalist Brian Dumaine does a good job of chronicling how Amazon has become one of the most valuable companies in the world (depending on the stock market’s daily mood), & how the company is revolutionizing modern business with profound effects on society. Dumaine argues that the success of Amazon boils down to three things: customer obsession, extreme innovation & long-term thinking.

For anyone interested in getting a general understanding of how Amazon works, Dumaine’s book is a worthwhile read. As opposed to many business books he sticks mostly to concretes & does not theorize too much – except for Jim Collins’ concept of a “flywheel”, but that is only because Bezos got hooked on that idea himself after a session with Collins.

I don’t think Dumaine brings any really original new insights into Bezos’ character, but it gives a good, if superficial, summary of his MO. Bezos has said publicly that he needs his

8 hours of sleep and likes to potter around, reading & not doing much else until 10 in the morning. Dumaine does not at all get into Bezos’ recent transformation from looking like a typical 90’s nerd to his current iron man physique & Bond Villain appearance. Many readers will already know that Bezos is famously hard-charging. One of his stock replies to employees who have not lived up to expectation is: “Are you lazy or just incompetent?” Or his quirky 2-Pizza rule; which dictates that no team should be bigger than getting by on two pizzas.

Bezos is also allergic to PowerPoint presentations, which he has banned at meetings, preferring instead the narrative structure of text rather than slick bullet point slides. Every meeting of Amazon’s S-team (S for senior executive) is centred around a 6—page narrative memo describing the problem at hand. The first 20 minutes of the meeting is spent on reading through the document, to make sure nobody shows up just pretending to have read it in advance. Similarly, every new project or initiative at Amazon starts with writing an internal press release, “working backwards” from the imagined launch date & serving as the project’s guiding document until the actual launch.

Prime Addiction

Why has Amazon started producing TV series? It is all about seducing customers into the Amazon ecosystem & getting them addicted. Prime members spend on average 1.300USD per year vs 700 for non-Prime customers. Looking at it that way it immediately makes more sense why Amazon for instance would spend 72mUSD on producing the series “The Man in the High Castle”. Considering that the show attracted 1,15m new Prime subscribers, that works out to a recruitment cost of 63USD per subscriber. Way less than the annual Prime subscri­ption fee of 99USD at the time – since increased to 119USD.

The business model of Prime is not a breakage model, unlike say a gym, that would be quite happy if their membersdidn’t show up that often. In contrast, Amazon wants Prime subscribers to use the service as much as possible. Because over time that will result in more sales – although there is currently increased speculation Amazon will hike the subscription for Prime again. That is why Prime is constantly adding more content & features. As Bezos has said: “Every time we win a Golden Globe Award, we sell more shoes”.

Logistics, Logistics, Logistics

Amazon spends astronomical amounts on shipping. 37,9bUSD in 2019, equivalent to 13,5 percent of revenue, up almost 40 percent from the year before – thanks to a soaring Prime membership & the introduction of guaranteed one-day delivery. The “Last Mile” on deliveries is a particular challenge, often accounting for as much as half of shipping costs.

Solving the logistical puzzle is one of Amazon’s top priorities. The company has a wide range of initiatives to streamline its logistics operation. The common denominator is that Bozos is keen to move the entire, or as much as possible of, the logistics chain in-house. Amazon is amassing its own fleet of cargo aircraft, to avoid reliance on the likes of FedEx, UPS & DHL. It also has a joint venture with Toyota to build its own autonomous delivery van, the e-Palette. In a 2013 interview Bezos said that delivery drones would be in use by 2019. That has not happened yet. But one should not be surprised to see Amazon drones buzzing around in big cities in the not too distant future.

As in any war the supply lines are of vital importance. That is the unseen side of Amazon for the customer. Highly efficient. Not always beautiful. In recent years Amazon has come under strong criticism for the working conditions in the company’s warehouses, or fulfillment centers as they are labelled. Some of the harshest criticism has come in The New York Times’ investigative exposé & the book “Hired: Six Months Undercover in Low-Wage Britain” by (Trotskyist) journalist James Bloodworth. After unflattering reports of Amazon employees having to endure inhumane working conditions & relying on Food Stamps, the Democratic Socialist Vermont Senator Bernie Sanders went on the attack with a “Stop BEZOS Act” in the autumn of 2018. Sensing the political zeitgeist moving against him Bozos pre­emptively implemented an across-the-board 15USD minimum wage for all of Amazon’s 350.000 hourly workers. This was not only a clever PR move, but also a shrewd tactic that would put less deep-pocketed competitors at a disadvantage.

Amazon is different from the other FAANG companies in that it has hundreds of thousands of low-skilled, low-wage workers. Dumaine is adamant that many of them will fall victim to technological unemployment. Bezos may have hiked the minimum wage for his serfs but there is no doubt that he would prefer to make them obsolete altogether.

Workers in Amazon’s fulfillment centers will probably be first to go – which are already heavily robotised. McKinsey, the management consultancy (not known for being universally right in their predictions) believes autonomous deliveries will slash shipping costs by 40 percent – which would amount to ~15 billion per year for Amazon.

If Amazon’s autonomous delivery van becomes a success – which is probably still some way into the future – that will translate to significant job losses. The 3,5 million truck drivers in America are obviously exposed – although for the moment America is facing a shortage of, not an over-supply of truck drivers. The job group probably more immediately at risk is cashiers, of which there are 3,6 million in the United States. Many of those jobs are being rendered obsolete as Amazon’s phenomenal growth continues & as shopping in general transitions from physical stores to online, while the remaining physical stores go to a cashier-less user experience – as in Amazon’s own Go stores.

Wal-Mart vs Amazon

Probably the only competitor with the wherewithal to take on Amazon head to head is Wal-Mart & the old retailer has no intentions of giving up without a fight. It is worth to remember that even though Amazon’s market value is more than four times that of Wal-Mart, the latter’s revenue is still almost double Amazon’s. Currently the Amazon/Wal-Mart rivalry seems to be mimicking the US political divide between “Globalists” on the urban coasts & “Nationalists” in the rural heartlands.

Venture Capitalist Peter Thiel has made the distinction between the Economy of Bits & The Economy of Atoms. That division is however becoming increasingly blurred. As Tencent-founder Tony Ma has put it: “There will be no purely Internet-only companies because the Internet will have spread to cover all social infra­structure; nor will there be purely traditional industries be­cause they will have grafted onto the Internet.” The key will be to offer the best hybrid experience. One obvious geographic advantage Wal-Mart holds over Amazon in that regard is that the Arkansas based chain’s 4.700 US stores are located within 10 miles of 90 percent of the US population. Amazon partly made up for that by acquiring the up­market grocery chain Whole Foods in 2017, whose 400 US stores are mostly concentrated in urban coastal areas.

Evev the biggest geniuses can fall to hubris. They only fall from higher up.

Will Amazon Fail?

Today, CEOs in almost all industries are worried that Jeff Bezos will wake up one morning & say: “Your margin is my opportu­nity”. No industry seems to be safely out of reach from Amazon’s all-invasive tentacles. Amazon’s advertising business is growing fast & challenging the oligopoly of Google & Facebook, thanks to superior conversion rates. Together with JP Morgan, the bank, & Warren Buffet’s conglomerate, Berkshire Hathaway,  Amazon has launched a health-insurance scheme for the three companies’ combined 1,5 million employees, that is widely anticipated to be a stepping stone for taking on America’s dysfunctional health insurance market. Banking is also a natural expansion path for Amazon. After all it is already providing loans to third-party sellers on its platform. Though there are regulatory hurdles to overcome. Dumaine believes Amazon could become the slick user interface front of a digital banking product, with a legacy bank (JP Morgan perhaps) running the nuts and bolts under the hood, mitigating the need for Amazon to become a regulated banking institution. Amazon’s own computer chips may repeat the success of AWS.

The un-ending reach of Amazon’s tentacles inevitably begs the question: Isn’t Amazon over-extending? It sure looks like a classic example of imperial overreach? Or is Amazon now so omniscient that it’s Al-powered flywheel will simply continue to accelerate while the competition is left ever further behind? For the moment that looks to be the case. Bezos has himself frankly admitted that Amazon will probably fail, at some point in the future. It is hard to see that happening in this decade. For the foreseeable future the only force that could conceivably stop Amazon is Washington. The case for antitrust action against the tech giants is building. Bezos faces his maiden Congressional hearing later this month & even Elon Musk (no doubt partly driven by personal rivalry) joining calls for Amazon to be broken up.

So how would Bezos respond if Washington or the EU decide to break up Amazon? Sensing that Western political institutions are failing in their mission to deliver value to citizens, perhaps Bezos will go on the counter-attack and have a go at reforming one of the oldest business models there is: the state. Amazon Republic? Why not? Would you rather be a citizen of your current country or of Amazon?

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