"The More We Limit Ourselves, the More Resourceful We Become": Beyond Aggregation and Amazon as a Service

"The More We Limit Ourselves, the More Resourceful We Become": Beyond Aggregation and Amazon as a Service

In late 2015, Amazon made a rare strategic mistake by closing down its Webstore business and directing its customers to Shopify. However, this move ended up being a blunder as Shopify transformed its business model from SaaS to a commission-based one. But what has changed is the composition of Shopify’s business. Amazon.com Inc. is now extending some of the offerings of its popular Prime membership program to merchants off its platform with a new service that embeds the online retailing giant’s payment and fulfillment options onto third-party sites.

The success of Amazon Web Services (AWS) is due to its massive fixed costs and the benefit it gains from economies of scale. The initial cost to build AWS was justified because Amazon’s e-commerce business was its first and best customer. This created a win-win situation where developers had access to enterprise-level computing resources with zero upfront investment, and Amazon gained more scale for its products. This model has now been applied to e-commerce as Amazon shifted from being a retailer to being a services provider.

Around 40% of Amazon’s sales are now sold by third-party merchants, most of whom leverage Fulfilled-by-Amazon. This means their goods are stored in Amazon’s fulfillment centers and covered by Prime. This increases the return to scale for Amazon’s fulfillment centers, enhances the value of Prime, and deepens Amazon’s competitive advantage.

It seems increasingly clear that Amazon intends to replicate this model in logistics as well. Amazon would be the first and best customer for its own logistics network, just as it was for AWS and e-commerce distribution. By offering its logistics network to third parties, Amazon can increase returns to scale and further solidify its position in the market.

However, while Amazon has control over demand and relevant consumer data, limiting a business to customer touchpoints that it controls also means limiting the overall addressable market. In the case of e-commerce, there will always be other options available to consumers, especially with the rise of The Anti-Amazon Alliance. Every customer that visits these websites has an Amazon-driven expectation in terms of shipping. Merchants need to follow suit to meet these expectations and compete effectively.

Amazon may have given away some business to Shopify in 2015, but it doesn’t matter much if that business ends up being a commoditized complement to Amazon’s true differentiation in logistics. Amazon's logistics network has a nearly impregnable moat due to the high expense required to build it out. This moat not only attracts businesses competing to be consumer touchpoints but also deepens as it grows larger. As Amazon processes more volume, it becomes increasingly difficult for Shopify to scale its own shipping solution.

However, there are still reasons why merchants may choose not to use Amazon's new offering. One major reason is the collection of data. Shopify's offering will always be differentiated in this regard. Additionally, successfully moving e-commerce beyond aggregation to a service business model would mark a significant achievement for Amazon. This would solidify the company's position and demonstrate the expertise of its CEO, Andy Jassy.

In conclusion, it is evident that the more Amazon limits itself in terms of customer touchpoints, the more resourceful it becomes. By expanding its services to third-party merchants and offering its logistics network, Amazon deepens its moat and solidifies its dominance in the market. However, there are still opportunities for competitors like Shopify to differentiate themselves and capture merchants who value data privacy. To stay competitive, merchants need to align with Amazon's shipping expectations.

Three actionable pieces of advice for businesses in the e-commerce industry are:

1. Embrace partnerships with established platforms like Amazon to leverage their resources and reach a wider customer base.
2. Focus on differentiating factors such as data privacy to attract merchants who prioritize these aspects.
3. Continuously adapt and meet customer expectations, especially when it comes to shipping experience, to avoid losing business to competitors like Amazon.