Beyond Aggregation: Amazon as a Service - The Microwave Economy

Beyond Aggregation: Amazon as a Service - The Microwave Economy

In late 2015, Amazon made a strategic mistake by closing its Webstore and directing its customers to Shopify. This move was seen as a blunder, as Amazon publicly proclaimed Shopify as its preferred partner for the Webstore diaspora. However, what has changed is the composition of Shopify's business. Initially, Shopify operated on a SaaS model, but it has now transformed into a commission-based one.

Amazon.com Inc. has extended some of the offerings of its popular Prime membership program to merchants off its platform. This new service embeds Amazon's payment and fulfillment options onto third-party sites. This move reflects Amazon's shift from being a retailer to being a services provider. Approximately 40% of Amazon's sales are sold by third-party merchants who leverage the Fulfilled-by-Amazon program. This program allows merchants to store their goods in Amazon's fulfillment centers and have them covered by Prime. This not only increases the return to scale for Amazon's fulfillment centers but also deepens Amazon's moat.

Just as Amazon applied the AWS model to e-commerce, it is likely to offer its logistics network to third parties. This move will increase the returns to scale and further deepen Amazon's moat. It is interesting to note that Amazon has successfully utilized a similar model for AWS, e-commerce, and logistics. By offering its logistics network to third parties, Amazon can compete with established players like UPS and FedEx while improving shipping costs and reliability.

Amazon's control of demand gives it a tremendous advantage. Not only does Amazon have power over its suppliers, but it also has access to relevant consumer data. This data can be used to fuel Amazon's self-contained ad platform, which is untouched by regulation. However, relying solely on customer touchpoints that Amazon controls limits the company's overall addressable market. While Amazon may appeal to everyone in markets with network effects, it will never be the only option in the e-commerce industry.

Customers visiting third-party websites still have an Amazon-driven expectation when it comes to shipping. If these expectations are not met, consumers may choose to buy from other sources. Merchants are constantly playing catch-up to meet Amazon's standards. To address this issue, Amazon has introduced a solution – shipping via Amazon. This allows merchants to provide an Amazon-like shipping experience, ensuring customer satisfaction.

Although Amazon may have lost business to Shopify in the past, it doesn't matter 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, attracting businesses competing to be consumer touchpoints and increasing Amazon's addressable market. As Amazon processes more volume, it becomes increasingly difficult for competitors like Shopify to scale their own shipping solutions. This poses a challenge to Shopify's current major initiative.

"The Microwave Economy" is a term used to describe the current state of America's focus on function over form, valuing efficiency and cost-effectiveness over beauty and meaning. This mentality extends beyond the food industry and permeates various aspects of our lives. Historian Lewis Mumford argued that our industrial mode of thinking has devalued intuitive knowledge, leading to a world that lacks soul and overemphasizes quantification.

The Microwave Economy prioritizes rationality and undervalues the needs of the soul. It diminishes the significance of rituals, possessions, and things that cannot be easily quantified. Taoist philosophy understands the importance of intangible experiences that cannot be grasped or articulated. Solitude, for example, requires isolation but is also a state of mind.

Interestingly, even wealthy individuals are not immune to the Microwave Economy. The focus on generic and cheap objects undermines the development of taste and individuality. Developing taste has nothing to do with wealth or proximity to luxury brands. It is about valuing and appreciating the things we know but can't easily quantify.

To opt-out of the Microwave Economy, one must first recognize the problem. By acknowledging the overemphasis on function and efficiency, individuals can begin to prioritize beauty and meaning. Here are four categories that can guide the decision-making process:

1. Generic and Cheap: These are commonly found objects that serve a basic function. They should be affordable and easily replaceable.
2. Generic and Expensive: For items in this category, it is important to find bargains. Although they may be generic, they should not be overpriced.
3. Stylish and Cheap: Stylish objects reflect individuality and creativity. They should be affordable and add a personal touch to the environment.
4. Stylish and Expensive: These rare purchases are meant to last for years. They should be carefully chosen and valued for their longevity.

By valuing the intangible aspects of life, such as beauty and meaning, individuals can escape the confines of the Microwave Economy. Developing taste and appreciating the things we know but can't easily quantify is a crucial step towards a more fulfilling and meaningful life.

In conclusion, Amazon's transformation into a services provider and its expansion into logistics reflect its successful application of the AWS model. By offering its logistics network to third parties, Amazon deepens its moat and increases its addressable market. Meanwhile, the Microwave Economy's focus on function over form has led to a devaluation of beauty and meaning. To escape this mentality, individuals must prioritize the intangible aspects of life and develop their taste. By valuing what we know but can't easily quantify, we can create a more meaningful and fulfilling world.

Three actionable advice before conclusion:

1. Prioritize beauty and meaning over function and efficiency in your purchasing decisions.
2. Recognize the value of intangible experiences and prioritize solitude and self-reflection.
3. Develop your taste by valuing what you know but can't easily quantify and appreciate the things that add personal meaning to your life.