Beyond Aggregation: Amazon as a Service

Beyond Aggregation: Amazon as a Service

In late 2015, Amazon made the decision to close its underperforming business, Webstore. However, this move turned into a strategic mistake when Amazon publicly announced that it was sending its customers to Shopify, proclaiming the Canadian company as its preferred partner for the Webstore diaspora. This decision marked a shift in Shopify's business model, transitioning from a software-as-a-service (SaaS) model to a commission-based one.

Amazon, on the other hand, has been extending 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 by Amazon showcases its transition from being just a retailer to becoming a services provider.

One of Amazon's most successful ventures is Amazon Web Services (AWS). AWS benefits from economies of scale and has significant fixed costs. The cost to build AWS was justified because Amazon's e-commerce business was its first and best customer. This win-win situation allowed developers to access enterprise-level computing resources with zero upfront investment, while Amazon gained more scale for its products.

The success of AWS led Amazon to apply a similar model to e-commerce. With 40% of Amazon's sales being sold by third-party merchants, the introduction of Fulfilled-by-Amazon (FBA) further increased the return to scale for Amazon's fulfillment centers. FBA allows merchants to store their goods in Amazon's fulfillment centers and take advantage of Prime's benefits. This not only deepens Amazon's moat but also increases the value of Prime.

Amazon's foray into logistics follows a similar pattern. The company aims to build out a logistics network that competes with established players like UPS and FedEx. By becoming its own logistics network's first and best customer, Amazon justifies the massive expenditure required for this venture. It plans to offer its logistics network to third parties, further increasing returns to scale and strengthening its position in the market.

Amazon's control over demand and its access to valuable consumer data give it a significant advantage. However, limiting the business to customer touchpoints that Amazon controls also limits its overall addressable market. While Amazon may not be the only option for consumers in e-commerce, it sets the standard for shipping expectations. Merchants constantly strive to meet these expectations or risk losing customers to competitors. Amazon's solution to provide an Amazon-like shipping experience is to ship via Amazon itself.

Although Amazon may have lost business to Shopify initially, 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 an impregnable moat, attracting businesses competing to be consumer touchpoints and increasing Amazon's addressable market. As Amazon's volume increases, it becomes more difficult for competitors like Shopify to scale their own shipping solutions, endangering their current initiatives.

One major advantage Shopify has over Amazon is the ability to differentiate itself by collecting data. Many merchants may choose to use Shopify's offering due to this differentiation. However, if Amazon successfully moves e-commerce beyond aggregation to a service business model, it would mark a significant achievement for the company.

In conclusion, Amazon's evolution from a retailer to a services provider has been driven by its ability to leverage economies of scale and its relentless focus on customer expectations. As Amazon continues to expand its offerings, it is clear that the company's goal is to dominate various industries by providing services that are unmatched by its competitors.

Actionable Advice:

1. For businesses looking to compete with Amazon, focus on differentiation through data collection. By offering unique insights and personalized experiences, businesses can attract customers who value privacy and customization.

2. Invest in building scalable infrastructure. As Amazon has shown with AWS and its logistics network, having a robust and efficient infrastructure is crucial for success in the digital age. Prioritize investments in technology and logistics to stay ahead of the competition.

3. Continuously adapt and evolve your business model. Amazon's success lies in its ability to pivot and find new opportunities. Stay agile and be open to exploring new avenues for growth and innovation.