The (other) secret to Amazon’s success

Ingenuism Weekly 37

“If you’re not stubborn, you’ll give up on experiments too soon. And if you’re not flexible, you’ll pound your head against the wall and you won’t see a different solution to a problem you’re trying to solve.” ―Jeff Bezos

MEDIA

The state of the progress movement – Silicon Valley Examined 26

In this episode of the Silicon Valley Examined podcast, Robert Hendershott and Don Watkins discuss the origins of the progress movement, why it’s so exciting, and how Ingenuism fits in to it.

Listen on Spotify or iTunes.

INSIGHT

The (other) secret to Amazon’s success

Robert Hendershott and Don Watkins

Photo by Christian Wiediger on Unsplash

Why is Amazon so successful? Jeff Bezos would say it’s customer obsession: the company’s relentless focus on delighting users. And at the end of the day, that’s probably true. But there’s also a factor almost no one talks about because it’s more tactical and less sexy: Amazon’s business model.

Amazon is, at its core, an online retail site. But the firm didn’t become one of the most valuable and impactful companies in the world just by selling things on the web. Amazon has been highly effective at developing world-class products and services, and then using a unique blended business model approach to magnify the value that these discoveries create.

Blended business models create two (or more) distinct value propositions, usually for two distinct customer groups, using the same set of assets and capabilities. Think being able to carry both people and freight on planes. This blend can increase revenue sharply while costs grow modestly, in which case the second (incremental) value proposition brings elevated profit margins. Blended business models are a way to build large, valuable companies.

In Amazon’s case, it uses an “inside-outside” blended business model that magnifies the value of the company’s expertise. After creating a leading online store, Amazon opened the store to outside sellers and now half of Amazon sales come from third parties. After developing the leading logistics and fulfillment system for the online retail model, Amazon created “fulfilled by Amazon” for third party sellers. Both efforts leveraged internal assets and capabilities created to build the world’s premier online retail site into significant (and very profitable) additional business opportunities.

Here’s another example. Amazon designed a novel robust, flexible computing infrastructure to support rapid technology development and buttress performance when facing sharp traffic increases in traffic during the holiday shopping season. This evolved into modern cloud computing, where computing is sold as a service rather than as dedicated hardware, with Amazon Web Services (AWS) commencing an astonishing four (six) years before Microsoft (Google) was able to launch a viable competitor.

It is hard to overstate how much these blended offerings have contributed to Amazon’s success. By Q3 2021 AWS has come to account for almost 15% of Amazon sales and non-retail revenue (Prime subscriptions, AWS, advertising, and third-party seller services) made up more than half of Amazon’s total sales. Without these blended services Amazon would not be a multi-trillion-dollar company today, and arguably would not have even survived.

In addition to magnifying the value of a company’s assets and capabilities, the inside-outside blended model guarantees that the internal services are world-class. You know that your computing infrastructure is cutting edge when other businesses are lining up to pay to use the same technology.

While Amazon is the ultimate example of building success on blended business models, other leading technology companies include a blended component. Apple and Google leverage their dominant smartphone positions into successful app stores hosting and selling third-party applications. Tesla has used its expertise in battery systems to produce leading power back-up options for homes and business.

But none of these additional instances of blended business models approach Amazon’s success. It will be interesting to see if Amazon is able to build on its Whole Foods acquisition to develop advanced systems for managing and delivering perishables. If it can, it will probably start offering this service to third parties, transforming the entire sector. 

This is not a given: Amazon has failed to produce superior results as often as it has delivered (remember the Fire Phone). The perishables supply chain is complex, involving six major steps from producer to consumer. Waste happens at every step. However, the biggest opportunities are in distribution / transportation / retail (the first two being areas Amazon has excelled in) and consumers’ homes.

Given that tens of millions of tons of food goes to waste every year in the United States alone, rationalizing the perishable food supply chain is a powerful opportunity for Amazon to both create and capture value. Potentially supporting households in how they manage their grocery purchases and consumption could be equally compelling.

If you build it, they will come. At least if you build it well and are committed to blended business models.

QUICK TAKES

Handicapping progress studies

As we talked about on this week’s podcast, the progress movement is doing a lot of exciting work. But how likely is it that progress studies will become a recognized field of scientific study generating a lot of new research?

Matt Clancy argues we should be skeptical of efforts to create new research fields—but not despondent.

I think we can say a few things with confidence. First, the direction of research does respond to money and perceptions of intrinsic value. But it doesn’t appear to be super responsive. That might be because of some incentives scientists face to stay focused: fields may need a critical mass of sympathetic peers before it is individually rational to enter them, and even when a critical mass exists, it is challenging for outsiders to do top work in them, at least initially. Building a new field is probably pretty hard for these reasons; but if you can get the ball rolling, it’s also possible that it can continue going on it’s own momentum.

His reasoning is even more interesting than his conclusion so see the entire piece.

The great Web3 debate

We’ve said we’re excited about the potential of Web3. But maybe we shouldn’t be?

This piece by Signal founder Moxie Marlinspike, which is pretty skeptical of Web3, stirred up a ton of conversation. A sample:

One thing that has always felt strange to me about the cryptocurrency world is the lack of attention to the client/server interface. When people talk about blockchains, they talk about distributed trust, leaderless consensus, and all the mechanics of how that works, but often gloss over the reality that clients ultimately can’t participate in those mechanics. All the network diagrams are of servers, the trust model is between servers, everything is about servers. Blockchains are designed to be a network of peers, but not designed such that it’s really possible for your mobile device or your browser to be one of those peers.

Matt Levine has a fun riff on the piece, mostly in agreement. But others are skeptical of the skepticism.

One Reddit user argues that Moxie’s criticisms are basically right about the state of Web3 today, but “are missing where the blockchain ecosystem is going.”

Suzuha notes that Moxie’s “is a very productive criticism that does not fall into the traps of reflexivity previously mentioned (‘it’s all a ponzi!’, etc).” But then goes on to address how the Web3 community can address some of the criticisms.

Dror Poleg has a more full-throated defense of Web3 (along with some interesting points in defense of NFTs).

This might sound like nonsense. Why would anyone want to buy and sell tokens that confer ownership of digital goods? But when you consider the fact that humans spent more than $60 billion on in-game purchases in 2021, or $13 billion on digital music streaming, or $22 billion on digital artworks — you begin to see the value of a digitally-native ownership system.

In Web 2.0, you can buy a movie on Amazon Prime or a song on Apple Music, but you lose access to these assets if you decide to leave the platform (or get kicked off). The goal of NFTs is to enable users to own their stuff outright, take it with them, and shift power away from platforms and corporations.

Meanwhile, Noah Smith has his own criticism of Web3, but also makes the very point that lands us on the optimistic side of the debate:

There’s still the question of what web3 will actually do. This isn’t actually as important a question as you might think; when people started building websites in the 90s, no one really knew what the Web might ultimately be useful for. Sometimes humanity gets a cool new toy, and playing around and seeing what it’s useful for is more important than sitting around and theorizing about it.

Tim O’Reilly, a Silicon Valley veteran, has a good post cautioning that it’s too early to get excited about web3 — we’re still early in the Hype Cycle, and most of what’s now being done will eventually end up as “dot compost”. Of course he’s right. But if you just like playing around with new toys, then you probably don’t care about that — especially since most web3 stuff is well funded, unlike web1 which was mostly just a hobby for the early adopters. Now you can get paid to play around, so why not?

Right now Web3 consists of a lot of smart people engaging in a ton of experimentation and exploration. It’s really rare for that not to pay off in some way. 

I heart drones

Yeah, we’ve all read creepy stories about people using drones to spy on sunbathing neighbors, but not a bad tradeoff when you hear stories like this.

Picture this: your medical first responder descends from the sky like a friendly, unmanned starship. Hovering over your door, it drops a device with recorded instructions to help a bystander jumpstart your heart that has stopped. This, after the 911 call but before the ambulance arrives.

This is exactly what happened on Dec. 9, 2021, when a 71-year-old man in Sweden suffered a cardiac arrest while shoveling snow. A passerby, seeing him collapse, called for an ambulance. In just over three minutes, a drone swooped overhead carrying an Automated External Defibrillator (AED). The patient was revived on the spot before the ambulance arrived to rush him to the hospital where he made a full recovery. The revolutionary technology saved his life.

Three minutes. That’s incredible, especially when you consider that the window for saving someone from cardiac arrest with a defibrillator basically closes at five minutes—"nearly always before emergency responders arrive.”

Want progress? Take control

Jason Crawford offers a helpful framework for thinking about progress:

Anything that matters to human life should be under our control.

Check out the entire thread.

One thing I like about this framework is that it helps sidestep a lot of the debates about what counts as progress. Those debates are important, but whatever end we’re after, our ability to control that area of reality is the precondition for achieving it.

Take the climate debate. We get really caught up with whether we’re impacting climate and trying to reduce our impact on the climate. But the pro-progress perspective would be: enhance our ability to control climate so that we can not only avoid potential disasters (whether man-made or natural), but so that ultimately we can optimize climate. 

My favorite question of 2022 (so far)

From James Pethokoukis:

What if the Industrial Revolution had started 2,000 years ago rather than 200? (And why didn’t it?)

What I love about this question is how it helps us overcome the difficulty of imagining the future. Two-thousand years from now seems unreal. But today seems pretty real! It’s alternative history but taken to a new level.

Anyway, my best guess is that if the Industrial Revolution had started 2,000 years ago, I wouldn’t exist. And that would be really sad for me.  

Until next time,
Don Watkins

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