The next stack in Amazon’s journey and what it means for you

Tyagarajan S August 4, 2016 11 min

“When we win a Golden Globe, it helps us sell more shoes,” said Jeff Bezos recently when talking about Amazon Prime Video. In that casual remark is hidden a deep insight into how Amazon, the world’s largest e-commerce company by revenue, views its future.

Prime Video to shoes is a small step for man but a giant leap for Amazon’s business. When seen from the context of everything Amazon does today, the Prime program is more than just a loyalty program whose subscribers buy more “stuff” from Amazon. It is the one-layer that will help bind all of Amazon’s customers and the ticket into the ‘Amazon World’ that the behemoth is building.

Platforming the world

It is increasingly difficult to define Amazon. It is an e-commerce company like no other. Today, it is also the world’s largest cloud service provider like Google and Microsoft. It is both a content distributor and producer like Netflix. It is a gadget company that put together the Kindle e-reader and bundled it with what is the largest library of books available digitally. Its latest invention, Amazon Echo, is changing home automation. It has its fingers in an array of new-tech from robotics to AI to the Internet of Things. (To be sure, it has had its share of bloopers such as the Kindle Fire, Fire Phone, Amazon Webstore and WebPay.)

On the surface, Amazon does look like an umbrella company pursuing any commerce that involves digital technology. Yet, there is a burning purpose and direction to nearly everything Amazon does; it’s an elaborate arrangement of the jigsaw into an image of the world that Jeff Bezos has envisioned.

In 2011, when Amazon launched the Kindle Fire, common PR-speak was this: Kindle Fire is a service, not a product. Replace Kindle Fire with anything Amazon does and you have the answer to how Amazon operates:

1. Find any area of consumption with value arbitrage
2. Innovate with technology to capture that market
3. Scale up quickly
4. Make it a platform or a service and roll it out as an offering

Fulfilled by Amazon (FBA), Amazon Web Services (AWS) and Kindle Direct Publishing (KDP) are three powerful platforms / services that followed this model. But that is just the methodology and these are just ecosystems.

The larger story here is that it is but in its natural evolution that Amazon will want to control all channels of creation and consumption in the world and it is well on its way to achieve this ambition.

Hitting the limits of selection, price and convenience

For nearly a decade, Amazon set about creating a value chain that would transform how products for physical consumption are bought and sold using three gospel-like truths: customers want more choices (selection), want things to be cheaper (price), and want the process of finding and consuming to be easier (convenience).

It set up both the technology as well as the physical infrastructure needed toward an everlasting pursuit of these three truths. This desperate pursuit was a goal in itself (aligned to making money for Amazon in the long run, of course) that helped it disrupt the world around it on these three axes.

Amazon, however, may be reaching local maxima in the spectrum it influences starting from assembling selection from sellers and ending with enhancing the delivery network.

Sure, it can always add more products and sellers. It can shave off an extra percentage point in price by pushing efficiency. Or it could bring down the shipping speed to hours instead of days. But these aren’t step-changes that could fundamentally alter the ecosystem.

This is not to say the company is hitting limits to growth – nowhere close. For instance, it is just starting in markets like India where there is immense potential to bring its existing e-commerce stack (now embellished with their much superior digital infrastructure) to create disruptive value.

But the search is on for its next big step change.

New frontiers for the next big step change

The next big step-changes are however likely to come from parts of the value chain that Amazon has not disrupted yet:
1. taking complete control over the selection itself
2. reshaping the movement of goods from source to the last-mile, and
3. innovating on customer discovery interfaces.

Aided by new technology, Amazon is taking its exploratory steps in all these directions.

Taking control of the selection

Amazon is already betting big on private labels. Armed with data unlike any other product manufacturer and without legacy SKUs to slow it down, Amazon is looking to replace its dependence on other brands to bring a relevant selection and disruptive pricing. Today’s cost structures are dictated by large consumer product brands that spend disproportionate amounts on marketing (as opposed to product innovation).

[pullquote align=”full” cite=”” link=”” color=”” class=”” size=””]In 2014, Amazon launched its 3D printing store where customers can customize items which will then be 3D printed and delivered to them.[/pullquote]

Amazon’s private label bet could change that.

Yet, Amazon is still largely dependent on a manufacturing infrastructure whose cost structures it does not control. That may change with time, though, and there are hints of it on the horizon. In 2014, Amazon launched its 3D printing store where customers can customize items which will then be 3D printed and delivered to them. Early 2015, Amazon filed a patent for an on-demand 3D-printing delivery trucks.

It is not inconceivable that Amazon is working toward a future where product options are infinite and manufacturing is so nimble that it can respond in near real-time to customer needs.

Reshaping the movement of goods

Amazon is taking bolder, more aggressive steps by automating its downstream chain to bring down human inefficiencies and costs.

Amazon has been betting on the robots to take over its fulfilment centres (that’s what the company calls its warehouses) for a while. Its $775 million takeover of Kiva Systems Inc. (a warehouse robotics startup) was a pivotal moment in translating that dream into a physical reality since it provided access to advanced warehouse automation technology. Today, 30,000 square-shaped droids slave away in Amazon fulfilment centres making them faster, cheaper and incredibly efficient. It is even actively training its robots to do manual, human tasks like picking the packages. Here, humans and robots collaborate in a synchronized ballet with the inventory in its fulfilment centers, storing, picking, packing and sending it on its way to the customers. With time, the touch of a human hand will only diminish.

Amazon plans to deploy its algorithm and automation-driven efficiencies beyond the fulfilment centers too. It is looking to increasingly in-source its logistics and delivery networks by leasing its own air-fleet and deploying its own trucks to operate within the precision of an ecosystem where orders, warehouses and delivery networks talk to each other with lower human intervention.

[pullquote align=”full” cite=”” link=”” color=”” class=”” size=””]In a sense, Amazon is relying on an army of robots to power its movement of products from source to customer. All of this, however, is just the backbone to the front-end that Amazon has been imagining.[/pullquote]

But, it is in the last mile that Amazon intends to create the world that science fiction movies envisioned with flying vehicles and traffic jams in the sky. Amazon’s Prime Air – the delivery system that will get packages into customers’ hands in 30 minutes or less using unmanned aerial vehicles – is already testing delivery drones in Canada, the UK and the Netherlands.

In its home country, Amazon is fighting to create regulations to ease the air traffic it intends to create. Underlying all this is the belief that drones could make deliveries near instantaneous and bring down delivery costs to as low as $1. It’s striving for a world where the cost of delivery becomes so low as to be irrelevant.

In a sense, Amazon is relying on an army of robots to power its movement of products from source to customer. All of this, however, is just the backbone to the front-end that Amazon has been imagining.

Innovating on customer discovery interfaces

Amazon is on a quest to end the hegemony of screens (laptops and smartphones) as the only window into the vast and thrumming value chain it has created. It is slowly crawling out of the screens and into homes seeking pervasiveness.

Take Amazon Dash for instance. An innocuous, little Tide button placed near a washing machine may seem like a gimmicky little approach but it is a genius way to relieve customers of multiple layers of friction that besets a purchase process (including that pesky step of making payment every time).

Households in United States are now littered with little buttons, the press of which magically brings the product to the doorstep. The time between thinking of a product and having it is being shrunk aggressively. The Amazon Dash coupled with Prime subscription and 30-minute Prime Air delivery seems like a perfect Jetsons moment.

But having thousands of buttons everywhere is perhaps not going to scale and here Amazon has gone a step further to pervade the very air you breathe in your home: Enter Amazon Echo. Enter a room and call out for a friendly assistant, Alexa, to replenish your groceries and she sets about ordering it for you in the background.

[pullquote align=”full” cite=”” link=”” color=”” class=”” size=””]Households in United States are now littered with little buttons, the press of which magically brings the product to the doorstep. The time between thinking of a product and having it is being shrunk aggressively.[/pullquote]

When it launched in 2014, Amazon Echo was a curious little tube that looked like a speaker, spoke to you like Siri and was generally seen as a fun little piece of hardware. Since then, it’s taken over households in the US and has its own band of loyal following. It has shaken up the smart home market and is selling out on Amazon consistently.

Apart from singing songs and ordering items on Amazon, Alexa creates to-do lists, manages alarms and get answers off the internet on anything from sports to cooking. Echo’s spectacular voice recognition has made the experience natural and easy (unlike the smartphone voice assistants). It’s that assistant we’ve seen people talking to in science fiction movies.

It’s an exceptionally powerful feeling that you could now summon that vast, complex and efficient global machinery of Amazon with just a little query to a floating ethereal voice in your home.

Tying it all up with machine intelligence

Even more powerful is an ethereal entity possessing the ability to predict and order on behalf of customers even without a need to ask.

Nearly two decades back when the world wasn’t filled with the jargon of AI and machine learning, Amazon was showing product recommendations to its customers using complex algorithms and what has now become the leading buzzword: machine learning.

In Echo, Amazon has the first traces of its own AI that will power the predictive and responsive intelligence of the future. Close to 1,000 people work in a team that is tasked with making Echo (and Alexa) smarter. Recently Amazon announced its own machine learning platform (Amazon Machine Learning) that will pit it against IBM’s Watson and Microsoft Azure Machine Learning. More recently, it hired Alex Smola, a top machine learning expert from Carnegie Mellon to run this platform.

For Amazon, building this layer of intelligence is critical in heralding a new world that it is trying to create.

Future: Amazon as a service

Economists have a general dislike for deflation. It makes money less fluid, reduces consumption, and stifles growth. A fear of deflation motivates governments and central banks to spur growth through inflation-biased measures that encourage borrowing and debt. Yet, what if technology is moving so rapidly that deflation is inevitable and may be not be such a horrible thing.

Consumption is the pivot of the world economy. What we consume has evolved and shifted with time, moving from the physical to the digital. Amazon and the explosion of the internet has increased the speed of and decreased friction in consumption. If you can imagine such levels of hyper-consumption in a deflationary world, you get the context that Amazon is preparing for.

Automation is lowering costs of product development and distribution rapidly. It won’t be too long before products get super-cheap (tending towards free) and are ordered even before you know you need them. In such a world, Amazon will be the global machine that will satiate consumption needs that will be considerably more commoditized that today.

[pullquote align=”full” cite=”” link=”” color=”” class=”” size=””]Customers may subscribe to Amazon as a service (much like Prime subscription) which provides a listening presence and real-world integrated interfaces to manage all needs. That is the world that Amazon is preparing for.[/pullquote]

Artificial intelligence will predict your needs (based on your history and usage patterns as also that of your peers) and never allow you to run out of products, assuming that is what you want. Customers may subscribe to Amazon as a service (much like Prime subscription) which provides a listening presence and real-world integrated interfaces to manage all needs. That is the world that Amazon is preparing for.

There are several parts of the jigsaw that are not in place yet in this Amazon plan. Primary among them is: the key to the consumer data vault of the world. Two behemoths some 800 miles down the Pacific Coast in California — Google and Facebook — hold that key for most of the world; in China, it is with Baidu or Alibaba. Anti-trust concerns rule out partnership between these biggies. How then Amazon plays its cards in meeting its ambition is anybody’s guess. But, one thing is clear, Amazon’s new stack will echo all around the world and, indeed, India.

(The writer worked at Amazon as a Sr. Vendor Manager in Bengaluru between 2012 and 2015.)