Gorilla Mode: Amazon – The Threat
It can be far too easy to fall into an underdog mentality, believing that since Amazon is the 800-pound gorilla, you’re differentiated and competitive because you have a smaller, deeper focus and more personal relationship with customers. What makes Amazon a threat is that they are not just big. Amazon possesses more pricing power, data intelligence, and influence than any other enterprise.
DOMINANCE
You’re likely familiar with the story of Quidsi, although you probably know it through the lens of its subsidiaries Diapers.com or Soap.com. Quidsi launched in 2005, and competed against Amazon in things like diapers and soap. Amazon knew diapers were a great business. Diapers.com was taking some of the market share, so Amazon sent someone to make an offer to acquire Quidsi.
Quidsi turned down Amazon’s offer. So Amazon analyzed short-term and long-term gain, dropped prices by 30 percent, and effectively forced the company into a sale because the radical reduction in margins scared investors who Quidsi needed to put more money in. Both Walmart and Amazon bid on the company, with Amazon eventually acquiring the company for $545 million, and the founder departing to later found Jet.com, which subsequently got bought by Walmart.
After the ordeal was closed, Amazon once again made the industry sustainable and raised prices on diapers. Quidsi lines were eventually absorbed by Amazon, and then the company and its websites were shut down earlier this year.
This story is one anecdote, but it perfectly illustrates Amazon’s ability to crush it’s competition. “Conform willingly, or we’ll do it the hard way.”
DATA
As outlined in several sections already, Amazon just knows more. It already has the customer relationships and has the budgets to acquire most anything not already in the company’s possession. How they could potentially utilize that data is a fascinating rabbit hole that we at Permanent Equity explore frequently.
CONSUMER PSYCHOLOGY
Without going over all the benefits of Amazon Prime again and listing more statistics about their dominance, let’s just say the relationship between Amazon and its millions of customers is far stronger than that of the average company-customer relationship.
As such, Amazon has helped to shape customer expectations. Consumers now expect free shipping, even though they know there is a cost to a box. Something not being delivered within 48 hours is hard to believe. Something being out of stock is a joke. If they don’t like it for any reason, they expect to be able to return it. And they want to pay the absolute lowest possible price for it.
Such expectations are not easily achieved. On top of that, customers want to enjoy the shopping experience. This requires outrageously expensive infrastructure and is another moat for Amazon.
And even if a brand does match all the customer expectations, there’s still an Amazon Prime membership, a commitment bias, to overcome. After all, if I’m paying $99 per year, I should use it, right?
PAID EXPOSURE
Tens of millions of people visit Amazon.com each day. The company spends an estimated $1 billion on media placement each year to promote the brand and its product selection. And then there’s the actual shipping and delivery of over one million packages each day, prominently stamped with the friendly Amazon logo. Particularly with its dedicated Amazon Prime subscribers, there are lots of potential impressions at play. Most days I get home to an Amazon package, then later watch something on Amazon video.
At the organic level, Amazon only shows a bias towards what customers prefer. What this means is that even if you’ve spent millions of dollars establishing a brand through other channels, on Amazon if your product is in the same category as a startup’s with no name recognition, you better guarantee more people buy your product and love it. Otherwise, be prepared to pay dearly, in profit and ad dollars, to compete for exposure.
Google’s primary profit model is based off of its ad revenue from brands and websites that want to put themselves at the top of search results and in front of users on YouTube. By contrast, Amazon’s core profit model is not based on advertising dollars, and yet it potentially has more advertising opportunities, both online and offline, than Google.
Amazon offers advertisers two primary advertising vehicles: Amazon Marketing Services (AMS) and Amazon Media Group (AMG). AMS is a self-service platform, similar to Google Ads, where advertisers can pay for impressions and clicks on their ads. AMG provides more opportunities for placement, including on Kindle devices and even on Amazon trucks, but is primarily used for brand-building impressions rather than click conversion.
Amazon clearly sees the value of their customers. They’ve established “Trusted Creative Partner” designations for marketing agencies, and are experimenting with all kinds of placement opportunities. In 2015, they let the release of Minions take over packaging. Lockscreens on Kindle and Fire tablets regularly feature ads. Amazon Lockers can now have giant ads across the front of them. Even the owned trucks and trailers are marketing content and brands around cities. More integrated opportunities like the recent Diageo-branded 20-minute “shoppable films” for Amazon Prime customers are likely in the future.
Amazon is notoriously secretive of customer data, and the platforms need further development before competing with Google or Facebook as far as buying and reporting sophistication. But we all know the data’s value and Amazon is in a far better position to help us realize it. And the more the company owns, the more they control any individual brand’s access to the customers.
As WPP’s Sir Martin Sorrell put it: “The elephant in the room is really Amazon.”
DEPENDENCY
The broadest threat for all businesses involved with Amazon is whether Amazon may change the rules at any given time, while the broadest threat for those working outside the Amazon ecosystem is customers’ existing familiarity with the platform and its extensions.
At this point, major companies rarely try to partner with Amazon, instead choosing to partner with each other against the gorilla (i.e. Google and Walmart, grocers and Instacart). That wasn’t always the case, and Toys ‘R Us provides another cautionary case.
After the 1999 holiday season, in which Toys ‘R Us had completely underestimated online order demand to the point that packages were delivered in January, the company was hit with a fine from the Federal Trade Commission. Shortly after, the company announced an investment from SoftBank and a 10-year partnership to sell toys and baby products through Amazon, leveraging their technology expertise and platform.
The terms of the deal looked like a long-term mutually beneficial partnership in 2000. Toysrus.com would redirect to Amazon.com. Toys ‘R Us would be Amazon’s exclusive seller of toys and baby products, and would stock the platform to meet demand. Toys ‘R Us would pay Amazon $50 million per year and a percentage of sales made through the site.
Within two years, demand was exceeding supply on Amazon. There were a series of lawsuits as Amazon sought to broaden its inventory and supply relationships. Toys ‘R Us ultimately realized they needed online autonomy again. Toysrus.com was relaunched in 2006, but the company had lost six years of digital development opportunity.
Fast forward to today: Amazon grew its toy sales by 24 percent in 2016, while Toys ‘R Us announced it would be filing bankruptcy in September 2017, right before another critically important holiday season. There are multiple causes of Toys ‘R Us’ recent troubles, but the Amazon agreement certainly didn’t help.
There are likely many more tales in which Amazon used a strategic partnership as a stepping stone to gain footing in an industry. There are some we know (i.e. Borders). But many more are likely mid-sized private companies that won’t make the front page of The Wall Street Journal or The New York Times.
TALENT
Most of what we’ve outlined so far has been in relation to competing in the marketplace. Looking through another lens, Amazon is also a recruitment and retention threat for many businesses.
The company recently announced that they are seeking to build a dual headquarters, keeping operations in Seattle while establishing another strong presence (to the tune of $5 billion) in another city. Why do that? You’ve got more talent needs than talented people in a reasonable geographic radius.
The company’s benefits packages are considered generous, and many employees receive restricted stock options, tying their wealth to the company’s future performance. Bezos touts benefits that are not particularly sexy by Silicon Valley standards, such as 20 percent of employees walk to work, the vibrant food truck scene outside their headquarters, and the ability for employees to actually open their windows.
Amazon also needs of lots of manual labor. By employing tens of thousands of people in its warehouses and distribution centers, the company is in a far superior bargaining position to set schedules and pay rates. But they also provide attractive benefits, job security and Amazon Career Choice programs in which the company prepays tuition on behalf of the employee and gives them space to train for a more skilled and in-demand career path.
For other employers, between dual headquarters, warehouses, distribution centers, Amazon Books stores, and more, Amazon needs a lot of people. And, so do you.
