How to Miss the Boat – Five Times
Despite Microsoft’s remarkable financial performance, as Microsoft CEO Ballmer failed to understand and execute on the five most important technology trends of the 21st century: in search – losing to Google; in smartphones – losing to Apple; in mobile operating systems – losing to Google/Apple; in media – losing to Apple/Netflix; and in the cloud – losing to Amazon. Microsoft left the 20th century owning over 95% of the operating systems that ran on computers (almost all on desktops). Fifteen years and 2 billion smartphones shipped in the 21st century and Microsoft’s mobile OS share is 1%. These misses weren’t in some tangential markets – missing search, mobile and the cloud were directly where Microsoft users were heading. Yet a very smart CEO missed all of these. Why?
I spend some thoughts on Amazon Prime this morning, after this headline caught my attention “Amazon to continue heavy investment in Prime despite losses”. What is the objective and purpose of Prime? What is the strategic motivation to invest in a service labeled as a “loss maker”?
From my view Amazon Prime creates value on different fronts for Amazon:
- Customer lock-in effect: A customer pays $99/year to get free 48h express shipping for all orders. Why should a customer buy offline or order from another shop if he enjoys express shipping by default from Amazon as a Prime subscriber. Ok, offline shopping is not a perfect substitute for online shopping, but the instant character of express shipping is an important factor in the competition with high street shops.
- Business model transformation: From a one-time transaction model to a subscription based model. Amazon is transforming it’s business model into a subscription based-model – razor/razorblade model. The razor (Prime) sells on a loss, while the razorblades (Products) are sold on a – hopeful – healthy margin. Amazon decouples the physical product sell from the shipping service. This could be further extended in the future, e.g. Prime subscribers are also getting preferred customer service treatment with a dedicated hotline or special return handling.
- Lever for Amazon Marketplace: Prime has different effects on the Marketplace business. A) Prime encourages 3rd party Merchants to go for Fulfillment by Amazon, as Merchants benefit from the free express shipping that Prime subscribers get B) Even if Amazon itself is not the cheapest seller, customers with Amazon Prime are incentivized to order from Amazon directly, as they get the free express shipping.
- Amazon Prime should also help to improve Amazon’s cash flow. Subscription based-models typically also help to create more stable cash-flows and have a better predictability.
Adding digital goods (ebooks, movies, music, photos storage) as value add to Amazon Prime, which have zero respectively low marginal cost (Ok, licensing), is another smart move and helps to drive the Amazon hardware business with the Kindle and Fire TV.
There are probably a couple of other advantages for Amazon. (e.g. driving customer satisfaction). Prime is definitely more than a simple loss-making up-sell/cross-sell.
Inside Amazon, employees lived under Bezos’s frugal edicts while they watched in awe as he kept pushing more and more chips into the pot. Gene Pope was an early engineer at Apple who reunited at Amazon with his former colleague Joel Spiegel. After watching the wild expansion for a few months, Pope said to Spiegel, “What we are doing here is building a giant rocket ship, and we’re going to light the fuse. Then it’s either going to go to the moon or leave a giant smoking crater in the ground. Either way I want to be here when it happens.
If you decide that you’re going to do only the things you know are going to work, you’re going to leave a lot of opportunity on the table. Companies are rarely criticized for the things that they failed to try. But they are, many times, criticized for things they tried and failed at.
The guys over at Telco 2.0 analyzed the Amazon Kindle concept a little bit more in detail. Here is the link: Telco 2.0: Amazon Kindle: A Wireless Trojan Horse
Wired has interesting article about Amazon and it’s Amazon Web Service (AWS). Here is the link to the story: Cloud Computing. Available at Amazon.com Today.
Should be worth reading if you are looking for more insights about Cloud Computing.