A Tale of Two Platforms

From Marker:

Jeff Bezos is the world’s richest person, and Amazon, the company he founded, one of the world’s most admired and valuable. Two recent books, Invent and Wander: The Collected Writings of Jeff Bezos, with an introduction by Walter Isaacson, and Working Backwards, by longtime Amazon executives Colin Bryar and Bill Carr, offer lessons from the company’s enormous success.

The Family Business, by Keel Hunt, due out April 20, tells the story of another company, Ingram Industries, which, not coincidentally, played an indispensable role in enabling Amazon’s initial success as the world’s largest online bookstore. Ingram is a family owned business, founded in 1857 as a sawmill in Wisconsin but reinvented multiple times, eventually becoming a transportation and distribution company based in Nashville. 50 years ago, it branched out into book wholesaling, later adding video (and in the heyday of that industry, packaged software.) When Amazon was founded In 1995, it was essentially a web front-end to Ingram’s warehouses and its database of virtually every book that was commercially available. Even today, the Ingram Content Group is a key part of the hidden infrastructure of publishing and bookselling in the US, including Amazon.

Reading these corporate biographies in parallel provides a lot of food for thought. I spend a lot of my time these days studying marketplaces and the technology platforms that enable them: Amazon, Google, Shopify, Alibaba, and of course, my own O’Reilly learning platform. I’m interested in what makes marketplaces succeed and what makes them fail. And in particular, I’m trying to understand how modern technology-based platforms decide the central question of economics: who gets what and why?

. . . .

The core narrative of Silicon Valley is of the invention of a new, magical user experience so transformative that it draws hundreds of millions of users: a storefront from which you can order any product with one click, a search engine that gives access to all the world’s information, a phone that is “insanely great,” an app that summons a car and driver to pick you up within minutes wherever you are and take you wherever you want to go. Exponential user growth is seen as the ultimate measure of success. Today, Silicon Valley companies look to be valued at billions of dollars on that metric alone, when some of them can hardly be called businesses, since they have no profits and may even lack a plan for earning any.

Jeff Bezos founded one of the first of the internet’s hyper growth companies, but he understood that the reality is far more complex than simply growth in users. In 2001, he supposedly drew Amazon’s strategy on a napkin. The picture looked something like this:

Jeff pictured a flywheel in which sellers provide a big selection of products, and the unique Amazon customer experience of unparalleled access to those products drives more traffic, drawing even more sellers. Growth of a super-scale business allows a lower cost structure, allowing Amazon to lower prices for customers, which drives an even better customer experience, which drives more traffic, draws more sellers and more products, around and around, faster and faster.

Companies like Amazon, Uber and Lyft, and even Google and Netflix, are marketplaces, connecting and enabling both buyers and sellers. Amazon connects buyers to hundreds of millions of products; Uber and Lyft connect riders with drivers, and Google and Netflix connect readers and viewers with content providers.

One of the big problems in these hyper-scaled marketplaces is building up both sides of the market at the same time. 

. . . .

It’s a lot easier if you only have to build one side of the market. When Amazon launched in 1995 as “the world’s biggest bookstore,” it didn’t have to spend money assembling a critical mass of books, publishers, and authors. Ingram had already done that. Starting in 1970, Ingram had been connecting publishers and bookstores, such that any bookstore — not just Amazon — had access to every book in print. Jeff’s revolutionary insight, the one that launched Amazon, was that the web made it possible to create a friendly online interface to Ingram’s enormous catalog and that technology could be used to radically simplify the process of ordering and delivering. And the flywheel began to spin.

By 2001, when Jeff drew his flywheel diagram, Amazon was already selling electronics and music CDs as well as books, and before long, it was the interface to virtually anything its customers might want to buy. Amazon also created its own, much faster, real-time distribution layer, while continuing to rely on Ingram (and other wholesalers of different kinds of products) for those products that have less demand. As its flywheel spun faster and faster, Amazon took in more and more products and vendors, built more and more infrastructure for warehousing and delivery, and became the master of logistics that we see today. With the success of its third-party marketplace, millions of sellers now compete to offer hundreds of millions of products.

. . . .

In his 1998 Letter to Shareholders, Bezos wrote, “Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation.”

And there’s the rub. Because Amazon understands so well that delighting the customer with lower prices, faster delivery, and a better customer experience drives its growth, it can sometimes forget that it operates a two-sided marketplace in which its merchants also matter. Rather than considering its merchants as among those “with whom we have a relationship, and … the ones to whom we owe a great obligation,” Amazon seems to view them as a resource to be exploited, an inexhaustible fount of redundant supply to whom no obligation is owed.

This is the Achilles heel of Silicon Valley. Focus on the user, taken as the only gospel, becomes a liability. Amazon faces antitrust investigations in both Europe and the US based not just on strongarm tactics against competitors but against its merchants. Google is likewise being investigated for competing against the web sites whose content it was originally created to help consumers search. Uber co-founder and CEO Travis Kalanick’s palpable disdain for one of his drivers led to a massive PR backlash and his ouster from the company.

Amazon’s treatment of its merchants seems like a curious blind spot in a company that has been so prescient, so innovative, and so capable of creating value for those in its ecosystem. Looking at Bezos’s flywheel, it should be clear to the company that merchants are as important to the flywheel as customers.

Why does this happen? Unlike many critics of Silicon Valley, I don’t think it’s because the leaders of these companies are making decisions solely motivated by profit as is so often claimed by their critics. In fact, Jeff Bezos, Larry Page and Sergey Brin, and Mark Zuckerberg are profoundly thoughtful individuals working to do the right thing. The problem is that they are working within an economic system that values growth above all else, disdains small businesses as inefficient, and tilts the playing field against them.

. . . .

Jeff Bezos has told his team that “[other companies’] margin is our opportunity,” and accordingly, Amazon works to eliminate anyone it considers a middleman between the consumer and the ultimate source of supply. As Business Insider pointed out, though, this didn’t eliminate costs so much as it “shifted them to different, often hard to police and control places instead.”

“Before online retail, supply chains relied on friction to achieve quality. Becoming a vendor to Walmart required years of work and experience. Those vendor relationships were precious and would last for decades. Because of how hard it was to build one, Walmart could trust on the network of vendors to keep up the quality. In turn, they were invested in vetting their suppliers. Friction in the system meant the supply chain could be trusted. And if anything went wrong, there was a clear path to follow to find the responsible party.”

For Amazon, competition with its merchants also means that those merchants have an incentive to look elsewhere for a better deal. Over the years, Amazon has rebuffed competitors from Ebay to Walmart. Shopify, a platform company that provides infrastructure for companies to operate their own ecommerce sites, is the first rival that has begun to catch up to Amazon, with Gross Merchandise Volume now about $120 billion to Amazon’s $490 billion (versus $38 billion for Ebay, and Walmart in the “single digit billions.”) One executive at Shopify said to me, “Amazon went down the wrong path enough for us to exist.”

What does all this have to do with Ingram?

Ingram is a private company. That means it doesn’t have a public stock price that allows it to receive decades of future earnings today. In this sense, it’s an old-fashioned company, which provides a service and makes its money in the form of each year’s profit. A dollar of earnings is worth a dollar to the company, not $1100 (Tesla), not $77 (Amazon), not $34 (Apple) or $37 (Google or Microsoft.)

Unexpectedly, this allows a company to take a longer-term, more balanced view. If you can achieve an astronomic valuation on user growth alone, it is easy to convince yourself that any improvement that delights users and speeds user acquisition is worthwhile, whether it be lower prices, faster delivery, or more corporate efficiency to enable those things, even if it is at the expense of other elements of the flywheel, such as the merchants who sell on your platform or the drivers who deliver the packages or the passengers to their destination.

Ingram doesn’t have “users.” It is a B2B platform. Both sides of its marketplace are businesses: that is, publishers and bookstores (in the segment of its business that we have always dealt with.) And it has to thoughtfully balance the needs of both of them. It can’t sacrifice one to please the other. And it doesn’t have to do so to please Wall Street. Ingram’s management understands that the businesses on both sides of its marketplace are its customers, and obsesses about both of them.

Ingram’s innovation began with support for booksellers. In 1973, the company provided a weekly microfiche feed of new titles, radically improving the ability of small bookstores to keep up with the output of the fast-growing publishing industry. However, much of what has driven Ingram over the years is innovation designed to support its suppliers (authors and publishers). 

. . . .

There’s no question that Amazon has also introduced many services that benefit the supplier side of its marketplace. But Amazon’s innovations on behalf of the supplier side often come with costs designed to soak up their margin. Merchants on the platform are expected to compete fiercely with each other for attention. Amazon’s huge and fast growing advertising business, for example, can be seen as a tax on merchants. Before the addition of this lucrative business, merchants mostly had to compete on product quality and price. Now, they must also pay to play.

Link to the rest at Marker

As PG read the OP, he was reminded of an old quote which is attributed to many different people:

What you see depends on where you stand.

The author of the OP, Tim O’Reilly, is the founder and CEO of O’Reilly Media, a company that may be most known by those who formerly spent time in college bookstores or the technology section of traditional bookstores for the distinctive covers of its technical publications.

PG can’t say for certain, but he expects O’Reilly’s book business was pretty well decimated by the Web which was, from the very beginning, jammed with free information on the topics covered by pretty much any book O’Reilly sold.

As far as the OP’s assessment of who Amazon’s “customers” are, the question for any business is, “What’s the best price (from my standpoint) I can find that will maximize my profits from everybody necessary for my business to survive and succeed?”

Paying close attention to both outgo and income is essential for survival and success.

  • If Amazon is not willing to pay enough to its suppliers to ensure it has products its customers want to purchase, Amazon has a problem.
  • If Amazon is not willing to price its products/services at a level that customers are willing to pay, Amazon has a problem.

These calculations are not subject to a one-and-done approach for Amazon. It has to constantly consider what prices will result in its having products to sell and what prices its customers will pay.

If O’Reilly is willing to sell Amazon a box of tech manuals today for $1.00 less than yesterday’s price, is Amazon treating O’Reilly badly or unfairly if it says it wants today’s price not yesterday’s price?

Nearly everything Amazon sells is available from a variety of other retailers. Hardcopy books, ebooks, toothpaste, diapers, are all available from a zillion other vendors.

PG just checked and Amazon’s top five bestselling products included four different brands of disposable diapers and one brand of baby wipes for cleaning up while changing a diaper. PG is not an expert on diapers and baby wipes, but he expects that a great many other vendors, both online and IRL (in real life) are offering to sell disposable diapers and baby wipes.

Amazon is never free from price competition, service competition and every other sort of competition known to humankind for 99.9% of the products it sells.

PG just checked and Amazon’s percentage net profit margin over the last ten years is in the low to mid single-digits, typical of a great many other retailers, small and large.

8 thoughts on “A Tale of Two Platforms”

  1. Well, O’Reilly is still in business, and they’ve been fairly forward thinking (e.g. I believe they were the first tech publisher to offer subscription access (the Safari program) to their entire library of books. Just took a glance, and Safari now includes books from other publishers, too.

    So O’Reilly had KU-like program for tech books way before Amazon. (In general, I’d say tech books publishers are way, way ahead of the big 4 TradPubbers). And, yes, the demand for books is probably down somewhat, but there is still a place for them or the video equivalent: searching is great when you know what you’re looking for, but for learning something new, a guided course (whether video, online, or a book) is much better.

  2. I know I would (and have) opted for an O’Reilly book before or after consulting random sites on the internet.

    As far as ‘zon goes, they are good for many things – I love my Kindle – and not so good for some others. The merchants that he feels are maligned actually often try all sorts of shady things on the website. Bait and switch, mislabeled merchandise, look-alike merchandise, inadequate shipping.

    Perhaps (in my opinion) the worst thing is that anyone can identify themselves with a known brand name as if they were that actual brand.

    Simple exercise. Visit Amazon.com. Search for “Sees Candy”. Click on any offering. Look closely. Under the item name it will say “Brand: Sees Candies”, but who you are actually buying from? You need to look even closer on the right – it’s a “third party seller” – investigate still further – they are from Vietnam. Now look at the reviews, such as this featured one…

    https://www.amazon.com/gp/customer-reviews/R2GRMDUB0JRLO6/ref=cm_cr_dp_d_rvw_ttl

    There is a lot of this on Amazon. Buyer beware.

    • I think it’s an Amazon issue, that shady sellers take advantage of.

      Another big Amazon issue is the bundling together of many items on one listing. Sure, it makes sense for items where the only change is the color, but it’s widely abused, including shady sellers latching onto legitimate listings — I’ve avoided buying some items from Amazon because I’m not confident I’ll get.

      Then there’s the matter of how sucky Amazon search is….
      And my trust in Amazon reviews has been going down over the years.

      I’d say in general, the big e-commerce sites all have major problems (e.g. look at Walmart.com) and have been getting worse (also thinking about Newegg.com, which used to be wonderful). Thankfully, some of the industrial sites I use (like Mouser and Digikey) are still top notch, although Digikey has been allowing some third party sellers, which might make matters worse.

  3. I will first say I’m a huge fan of ‘Zon and the company’s success. Was a Prime member back before most people knew what that was. (I think it was 2003, IIRC). I made my first Amazon order 22 years ago. (wow!)

    One aspect of Amazon’s merchant business I didn’t see mentioned in that article is quality control – at least as how it relates to Amazon anyway.

    Amazon has a HUGE quality control issue, and realistically should take a greater hand in ensuring consumer quality in their third party market place.

    Also, and I think this was mentioned, but it bears repeating – is how much Amazon competes with its business partners, unabashedly. And that’s on the product level, but God forbid Amazon notices what business your in and takes a liking to it. When one of the largest companies in the world wants to compete with your small business, your days are numbered.

    I get why there are lawsuits starting to rage – I’d hate to be an Amazon competitor on any scale.

  4. For some reason, people keep expecting Amazon to do other-than-their-best-interest things. Especially the trade publishing mafia who keep expecting Amazon to act like a not for profit or public utility.

    (It is also worth remembering that Amazon is an empire and the different units are autonomous and each needs to be considered independently; the behavior of one unit doesn’t predict the behavior of another.)

    Until Sanders and co mandate must-carry rules like old-time broadcast TV and cable, riding on Amazon’s platforms is at Amazon’s discretion. It can be very profitable but it is worth keeping in mind that it is a marriage of convenience; divorce is always an option. Be prepared. Whining is not a strategy.

    The same applies to every other business relationship so this isn’t Amazon-unique.
    But the weird expectations are.

  5. I’m still a big Amazon fan (and not ashamed to admit it), but I do think that overall management of the retail site has declined since Bezos stepped back from day-to-day management of the overall business.

    I’ve read about a problem that can occur with leadership succession following the retirement/death of a strong and powerful CEO.

    Ideally, you would like to find someone else with a similar temperament to keep the organization healthy and growing. However, individuals with such a temperament are less inclined to hang around an organization run by someone else with the same temperament. Instead, they move on to better opportunities to be the big dog in another business.

    Logical successors who remain near the top of the corporate hierarchy of a company run by a Bezos-style leader tend to have complementary personalities to the leader instead of Bezos-styoe personalities.

    • The Amazon “problem” is three-fold:
      1- the retail site is minimally profitable and always has been.
      2- the various units are judged individually.
      3- AWS has raised the bar and supplanted retail as the primary free cash flow generator in the empire.

      So the retail guys are looking for ways to boost revenue any way they can. Ditto Audible.
      By contrast Lab123, Prime, and KDP have healthy margins and no need to squeeze suppliers or customers.

      Folks looking to break up Amazon had better be wary; they might be freeing the tech side of Amazon from the low-margin, cash-intensive retail side. Some “solutions” are worse than the “problem” they seek to cure.

    • I’d say the business got too big for Bezos to manage. He really didn’t step aside. The business left him behind. That’s no criticism of Bezos, just an observation of scope and any man’s effectiveness, no matter how good he is.

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