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The Amazon advantage: Why its quest for dominance doesn't stop at online shopping

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Cowboys had six bullets to do their work; Amazon executives have six pages. That is the amount of paper CEO Jeff Bezos, the world’s richest man, requires his employees to submit when pitching ideas for new lines of business. 

These memos can be the basis of entire divisions which later make Amazon billions. Or they can end up in the bin, never to be seen again.

One new business arm that escaped the waste paper bin is Amazon Shipping, the company’s play for the US package delivery market.

Amazon has been delivering its own packages in some form since 2014, after its overwhelmed partners were unable to cope with a rush of orders the year before. Earlier this year, the company started pitching its own delivery services to businesses. In response, last week FedEx ended its ground delivery contract with Amazon’s retail arm.

It is just one more step in the e-commerce giant’s plan for world domination, which has so far encompassed web services, logistics, entertainment, digital advertising and grocery shopping. 

But these relentless expansions are not random shots in the dark. “Amazon is continually experimenting,” says Matti Littunen, an analyst who covered the company for four years at Enders Analysis. 

“What they do is hire a bunch of bright young MBAs and just let them loose. They analyse existing areas and look for opportunities to serve their end customers. All these experiments get tested and launched, and if they make it work then they quickly put resources behind it.” 

Bezos, he says, is unafraid to give lieutenants the resources and autonomy to challenge his legacy business. Once he gives a new division the green light, he gives it real power too.

The prime example is Amazon Web Services (AWS), now the world’s biggest cloud computing provider by market share. AWS began as a way for Amazon itself to organise the ever-growing pile of server space. Selling it to others was a useful bonus. In the first six months of this year, AWS has made an operating profit of $4.3bn, more than the retail business’s $3.2bn.

Amazon’s advertising business, which this year began to eat into began Google and Facebook's duopoly over the digital ad market, is another example: charging vendors to promote their products in search results builds naturally on the shopping habits data that Amazon already has. 

Even Amazon Marketplace fits this pattern. The company spent six years building a popular central repository and search engine for books, DVDs, toys and gadgets before it opened that platform up to third party vendors in 2003. Three years later, having also built an efficient delivery network for its own products, it opened that up as well, allowing third party orders to be “Fulfilled By Amazon.”

FedEx appears spooked – and rightly so. Amazon is not to be underestimated. Last year, when it dipped a toe in the medical world, buying online pharmacy PillPack, shares in its new competitors Walgreens, CVS and Rite Aid plunged, with the three companies losing $11bn in market value in one day. 

Unlike other businesses, Amazon can afford to be unprofitable in any one sector because it can subsidise itself with its profitable cloud computing and advertising divisions. 

This isn’t economic rocket science. But there are a few things that make Amazon so wildly successful. It has first-mover advantage: it was one of the first businesses to sell successfully, at scale, on the internet. Once it moves into one of those sectors, it can spot the further opportunities there. And once it’s in a sector, it does well, because it’s at both ends of the supply chain, it has a much better view of what customers want, says Colin Sebastian, a research analyst at Baird. 

“Amazon as an e-commerce retailer has a lot of insight into delivery and fulfilment and logistics and about what works and what doesn't, and what is better for customers. It is its own customer, in a sense. And that's perspective that a FedEx or UPS will lack,” he says. 

Littunen also describes a virtuous cycle, where each new line of business feeds off, and feeds, the previous ones. 

“E-commerce is not a very profitable business,” he says. “It’s got razor-thin margins and everyone’s competing on price.The only way you can survive there is having large economies of scale – but also finding non-retail ways of making money from those transactions.”

In other words, it is not only that Amazon’s high-margin businesses cross-subsidise its retail operations, it is that these businesses also increase the value of every product it sells, because those products are now doubling or tripling as data points or as objects of advertising efforts.

But then, Littunen says, instead of keeping the extra money, Amazon ploughs it directly back into cutting retail prices even further. At which point the cycle begins again.

That’s not to say that it always gets it right. Littunen says that Amazon expects its MBA adventurers to operate on shoestring budgets – which sometimes creates good discipline, but sometimes undermines them. Moreover, when Amazon moves away from projects which are directly symbiotic with its retail business, it tends to falter. 

Littunen cites Amazon Game Studios, intended to produce video games for Android phones and Kindle Fire devices, which hired a rash of eye-catching talent in 2014 and then made barely a ripple.

What does the future hold? Amazon’s high-tech warehouses could be an interesting export. Licensing its pack-and-ship robots to other e-commerce companies would help it scoop up even more data about the business of buying, selling, and moving things around. 

“You can imagine, ultimately, once Amazon has that built out, and it isn’t using all the capacity it has in air cargo or last mile delivery, that it’ll offer that as an alternative to the shipping companies. So as a business selling, or even as an individual and shipping a product from point A to point B, at some point, I assume you'll be able to, instead of sending it in the postal service, or FedEx, you’ll send it via Amazon,” says Sebastian. 

A check on all this could be competition regulators, who have been breathing down Amazon’s neck in the e-commerce sector.

Europe has proved itself much more willing to act than the US, with EU competition commissioner Margrethe Vestager recently launching a full-on investigation. She is concerned over how Amazon is using the data from its third-party sellers, something which has enabled it to launch its own best-selling versions of many products.

But the US is waking up to this too. It’s become something of a hobby horse for the crop of Democratic political candidates, led by Elizabeth Warren. 

So far the appetite for action has been small, since US regulators are concerned with whether customers are getting a fair deal, and Amazon has mostly had a downward impact on prices. It was under fire for requiring sellers to offer their products for a higher price elsewhere than on its site, a policy it recently reversed. 

But the political situation could change, says Sam McGowan of Beacon Policy Advisors, who believes a break-up is possible within the next two decades. 

Delivery is likely to be a particularly touchy new area, since Donald Trump has repeatedly accused Amazon of ripping off the US Postal Service. Progressives, meanwhile, are keen for regulators to start looking at wages, income inequality, and the concentration of political power, as well as prices, McGowan says. “I don't believe that they could get them on a serious antitrust penalty right now. But the tipping point would be more broadly speaking, in the political realm.”

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