Amazon is coming….but where and when? Part 1 of 2

A look into how digital platform giants decide their next move

In this two-part article, I inspect Amazon’s history through the lens of a platform strategist and present my theory on where Amazon might go next. First, I share a definition of a platform, discuss what industry characteristics make a good opportunity for a platform solution, and then cover four main ways in which existing platforms add to their value proposition. In part two, I apply these learnings to Amazon’s product and acquisition history to understand the WHY behind their decisions. From this uncovered logic, I attempt to project where Amazon might go next. 

Why I care

Today, I look back at my first project as a young Accenture consultant in comical hindsight. Two years of hard work, presumably gone, scraped, replaced. While I cannot say for sure what happened after I left the Whole Foods Market (WFM) digital transformation initiative, we all know what happened in 2017: the infamous 13.7-billion-dollar Amazon acquisition of WFM. While our team was bringing a grocery store into the digital world, an already digital titan was about to enter the physical one. It must have been less than a week after the acquisition that Amazon Prime member discounts were prominently displayed throughout the once hailed anti-corporate commune. If you somehow managed to turn a blind eye to the bright blue signs, the cashier would kindly remind you upon checkout: “are you a prime member? Download the app for Prime benefits,” with the conflicting tone of a newly-trained corporate hippie.

I thought Amazon was an online retail platform. Online. Platform. Yet here they were, buying a physical retailer, a pipeline business.

What did the WFM acquisition tell us about the next generation of Amazon business strategy, about the evolving landscape of platform strategy in general? 

Coincidentally, when Amazon acquired Whole Foods Market in 2017, I was beginning my MBA at Babson College, formally learning about the platform business model for the first time. After delving into platforms in depth, I am now equipped to answer these pressing questions

A shared definition

Platforms “don’t buy inputs, make stuff, and sell it”1 like traditional businesses; instead they “enable value-creating interactions between external producers and consumers.”2 Marriott builds hotels and Airbnb connects homeowners (producers) to renters (consumers). Below is a simplified diagram of the difference between traditional and platform businesses.

To understand where Amazon is likely to go next, we must understand the industry dynamics and interaction characteristics that are ideal for platform disruption. Three key industry dynamics create ample platform opportunity: gatekeepers, untapped value and community feedback loops:

1. Gatekeepers – Want to sell your products in Walmart? Good luck. Conversely, you can start selling products on Etsy today. Note, sometimes gatekeepers are regulators, meaning entering regulated businesses can also be an attractive option (if you have the resources and wherewithal to work with regulators).
2.  Untapped Value – From just-in-time inventory, to “not-even-mine” inventory,”3 platforms can tap into unutilized capacities, as Uber does with cars, Airbnb with homes, and Upwork with talent.
3. Community Feedback Loops – Platforms enable communities to replace management, supervisors, and other complex people heavy processes. Uber driver ratings, Amazon customer reviews, and social media likes all enable participants to create value for each other without directly involving management. Can you imagine if Uber directly managed quality control of drivers? 

Additionally, not all interactions within a chosen industry are ideal. The best interactions are low-risk, high frequency, and highly interactive:

1. Low Risk If Failure – A bad experience doesn’t lead to a life or death situation. For example, if my Uber driver takes a wrong turn, I will still probably use Uber again. On the other hand, a platform for on-demand neurosurgeons? Probably not a good idea.
2. High Frequency – High-frequency interactions lead to more connections amongst participants, which means more value creation; that is why we see the rise of platforms in transportation, retail, and social (things we do every day) over laagered industries such as healthcare and defense.
3. Interactive – The more interactive, the more data the platform can collect, the better the experience it can offer. For example, shopping around on Amazon gives the platform more data to process, and hence the opportunity to offer better recommendations.

Combined, these traits help us understand spaces that any platform company may disrupt. To analyze where Amazon may go next, we need to introduce one more concept: the core interaction and how to build on it. The core interaction is exactly what it sounds like, the main exchange on the platform (uploading and viewing videos on YouTube for example). Adding to the core interaction is conceptually no different than a traditional business trying to add value to their core offerings, but it is how a platform goes about adding value that differentiates it.

The book “Platform Revolution” describes four major methods for how to add value to the core interactions. Below I have summarized those four methods, provided examples, and compared these methods to a traditional business model for better comprehension.

Now that we understand how platforms differ from pipelines, what industries and interactions are most susceptible to platforms, and how mature platforms can add to their core, we are now well equipped to analyze Amazon's history and predict where the behemoth may go next.

In part 2 of this article, I will apply these platform strategy fundamentals to Amazon’s history and potential future. 

Sources:

[1] https://hbr.org/2013/01/three-elements-of-a-successful-platform

[2, 3, 4] Geoffrey Parker, Marshal Van Alstyne, and Sangeet Paul Choudry. Platform Revolution: How Networked Markets Are Transforming the Economy and How to Make Them Work for You. New York: W. W. Nortan and company Inc, 2017

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