Gordon Fletcher from Salford Business School lifts the lid on what the global business giant Amazon is planning next.
This article will look at the company’s success to date and ask the question – what other sectors might it pivot into? For example, could it disrupt the traditional model of banking, considering its balance sheet and customer base?
After 20 years of trading, Amazon is now regarded as the ultimate e-commerce success story. The path to success has been difficult, controversial and dramatic enough to produce a range of books documenting the company’s history.
The future for this giant is equally complex but more importantly, it is not solely to be found online. Amazon has already started buying traditional retail chains and is opening its own ‘bricks and mortar’ stores but at its heart, it will continue to succeed because it is a data-driven business.
It is not just that 10% of Amazon’s revenue comes from Amazon Web Services (AWS) – its cloud-based data services business. By being self-conscious of the central importance of data to its business model, it means that everything else Amazon does can be fluid.
Failed Fire phone project
This also results in some of its experiments failing. Nobody ever talks about the Fire phone project, even though the listing can still be easily found on Amazon. Some services remain in a continuous state of evolution.
This is most acutely seen in the efforts to define a business model that can offer rapid and local delivery of small and perishable items. The original attempt to access this market appeared as the free Kozmo.com service in the US but is now integrated into Amazon for an additional fee.
Some of Amazon’s innovations have become major competitors in their own right in new sectors beyond retail including the Prime Video streaming service. The name of the service links it closely to the paid membership features of Amazon and benefits from the plug and play simplicity of the Firestick. At the same time Prime Video has become a competitor to Netflix and other more traditional studios by producing its own original series and movies.
Impact of Alexa
The Alexa voice assistant remains the next big opportunity for Amazon. By bringing voice interfaces into the mainstream (and the living room and kitchen) the ability for Amazon to be the voice and service at the other end of the line only increases its opportunities to monetise engagement with customers within its ecosystem.
Patents have been filed recently specifically describing extensions to the capabilities of Alexa that take engagement into new data-driven customer services. All this means that Amazon is continuously learning from the data it gathers to deliver services consumers’ want that are combined together in ways that can generate more revenue for the company.
The advantage in building an encompassing consumer ecosystem is that regular customers are increasingly likely to purchase immediately without making any comparisons. With customers not looking at other online prices or considering their local and high street prices, Amazon already has a tactical advantage over its many competitors in the retail sector – as well as any sector in which it chooses to experiment.
Any sector that is ready for data-driven transformation is a potential target for being brought into the Amazon ecosystem. There are already many hints through its recent acquisitions as to what Amazon is considering as their next big thing.
Amazon’s 2019 purchase of the autonomous vehicle company Aurora is too sensible to ignore. The Christmas 2018 launch of the AWS DeepRacer 1/18th model car joins the dots very clearly. DeepRacer was an autonomous vehicle that Amazon claimed was designed to teach machine learning in an easy way for everyone. But this product was far more than the educational toy of the season.
The AWS badge links the vehicle with Amazon’s cloud computing service and much of the publicity about the kit presents it as an emerging esport offering with a DeepRacer League and a DeepRacer Cup.
Entering the $1bn global esports economy with a new competitive platform certainly justifies an occasional experiment. It is also worth remembering that Amazon paid nearly $1bn five years ago to buy Twitch – the video game streaming service and more recently the augmented and virtual reality company Goo Technologies along with the network of gaming websites called Curse.
But even more attractive is the potential for Amazon to use data from DeepRacer to build a route into the multi-trillion-dollar logistics industry by developing its own autonomous trucks and cars.
The use of autonomous electric vehicles would be a significant development for the core of Amazon’s retail business. It is also unlikely that the design of the infrastructure that will deliver Amazon products to homes in the future could be comfortably left to others including potential competitors.
Will Amazon launch its own car?
The investment Amazon has made into other artificial intelligence and machine learning companies including Harvest.ai and Graphiq is further evidence of an intended push into the autonomous vehicle market. It is only with robust, highly responsive AI technologies that safe vehicles can be produced that will satisfy local regulators, insurers and the Amazon customer.
Making Amazon’s own brand of autonomous cars available to consumers would be a new direction for its retailing activity. Although some extremely expensive items can be bought through Amazon most items are better described as being in a range between £10 and £1000. Cars present a significantly more expensive individual item than the products more usually found for sale.
How realistic is the launch of the Bank of Amazon?
This leads to the potential for Amazon to explore creative ways to offer different payment options for its consumers, that keeps them within the ecosystem and at the same time can challenge traditional banking practices – without itself becoming the Bank of Amazon.
Amazon’s investment so far in financial services has been with the disruptive fintech sector in specific countries. This makes sense. The financial services industry is highly regulated and very different in every country where Amazon currently operates. Coupled with the continuing dominance of traditional banks in most countries it is prudent for Amazon itself to wait.
At the same time it can continue to support disruption and provide the ecosystem – including AWS – on which others can build their own fintech innovations. Amazon already sits on enough computing power and technical capability to develop and launch its own cryptocurrency that could rival bitcoin or Ethereum.
There are many reasons why cryptocurrency is important to Amazon. While the focus of media attention has been on the exchange price and volatility of a single bitcoin the real value of these currencies is their divisibility. A coin can be divided into any small fraction that is required. An ability that would make micropayments for very small (digital) services commercially practical.
But taking this potentially radical course of action is only viable once there is mainstream acceptance of cryptocurrency by the core consumers in the ecosystem and there is sufficient regulation in place – not so much to protect consumers but rather to protect Amazon.
A far more attractive proposition for Amazon would be to monetise the blockchain itself by giving it an easy to use interface within the ecosystem that would then enable its users to create their own entries in the public ledger. With enough soft Amazon wrapping around the technical complexities of this system, a challenge to the legal services industry would bring an entirely new level high value and high margin services to the company.
How could it impact the health sector?
Machine learning and artificial intelligence capabilities also open new opportunities in the health sector. A recently filed patent for Alexa detects when someone is ill through slight changes in their voice or audible coughing. It is unlikely that a patent of this type is a coincidence when Amazon also purchased Pillpack, a US-based online prescription service, in 2018.
A year earlier Body Labs also became part of Amazon. The service uses still images and video to create statistical models of the human body that can then integrate movement into the interface of an app. This technology would take Alexa to a new level of sophistication with an ability to detect changes in the stance or posture of customers.
The business opportunities that Body Labs technology brings to Amazon are wide-ranging. The application could, for example, lead to the early detection of degenerative illnesses, a new form of esports interface or health assessments for life insurance.
Amazon appears unstoppable. As it has expanded from the relatively unregulated world of selling books there are a variety of barriers that it must overcome to expand its existing ecosystem. Both autonomous vehicles and healthcare move the company into highly regulated areas in the same way as any development into the financial services sector. The situations vary within each country that Amazon operates.
What are the threats to Amazon?
The government regulations around finance, cars, and health are all in place to primarily protect people. But different countries hold different views about the ways in which protection should be experienced.
For example, the centralised and public model of UK healthcare including the NHS’s tight data security may prove too big a challenge for Amazon’s 3.8% operating margin to tackle head on. However, the rise of citizen health with its encouragement of informed sharing between individuals provides a different route to monetising any Amazon health device or service as the convenience and integration brought by remaining inside the ecosystem outweighs other data privacy concerns or benefits offered by a public health service.
Threat of digital services tax
Even more challenging for all of Amazon’s operations in the UK is the 2% digital services tax (DST) on revenue that was introduced by the Chancellor in 2018. It will be of the most marginal relief to Amazon that this tax is only applied after the first £250 million of revenue.
This is unashamedly a taxing of the largest US-based Internet companies. While Facebook and Google – where operating margins are significantly higher – may not pause to reconsider their UK business models it is closer to the bone for a retailer who sees $14.5 worth of sales (in 2018) from its third-largest market.
The tax may be enough incentive for Amazon to move towards a bricks and mortar model in the UK, to focus on higher margin services or, more simply, to raise prices.
The tax will not see Amazon shuttered. For a company that is not afraid to experiment to extend its ecosystem and its markets, this will just be the next challenge to innovate further. There is no reason to expect that any innovations in response to the DST will directly benefit consumers, but they will undoubtedly protect current margins.
Alibaba’s alternate ecosystem is a threat
Amazon’s other threat is Alibaba’s alternate ecosystem. Currently confined primarily to China, Alibaba is as impressive as Amazon, but it is also contrasting with a more thorough embracing of financial services processing every step in a consumer’s journey. While Alibaba is not going to immediately threaten Amazon in its key markets of the US, Germany, UK or Japan it is the potential for expansion into large markets such as India where Alibaba and Amazon could meet head to head.
Amazon is attempting to secure access to what will soon become the largest middle class in the world by buying India’s fourth largest retail brand, More. Alibaba, in contrast, has supported Zomato an online food delivery service and exported the Alipay system.
Amazon has also invested in Souq.com and Wing.ae. Both services provide deeper access to the Arabic speaking world and push the Amazon brand into the Gulf states. Amazon’s continuous product and service innovation is only one part of its future.
Becoming a truly global brand rather than just the largest US retailer is not just ambition but will become increasingly a necessity to produce the revenues required to fund larger and more ambition developments that draw more and more services into the single Amazon ecosystem.