Introduction To Behemoth

 

~ Chapter 1: Introduction ~

Amazon is the most extraordinary business story of our time. Facebook has more members. Google is central to the knowledge economy. Apple has by far the prettiest toys. But after only 25 years, Amazon stands astride the river of goods that flows through the American economy. It is the retailer, the marketplace, the electronic infrastructure, the gatekeeper publisher, the advertising channel, the distributor. It is increasingly the arbiter of retail, the pacesetter for employment, and a private taxing authority.

And Amazon shows absolutely no sign of slowing down, or settling down into a role as most very large companies do. Just in the last year, Amazon’s share of books sold in the US tipped to over 50%; it signed hundreds of “exclusive brand” deals – a new strategic initiative in retail. It grew its dominant and highly profitable internet services business by 35% (to $30 billion in annual revenues). It grew its (even more profitable) advertising business ten-fold in a single year, cracking $10 billion in revenue. Its video studios won 7 Emmys. Twitch usage by gamers reached 560 billion minutes – up 58%. Counting all its varied revenue channels, Amazon now harvests more than 50% of gross revenues from its Marketplace.

There is no obvious end to Amazon’s expansion. Jeff Bezos’ self-described mission is to create the most customer-centric company on the planet. That vision has no natural limits: there are customers everywhere, in every sector and every business, and they all “deserve” to be served by Amazon. Other firms are limited by the scope of their industry. Hopping boundaries is risky, so few firms make the jump. If they do, it’s usually to one or two closely aligned businesses.

Amazon doesn’t respect those boundaries at all. It goes anywhere there is opportunity and where it can see ways to leverage existing assets. Its interlinked platforms provide both impenetrable defenses for Amazon’s core, and key assets to leverage as Amazon reaches into new territory.

Understanding Amazon is a formidable challenge. Its reach spreads relentlessly across more sectors, more technologies, more markets in the US and globally, so it’s hard to grasp how the pieces fit together. Big companies in a single sector are one thing (like Walmart) – their activities are all aligned. Big conglomerates in multiple sectors are another (think GE) – their activities are not aligned, so what happens in elevators matters little to jet engines. But Amazon combines both – it has multiple huge businesses, but they are aligned. They create leverage for each other, so gains in one business help drive growth in others: the Amazon retail Marketplace creates retail volume by selling goods from other vendors (not Amazon). That increases the flow of goods, and volume reduces unit costs for distribution. That in turn feeds back into lower costs and hence lower prices, so customers engage more with Amazon, which then in turn makes Marketplace more attractive to vendors. The pieces all fit. And now, that distribution network – built on retail – can be used for anything that moves goods from point A to point B. A year ago Amazon bought a pill distribution company (Pillpack). So CVS is quaking, worried that Amazon will gut its business by cherry-picking the most lucrative products for home distribution. Amazon bought Whole Foods and introduced Amazon Go. Are zero-worker stores and home deliveries Amazon’s vision for the future of groceries? What if they are right?

Old businesses are naturally replaced by new businesses. Old firms burn out, or their model is superseded by a better one. Sears displaced the old department stores, which themselves had displaced individual family businesses. And Sears was then brushed aside by Walmart. What’s different this time ? Won’t Amazon be replaced in its turn? Well, no. It won’t. Amazon owns each of the four core drivers of competitive advantage in retail: it has by far the best selection, it has highly competitive prices, it has the best customer service and connection to customers, and it is the most convenient – now with one-day or even same-day delivery. And it has its extraordinary size, placing a huge thumb on the scale of competition. It’s very hard to see how any one of these core advantages can be overturned. It’s impossible to see how they could all be reversed.

As Amazon continues to a grow (metastasize?), four issues stand out:

  • Where did Amazon come from – how did Amazon grow so big so fast?
  • What can we learn from the history – can we distill key lessons about objective, strategy, tactics, and corporate culture?
  • Where is Amazon going? What will Amazon look like in 2030?
  • What should we – the collective we – do about it? Is Amazon a threat? Should we simply applaud? Are there characteristics to worry about? And if so, what is to be done?

Behemoth is organized around concepts and models that help us to understand Amazon, not just describe it. Behemoth captures Amazon’s remarkable rise, its multiple dimensions, its strategies and patterns, and its future. Scale, ruthlessness, innovation, and logistics help explain Amazon’s success. But the real lesson is how all the pieces of the puzzle fit together.

Behemoth explores these linkages in three sections. The first section covers the elements that drove Amazon’s rise, using the book business as an example. It shows how Amazon, step-by-step, cemented its hold over books. It explores in detail the role of logistics, where Amazon has invested multiple billions to create a network of 154 US warehouses and a low-cost, highly efficient, to-the-household delivery system – a secret weapon that gives it a key competitive edge in every business that delivers physical goods. This section also describes and analyzes Amazon Prime, the glue that holds customers tight to Amazon. Prime builds long-term strategic advantage that helps Amazon scale, while making it almost impossible for other online vendors to peel customers away from Amazon.

The rest of the first section analyzes Amazon’s collection strategies for customers beyond Prime. Amazon studies its customers scientifically, offering personalized attention to wants and needs, which can be satisfied almost before customers are conscious of them. It also applies scale in new ways – through user recommendations, for example – to create yet more competitive advantages. Through all this relentless effort, Amazon has made itself the most trusted brand in America, and trust is of course a core advantage in online commerce where customers and vendors don’t physically meet. The last chapter in this section explains the importance of Amazon Marketplace – the online store where other vendors sell (and pay Amazon well to do so). Marketplace is Amazon as platform, owner of the biggest and best online bazaar. Amazon as Marketplace is so successful that it could over the medium term replace Amazon as retailer altogether.

The second section explores Amazon outside the frame of the retail sector. It covers the entirely new business in cloud computing, which Amazon invented and quickly dominated. Strategic links between AWS and Amazon the retailer drove the growth of AWS and simultaneously accelerated efficiency and innovation within the retail arm. AWS isn’t just a large business, though; it’s also in part a model for how Amazon attacks sectors outside its core retailing business. That’s how Amazon will enter future businesses like healthcare and finance.

Amazon is famous for its long-term perspective, where profits are postponed for years and revenues are plowed back into growth. Well, that period is over. Amazon is now big enough and dominant enough to have its cake and eat it too: it can generate rapidly growing profits while also growing extremely fast and relentlessly investing for the future. How is Amazon monetizing its dominance? Where does the money comes from? Behemoth explores how Amazon squeezes profits out of every stage in the production and distribution chain, and explains how and where Amazon has pricing power.

The second section concludes with three chapters looking to the future. Amazon as innovator picks out some of Amazon’s most important innovations and explains how they contributed to Amazon’s success. Innovating and taking related risks are deep in Amazon’s DNA, and are key growth factors. Scale and Moats explores in a systematic way why Amazon is unbeatable: why this time really is different. It explains why the retail war online is already over, and Amazon has won. It simply remains to be determined how the sector will be organized, and how quickly (and extensively) retail that is currently offline in bricks and mortar stores moves into the digital domain of ecommerce. By 2030, about 30% of the retail goods sector likely be online – 3 times its current share – and Amazon’s share of that online retail will likely soar. Amazon could push more than 3 million retail workers out of their jobs. How many will find comparable jobs as warehouse and delivery workers, before those jobs in turn are inevitably automated?

The last section of the book explores the wider implications of Amazon’s rise for the economy and society as a whole. It’s true that customers are still in the throes of first love for Amazon. We smile at every digital lily cast at our feet, at the packages landing at the front door, at the dainty handcuffs that Amazon fashions to keep us attached, even if slightly more closely than we want. But we are not just customers. We are also workers and producers. To provide those delicious customer benefits, Amazon has adopted – exemplifies – a working culture that is deeply problematic. It is differentiated by class, with part-time delivery drivers and seasonal warehouse workers at the bottom, full time blue-collar workers above them, a large and internally differentiated salariat, and of course the big guns at the top, many of whom have been there for more than a decade. Class matters. As you might expect, life at the bottom of the Amazon pyramid isn’t so hot; but life in the middle isn’t a bed of roses either.

Amazon’s culture is also differentiated between those who thrive and those who don’t. Amazon aims for excellence, and takes hiring and performance review extremely seriously. But its model for building a top-class workforce is profoundly 19th century; it is built on the disposable worker. Amazon demands that workers commit body and soul to Amazon’s needs and vision, but at the same time those workers are mostly just replaceable. Bezos is famous for saying that employees should think like owners, which seems laudable. But he’s also famous for saying that that his people should work hard, work smart, and work long. That demands a commitment that’s sustainable only for a few. Working 60, 70, or 80 hours a week is just exploitation of labor regulations and norms. What’s permitted becomes what’s permissible, and then what’s normal. It’s 19th century capitalism, reinforced by 21st century surveillance, and driven by a cult-like devotion to the customer and to Amazon itself.

That high-stress/high-demand environment works great for those who thrive on that culture, on the freedom to innovate, on the small project teams, on the opportunity to work on important projects that will change the world. There are thousands of positive comments on Glassdoor attesting to how well Amazon’s culture works for some people.

That’s the challenge of understanding Amazon@Work: it’s a brilliant place for some people, and can be tolerated by many more people for a period of time. But as one former long-time Amazon employee told me, “Amazon just uses the same strategy the Russians used at Stalingrad: they keep sending in fresh waves of bodies until the enemy is overwhelmed.” Amazon is notorious for turnover among new hires, most of whom don’t last even 2 years.

Amazon is the fastest growing big employer in the country. It now has 530,000 employees. It is rabidly anti-union. It demands complete commitment – and it ranks its employees every year, in part to eliminate the bottom tier. “Rank and yank” is a highly toxic model that other big companies like Microsoft and GE have long since abandoned. Is the Amazon employment model what we want? Because as Amazon grows, its power as exemplar grows too. More pointedly, how can Amazon be restrained? In a single year – 2018 – it cut its use of USPS in half, effectively replacing a unionized employee workforce with its own gig workers and contractors. Amazon is big enough to matter far beyond Amazon.

Beyond the workforce, Amazon acknowledges no limits to its ambitions, and it has found the secret sauce of cross-leverage, using advantages in one segment of its business to build advantages elsewhere. For example, its logistics advantages and access to its 100 million Prime households make participation in the Amazon Marketplace effectively compulsory for online vendors – who are then “politely” encouraged to pay Amazon for advertising. That’s how Amazon’s advertising business went nuclear in 2018. Is this a problem? Do we care about how Amazon treats vendors and suppliers? I believe we should. Just looking at customers isn’t enough.

The final chapter in the book explore options for managing Amazon. How can we keep the best parts of Amazon while dealing with the problems? Antitrust and utility regulation are possible pathways, but we need to think much more broadly. For example, Amazon is among the most secretive public companies in America. What if it were forced to disclose, to publish the data that it hoards? What would it be like if Amazon vendors could organizer and exert collective power? Alternatively, how would Amazon cope with a sea change in employment law that helped employees (and contract workers) unionize, or limited forced arbitration? What if giggers were reclassified as employees? Could Amazon be as efficient, effective, and innovative if it could no longer build itself on the back of a ruthless and exploitative culture?

Amazon is the greatest thing since sliced bread for most of its customers. They love Amazon. And I personally cannot wait for Bank of Amazon and AmazonCare – I expect both would be much better for customers than our current financial and healthcare overlords. But… Amazon is already the Everything Store. Should it really run everything? Should Amazon alone and untrammeled stand at the nexus of all digital commerce? James Madison wrote in Federalist No. 47:

“The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elective, may justly be pronounced the very definition of tyranny.”

Madison was talking about the Federal government, but in online retail at least, Amazon increasingly is the government. His warning therefore applies, in spades.

Behemoth: Amazon Rising

~ Introduction ~

Amazon is the most extraordinary business story of our time. Facebook has more members. Google is central to the knowledge economy. Apple has by far the prettiest toys. But after only 25 years, Amazon stands astride the river of goods that flows through the American economy. It is the retailer, the marketplace, the electronic infrastructure, the gatekeeper publisher, the advertising channel, the distributor. It is increasingly the arbiter of retail, the pacesetter for employment, and a private taxing authority.

And Amazon shows absolutely no sign of slowing down, or settling down into a role as most very large companies do. Just in the last year, Amazon’s share of books sold in the US tipped to over 50%; it signed hundreds of “exclusive brand” deals – a new strategic initiative in retail. It grew its dominant and highly profitable internet services business by 35% (to $30 billion in annual revenues). It grew its (even more profitable) advertising business ten-fold in a single year, cracking $10 billion in revenue. Its video studios won 7 Emmys. Twitch usage by gamers reached 560 billion minutes – up 58%. Counting all its varied revenue channels, Amazon now harvests more than 50% of gross revenues from its Marketplace.

There is no obvious end to Amazon’s expansion. Jeff Bezos’ self-described mission is to create the most customer-centric company on the planet. That vision has no natural limits: there are customers everywhere, in every sector and every business, and they all “deserve” to be served by Amazon. Other firms are limited by the scope of their industry. Hopping boundaries is risky, so few firms make the jump. If they do, it’s usually to one or two closely aligned businesses.

Amazon doesn’t respect those boundaries at all. It goes anywhere there is opportunity and where it can see ways to leverage existing assets. Its interlinked platforms provide both impenetrable defenses for Amazon’s core, and key assets to leverage as Amazon reaches into new territory.

Understanding Amazon is a formidable challenge. Its reach spreads relentlessly across more sectors, more technologies, more markets in the US and globally, so it’s hard to grasp how the pieces fit together. Big companies in a single sector are one thing (like Walmart) – their activities are all aligned. Big conglomerates in multiple sectors are another (think GE) – their activities are not aligned, so what happens in elevators matters little to jet engines. But Amazon combines both – it has multiple huge businesses, but they are aligned. They create leverage for each other, so gains in one business help drive growth in others: the Amazon retail Marketplace creates retail volume by selling goods from other vendors (not Amazon). That increases the flow of goods, and volume reduces unit costs for distribution. That in turn feeds back into lower costs and hence lower prices, so customers engage more with Amazon, which then in turn makes Marketplace more attractive to vendors. The pieces all fit. And now, that distribution network – built on retail – can be used for anything that moves goods from point A to point B. A year ago Amazon bought a pill distribution company (Pillpack). So CVS is quaking, worried that Amazon will gut its business by cherry-picking the most lucrative products for home distribution. Amazon bought Whole Foods and introduced Amazon Go. Are zero-worker stores and home deliveries Amazon’s vision for the future of groceries? What if they are right?

Old businesses are naturally replaced by new businesses. Old firms burn out, or their model is superseded by a better one. Sears displaced the old department stores, which themselves had displaced individual family businesses. And Sears was then brushed aside by Walmart. What’s different this time ? Won’t Amazon be replaced in its turn? Well, no. It won’t. Amazon owns each of the four core drivers of competitive advantage in retail: it has by far the best selection, it has highly competitive prices, it has the best customer service and connection to customers, and it is the most convenient – now with one-day or even same-day delivery. And it has its extraordinary size, placing a huge thumb on the scale of competition. It’s very hard to see how any one of these core advantages can be overturned. It’s impossible to see how they could all be reversed.

As Amazon continues to a grow (metastasize?), four issues stand out:

  • Where did Amazon come from – how did Amazon grow so big so fast?
  • What can we learn from the history – can we distill key lessons about objective, strategy, tactics, and corporate culture?
  • Where is Amazon going? What will Amazon look like in 2030?
  • What should we – the collective we – do about it? Is Amazon a threat? Should we simply applaud? Are there characteristics to worry about? And if so, what is to be done?

Behemoth is organized around concepts and models that help us to understand Amazon, not just describe it. Behemoth captures Amazon’s remarkable rise, its multiple dimensions, its strategies and patterns, and its future. Scale, ruthlessness, innovation, and logistics help explain Amazon’s success. But the real lesson is how all the pieces of the puzzle fit together.

Behemoth explores these linkages in three sections. The first section covers the elements that drove Amazon’s rise, using the book business as an example. It shows how Amazon, step-by-step, cemented its hold over books. It explores in detail the role of logistics, where Amazon has invested multiple billions to create a network of 154 US warehouses and a low-cost, highly efficient, to-the-household delivery system – a secret weapon that gives it a key competitive edge in every business that delivers physical goods. This section also describes and analyzes Amazon Prime, the glue that holds customers tight to Amazon. Prime builds long-term strategic advantage that helps Amazon scale, while making it almost impossible for other online vendors to peel customers away from Amazon.

The rest of the first section analyzes Amazon’s collection strategies for customers beyond Prime. Amazon studies its customers scientifically, offering personalized attention to wants and needs, which can be satisfied almost before customers are conscious of them. It also applies scale in new ways – through user recommendations, for example – to create yet more competitive advantages. Through all this relentless effort, Amazon has made itself the most trusted brand in America, and trust is of course a core advantage in online commerce where customers and vendors don’t physically meet. The last chapter in this section explains the importance of Amazon Marketplace – the online store where other vendors sell (and pay Amazon well to do so). Marketplace is Amazon as platform, owner of the biggest and best online bazaar. Amazon as Marketplace is so successful that it could over the medium term replace Amazon as retailer altogether.

The second section explores Amazon outside the frame of the retail sector. It covers the entirely new business in cloud computing, which Amazon invented and quickly dominated. Strategic links between AWS and Amazon the retailer drove the growth of AWS and simultaneously accelerated efficiency and innovation within the retail arm. AWS isn’t just a large business, though; it’s also in part a model for how Amazon attacks sectors outside its core retailing business. That’s how Amazon will enter future businesses like healthcare and finance.

Amazon is famous for its long-term perspective, where profits are postponed for years and revenues are plowed back into growth. Well, that period is over. Amazon is now big enough and dominant enough to have its cake and eat it too: it can generate rapidly growing profits while also growing extremely fast and relentlessly investing for the future. How is Amazon monetizing its dominance? Where does the money comes from? Behemoth explores how Amazon squeezes profits out of every stage in the production and distribution chain, and explains how and where Amazon has pricing power.

The second section concludes with three chapters looking to the future. Amazon as innovator picks out some of Amazon’s most important innovations and explains how they contributed to Amazon’s success. Innovating and taking related risks are deep in Amazon’s DNA, and are key growth factors. Scale and Moats explores in a systematic way why Amazon is unbeatable: why this time really is different. It explains why the retail war online is already over, and Amazon has won. It simply remains to be determined how the sector will be organized, and how quickly (and extensively) retail that is currently offline in bricks and mortar stores moves into the digital domain of ecommerce. By 2030, about 30% of the retail goods sector likely be online – 3 times its current share – and Amazon’s share of that online retail will likely soar. Amazon could push more than 3 million retail workers out of their jobs. How many will find comparable jobs as warehouse and delivery workers, before those jobs in turn are inevitably automated?

The last section of the book explores the wider implications of Amazon’s rise for the economy and society as a whole. It’s true that customers are still in the throes of first love for Amazon. We smile at every digital lily cast at our feet, at the packages landing at the front door, at the dainty handcuffs that Amazon fashions to keep us attached, even if slightly more closely than we want. But we are not just customers. We are also workers and producers. To provide those delicious customer benefits, Amazon has adopted – exemplifies – a working culture that is deeply problematic. It is differentiated by class, with part-time delivery drivers and seasonal warehouse workers at the bottom, full time blue-collar workers above them, a large and internally differentiated salariat, and of course the big guns at the top, many of whom have been there for more than a decade. Class matters. As you might expect, life at the bottom of the Amazon pyramid isn’t so hot; but life in the middle isn’t a bed of roses either.

Amazon’s culture is also differentiated between those who thrive and those who don’t. Amazon aims for excellence, and takes hiring and performance review extremely seriously. But its model for building a top-class workforce is profoundly 19th century; it is built on the disposable worker. Amazon demands that workers commit body and soul to Amazon’s needs and vision, but at the same time those workers are mostly just replaceable. Bezos is famous for saying that employees should think like owners, which seems laudable. But he’s also famous for saying that that his people should work hard, work smart, and work long. That demands a commitment that’s sustainable only for a few. Working 60, 70, or 80 hours a week is just exploitation of labor regulations and norms. What’s permitted becomes what’s permissible, and then what’s normal. It’s 19th century capitalism, reinforced by 21st century surveillance, and driven by a cult-like devotion to the customer and to Amazon itself.

That high-stress/high-demand environment works great for those who thrive on that culture, on the freedom to innovate, on the small project teams, on the opportunity to work on important projects that will change the world. There are thousands of positive comments on Glassdoor attesting to how well Amazon’s culture works for some people.

That’s the challenge of understanding Amazon@Work: it’s a brilliant place for some people, and can be tolerated by many more people for a period of time. But as one former long-time Amazon employee told me, “Amazon just uses the same strategy the Russians used at Stalingrad: they keep sending in fresh waves of bodies until the enemy is overwhelmed.” Amazon is notorious for turnover among new hires, most of whom don’t last even 2 years.

Amazon is the fastest growing big employer in the country. It now has 530,000 employees. It is rabidly anti-union. It demands complete commitment – and it ranks its employees every year, in part to eliminate the bottom tier. “Rank and yank” is a highly toxic model that other big companies like Microsoft and GE have long since abandoned. Is the Amazon employment model what we want? Because as Amazon grows, its power as exemplar grows too. More pointedly, how can Amazon be restrained? In a single year – 2018 – it cut its use of USPS in half, effectively replacing a unionized employee workforce with its own gig workers and contractors. Amazon is big enough to matter far beyond Amazon.

Beyond the workforce, Amazon acknowledges no limits to its ambitions, and it has found the secret sauce of cross-leverage, using advantages in one segment of its business to build advantages elsewhere. For example, its logistics advantages and access to its 100 million Prime households make participation in the Amazon Marketplace effectively compulsory for online vendors – who are then “politely” encouraged to pay Amazon for advertising. That’s how Amazon’s advertising business went nuclear in 2018. Is this a problem? Do we care about how Amazon treats vendors and suppliers? I believe we should. Just looking at customers isn’t enough.

The final chapter in the book explore options for managing Amazon. How can we keep the best parts of Amazon while dealing with the problems? Antitrust and utility regulation are possible pathways, but we need to think much more broadly. For example, Amazon is among the most secretive public companies in America. What if it were forced to disclose, to publish the data that it hoards? What would it be like if Amazon vendors could organizer and exert collective power? Alternatively, how would Amazon cope with a sea change in employment law that helped employees (and contract workers) unionize, or limited forced arbitration? What if giggers were reclassified as employees? Could Amazon be as efficient, effective, and innovative if it could no longer build itself on the back of a ruthless and exploitative culture?

Amazon is the greatest thing since sliced bread for most of its customers. They love Amazon. And I personally cannot wait for Bank of Amazon and AmazonCare – I expect both would be much better for customers than our current financial and healthcare overlords. But… Amazon is already the Everything Store. Should it really run everything? Should Amazon alone and untrammeled stand at the nexus of all digital commerce? James Madison wrote in Federalist No. 47:

“The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elective, may justly be pronounced the very definition of tyranny.”

Madison was talking about the Federal government, but in online retail at least, Amazon increasingly is the government. His warning therefore applies, in spades.