1
Amazon Strategy
Teardown
AM AZ O N ’ S BARRELING IN T O PH Y SICAL RE TAIL ,
FIN ANCI AL SER VICES , HEALTHCARE , AND
AI - LED CO MPUTING
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Seattle-based Amazon is doubling down on
AI for AWS and the ecosystem around its AI
assistant, Alexa. It’s seeking to become the
central provider for AI-as-a-service. But it’s not
leaving retail behind either, running grocery,
book, and convenience stores across the US.
Amazon is the exception to nearly every rule in business.
Rising from humble beginnings as a Seattle-based internet
bookstore, Amazon has grown into a propulsive force across at
least 5 major industries: retail, logistics, consumer technology,
cloud computing, and most recently, media & entertainment.
Notably, Amazon’s $13.7B purchase of grocery chain Whole
Foods last year shook up the grocery industry, highlighting
Amazon’s increasingly deep push into brick-and-mortar retail.
Of course, the company has had its share of missteps — the
expensive Fire phone flop comes to mind — but Amazon is also
rightly known for strokes of strategic genius that have launched it
ahead of competitors in promising new industries.
This was the case with the launch of cloud business AWS in the
mid-2000s, as well as the more recent consumer hit Amazon
found with its Echo device and Alexa AI assistant.
Today’s Amazon is far more than just an “everything store;” it’s a
leader in consumer-facing AI and enterprise cloud services. And
its insatiable appetite for new markets means competitors must
always be on guard against its next moves.
As the United States’ biggest online retailer, the company
accounts for about 4% of all retail and about 44% of all e-com-
merce spending in the US. While the company has been publicly
traded for more than two decades, its market capitalization has
swelled in recent years.
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Wall Street banks like Morgan Stanley expect Amazon to continue
growing at a rate that no company its size has ever done before,
estimating 16% average compound growth in sales through 2025.
Morgan Stanley analysts have also set a price target at $2,000/
share — or a market capitalization exceeding $1T — within the
year. If Amazon is able to satisfy these lofty goals, it will be “the
most aggressive expansion of a giant company in the history of
modern business.”
Understanding the many-headed beast that is Amazon is no easy
feat, especially because the company is so much less transparent
than many its peers. As the New York Times reports,
“[Amazon] isn’t just secretive, the way
Apple is, but in a deeper sense, Jeff
Bezos’ e-commerce and cloud-storage
giant is opaque. Amazon rarely explains
either its near-term tactical aims or its
long-term strategic vision. It values
surprise.”
In this report, we dive into that “opaque” strategic vision, from
Amazon’s investment and M&A history, to analysis of its patents,
to initiatives across AI, media, AWS, and more.
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Key takeaways
Given Amazon’s enormous breadth, we won’t be covering every
aspect of its business. But highlights from our analysis include:
Amazon is growing more acquisitive. Amazon acquired 10
startups in 2017 — more than any other year on record.
In addition to its purchase of Whole Foods, the company
bought Harvest.ai, a cybersecurity player, GameSparks, a game
development platform, and Blink, a developer of home security
cameras, while also expanding geographically with its acquisition
of Souq.com, a Middle Eastern e-commerce site.
This acquisition-heavy year, in comparison to the company’s
generally more conservative M&A history, could mean Amazon
is shifting to a more proactive stance to fuel its AI and enterprise
ambitions.
Amazon’s next pillar is AI. In a letter to shareholders published
in April 2017, Bezos wrote extensively about AI and machine
learning as a focus when it comes to the company’s efforts to
maintain its relevance and edge over its competition.
Voice, virtual assistants, and natural language processing will con-
tinue to be a focus for Amazon. But the company is also focused
on AI-as-a-service, putting the basic tools of AI in the hands of its
cloud computing and developer community. More than ever before,
Amazon is aspiring to become a platform company.
Amazon is going after healthcare. Its investment into cancer
detection company GRAIL was a vote of confidence in genomics,
which with its massive data and processing needs, will be a major
area for computing. In addition, Amazon’s recent partnership
with JP Morgan and Berkshire Hathaway to provide employees
with better health insurance signals broader ambitions to upend
traditional healthcare.
Amazon is proactively creating a valuable ecosystem around its
Alexa voice computing platform. Currently, the Alexa platform
offers software development kits (SDKs) that allow third-party
developers to build skills for the AI assistant and other manufactur-
ers of hardware to integrate the Alexa assistant into their products.
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Meanwhile, the Alexa Fund & Accelerator’s investments point to
new interfaces — like gesture controls developed by Thalmic Labs
— and new hardware category possibilities, as with GPS tracking
companies Mojio and TrackR. In addition, Amazon continues
to show interest in the mobile hardware market despite recent
failures, with the Alexa Fund participating in a $300M Series B
round to mobile phone developer Essential Products in Q3’17.
More recently, Amazon has acquired two Alexa-enabled smart
home security camera companies: Blink (acq Q4’17), which
was acquired primarily for the energy-efficient chips used by
its wireless security cameras, and Ring (acq Q1’18), which was
acquired for its success in the smart doorbell market. Ring will
continue to operate independently and will complement Amazon’s
new delivery program, Amazon Key.
Lab126, Amazon’s secretive R&D lab, is behind the company’s
recent consumer tech hits. Is this the new Bell Labs or Xerox
PARC?
The secretive Silicon Valley-based R&D lab is behind hardware
hits like the Echo and Kindle. And although it was also where the
ill-fated Fire phone was developed, the lab is an often under-ap-
preciated example of Amazon’s internal dedication to innovation.
Amazon aims to grow market share in physical retail and CPG,
as well as consumer goods in general. The company operates
its own shoe line (The Fix) and apparel brands (Ella Moon, Good
Threads, Paris Sunday) as well as consumer goods grouped
under its AmazonBasics label.
Amazon has also begun opening brick & mortar bookstores and
recently launched Amazon Go, its cashier-less convenience store,
with plans to expand the stores nationwide.
But Amazon’s largest acquisition to date, the $13.7B purchase
of Whole Foods, is the company’s most aggressive expansion
into the grocery market and will introduce new opportunities
for hyper-local distribution. Since the Whole Foods acquisition,
Amazon has also started a restaurant delivery service that offers
free delivery to Prime members.
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Amazon’s search for its second US headquarters highlights the
company’s economic muscle. Cities have aggressively competed
to attract Amazon after the company announced a search for a
city with the talent and entrepreneurial streak to host its second
US headquarters.
(Notably, Amazon also maintains a European Headquarters in
Luxembourg, which is said to help the company avoid billions in
federal taxes to the US government).
The selected city will reap 50,000 new jobs and $4B in total
investment. Rumors have circulated for months as to which
city Amazon will call (its second) home. Austin, Boston, Denver,
Fairfax, and Raleigh are all popular, while Atlanta is the favorite
among CB Insights’ newsletter readers.
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1 Background
» History & funding
» The three pillars
» Structure & hiring
2 Acquisitions
» Acquisition activity is on the rise
» Largest acquisitions
» Acquisition trends
3 Investments
» Alexa Fund & Accelerator
» Amazon corporate
4 Patent Data Analysis
5 Amazon Initiatives by Sector
» Core business in e-commerce & retail
» Transportation & logistics
» AI & voice
» AWS & enterprise cloud
» Media & advertising
» Hardware & devices
» Other new business
6 Closing words
Table of
contents
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Background
HISTORY & FUNDING
Jeff Bezos, the company’s founder and longtime CEO, first
hatched the idea for Amazon while working on Wall Street at the
hedge fund and tech private equity group D. E. Shaw & Co.
For a while, Amazon was a bootstrapped internet bookstore,
funded by Bezos’ money and contributions from friends and
family. In 1995, Bezos raised nearly $1M in small checks from 20+
local angels, with a typical check size of $30K – $50K. Among
those angels, Nick Hanauer, Eric Dillon, and Tom Alberg (of
Madrona Venture Group) were brought on as company advisors.
In 1996 Bezos sought outside investment from John Doerr of
Kleiner Perkins Caufield & Byers. In Amazon’s only round before
IPO, KPCB invested $8M at a $60M valuation for a 13% stake. In
1997, Amazon went public at a $382M valuation.
Just over twenty years later, as of February 2018, Amazon’s stock
price is up over 88,000%, while its market capitalization hovers
just over $735B.
Over the past two decades, the Seattle-based company built
an e-commerce-centric business that now appears to be at an
inflection point.
THE THREE PILLARS
In a 2016 interview, Bezos said Amazon rests on 3 pillars:
1 Amazon Prime, which offers membership e-commerce bun-
dled with elite digital media products.
2 Amazon Web Services, which leads the tech pack in cloud
computing.
3 Marketplace, Amazon’s third-party seller business.
Bezos has mentioned there are several new pillars in the works,
but on the subject of how those will pan out, said to “ask him in
10 years.”
Many newer (possibly “pillar”) initiatives — such as the Alexa
platform for voice-enabled apps — align with Amazon’s core
e-commerce business and are already beginning to pay dividends
by enabling more frictionless commerce. Amazon’s customers
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can already order and purchase items directly through Alexa, and
Prime members can access exclusive discounts and content
through the platform.
Success in these newer bets has cracked open new opportunities
and established Amazon’s position as the company top execu-
tives are most eager to talk about. At the same time, Amazon
must defend and build on its new businesses — something it
can only do if it continues to innovate faster than rivals Apple,
Facebook, Google, Microsoft, and others.
To see how Amazon is stacking up to its peers, we analyzed the
number of times top tech giants were mentioned during earnings
calls. Amazon was mentioned nearly 3,000 times in 2017 – more
than Facebook, Apple, and Microsoft combined.
The sharp uptick in Amazon mentions highlights how the compa-
ny’s success has begun to rattle companies across industries. In
2017, the companies discussing Amazon were an eclectic mix,
ranging from CVS and Macy’s to Netflix and Oracle.
However, the question still remains of whether or not the
famously customer-obsessed Amazon can successfully transition
to becoming a conglomerate with stakes in vastly divergent
business models. Amazon’s newest offering with AWS is a
business-to-business product, as are many of its newer tools and
services, like voice and AI-as-a-Service.
STRUCTURE & HIRING
Presently, Amazon is comprised of over 100 business entities
held across the world, many of which are affiliates of its
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e-commerce and media businesses. Some subsidiaries — many
of which are the product of acquisitions — focus on specific
categories, like Audible in audiobooks, Whole Foods in groceries,
or Zappos in shoes.
Among these, Amazon has separate retail websites for the United
States, the United Kingdom and Ireland, France, Canada, Germany,
Italy, Spain, the Netherlands, Australia, Brazil, Japan, China, India,
and Mexico.
Across these 100 worldwide business entities, Amazon
collectively employs approximately 560,000 people — nearing the
collective population of Wyoming.
Despite recent job cuts, which are rare for the company, Amazon
claimed to have hired about 130,000 new employees in 2017,
excluding employees of Whole Foods. The company also plans
to ramp up hiring in the future, especially with imminent plans for
HQ2.
As of February 2018, Amazon has over 13,200 current job
openings. AWS is the biggest area Amazon is scaling up: with
more than 5700 job openings, AWS accounts for over 43% of all
the open listings (compared to 33% a year ago).
Fulfillment & Operations is the next-largest hiring area,
representing nearly 13% of open positions (down from 19% a year
ago). Other notable hiring areas are the Alexa Team, with more
than 1130 jobs (9% of current open positions, 5% a year ago) and
the Amazon Devices team, which includes the recommendation
algorithm team MAKO, which accounts for over 5% of job listings
(4.5% a year ago).
While there are approximately 4,000 fewer job openings than
there were a year ago, this could be attributed to a growing pool
of quality candidates and improved retention for the company.
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Acquisitions
Amazon has earned a reputation as a conservative M&A player,
but now the tide may be turning.
ANNUAL ACQUISITION ACTIVITY
IS ON THE RISE
With 10 M&A deals in 2017, the company’s acquisition tally
exceeded the previous record set in 2015, and far outpaced
activity in 2016. The uptick in M&A is particularly notable given
that the company has rarely had more than 5 deals per year.
Looking at Amazon’s annual acquisition history, activity has
grown since the dot-com bust, especially in recent years. That
said, more acquisitive years are interspersed with years of
conservative activity.
While Amazon only spent $103M on acquisitions in 2016, M&A
spending far exceeded $14B in 2017, which saw the acquisitions
of Whole Foods ($13.7B) and Souq.com ($750M), the so-called
“Amazon of the Middle East”.
These recent acquisitions could mark a new approach for the
company. It’s clear that Amazon is willing to spend, but only when
it finds the right opportunity. As Nat Burgess, an M&A specialist at
TechStrat, remarked,
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“Amazon is a conservative buyer. They
think long term and they don’t get
seduced by high-flying valuations….
Amazon is unlikely to overpay for a
high-flying, fully baked platform as the
basis for the next dreamy business.“
The data backs up this idea that Amazon moves more cautiously
in the M&A arena.
Compared to its tech giant peers, Amazon is less acquisitive: its
highest years saw 9 and 10 deals (in 2015 and 2017, respectively),
while Amazon bought only 5 companies in 2016.
In comparison, Apple has annually completed 8 – 14 M&A deals
in recent years, while Facebook, despite trending downward
lately, once hit back-to-back years of 14 acquisitions. Google is an
outlier in M&A activity, having acquired 36 companies in 2014 —
more than 7x Amazon’s 2014 total of 5.
LARGEST ACQUISITIONS
What exactly does Amazon look for in a potential acquisition?
Jeff Bezos himself outlined what constitutes a must-have
“dreamy business” in a 2015 shareholder letter:
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“A dreamy business offering has at least
four characteristics. Customers love
it, it can grow to very large size, it has
strong returns on capital, and it’s durable
in time — with the potential to endure
for decades. When you find one of these,
don’t just swipe right, get married.”
Notably, many of Amazon’s largest deals meet some or all of these
criteria, proving to be capable of growth and durability in the long run.
Amazon’s largest deals to date include Whole Foods ($13.7B,
2017) shoe retailer Zappos ($1.2B, 2009), smart doorbell and
security camera Ring (~$1B, 2018), e-sports streaming site
Twitch ($970M, 2014), and warehouse robotics maker Kiva
Systems ($775M, 2012).
Even years later, many of these are still fast-growing, significant
parts of the company. Kiva’s robots have helped cut operating
expenses in fulfillment centers by 20%. While Zappos is still
reeling from experiments with its org structure, it played a crucial
role in building Amazon’s retail business and its creation of
private label clothing brands.
Of course, some of these acquisitions were initially met with
skepticism. But despite much of the tech industry being skeptical
when Amazon bought Twitch back in 2014, analyst Gene Munster
now expects the subsidiary to be worth $20B and generating $1B
in revenue by 2020.
While it’s too early to assess the success or failure of the Whole
Foods acquisition, some skeptics wonder whether Amazon’s
choice to lower Whole Foods’ prices will deter shoppers who
associate low costs with low quality.
But even so, the company is likely to see a net gain in shoppers,
especially with offers like 5% cash back to Prime members and
cardholders.
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While Amazon’s biggest-ticket M&A deals helped it establish
itself in new markets and technologies, the recent theme has
undoubtedly been about fortifying its AWS offerings.
A number of Amazon’s recent acquisitions appear to reinforce its
blossoming cloud services business: Irish company GameSparks
(July 2017) provided a back-end development platform for game
developers, Italian startup NICE (February 2016) made software
for technical computing, Graphiq (July 2017) created data-visu-
alization tools for databases, and Cloud9 IDE (July 2016) made
a collaborative development platform for software developers.
All of these help AWS cater to developers and become the go-to
place for deploying code.
ACQUISITION TRENDS
Amazon’s M&A spree in 2017 indicates a strategic desire to
bolster AWS, as well as the company’s newer desire to expand
overseas.
Expansion into Asia & the Middle East
This geographic expansion effort is exemplified by the recent
acquisition of Dubai-based Souq.com, mentioned above. The
purchase will allow Amazon to expand its e-commerce footprint
into Egypt, Saudi Arabia, and the UAE, and comes at a time when
Amazon’s overseas efforts, particularly in Asia, are beset by
intense competition.
Amazon faces a number of well-funded competitors in the
region, including Flipkart in India (which was launched by two
former Amazon employees in 2007) and Alibaba in China.
Notably, Alibaba has moved into foreign markets through recent
acquisitions, including its April 2016 purchase of Singapore-
based Lazada, which provides e-commerce services throughout
Southeast Asia.
Some of Amazon’s competitors seem to be banding together as
well: in 2017 Flipkart raised approximately $4B from Softbank,
Tencent, eBay, and Microsoft, which all compete with Amazon in
various ways.
Bolstering AWS
The vast majority of Amazon’s 2017 deals fall under the purview
of AWS.
Cybersecurity startup Harvest.ai was likely bought to strengthen
cloud offerings, while Goo Technologies, a platform that improves
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online rendering for graphically sophisticated games, may attract
game developers to AWS.
Meanwhile Body Labs, which provides 3D body scanning and
mapping software, may be used by AR/VR developers as well as
by Amazon’s internal Echo Look team for virtual dressing rooms.
Traditional digital video also makes up a lot of the data stored
on AWS, and has been a focus for content creation toolmaker
Thinkbox Software, which will build on video editing assets
like Biba Systems. And it’s been speculated that Amazon’s
acquisition of enterprise meeting productivity tool Do.com (March
2017) will roll-up into AWS’ new Chime initiative, which is a video
conferencing suite for business.
Another notable acquisition in 2017 was Amazon’s purchase of
battery-powered home monitoring system, Blink. At first glance,
it may appear to be just another smart home device designed
for Alexa integration, but a deeper look reveals the deal could be
much more than that.
While the device could certainly add value to Amazon’s new
in-home delivery program, Amazon Key, Blink’s underlying
hardware will likely find its way into all future Amazon
devices. Prior to developing its smart camera, Blink developed
energy-efficient chips. After the company found the pure-play chip
market too competitive, it leveraged its technology to create an
energy-efficient, battery-powered, connected consumer device.
These chips are the foundation of Blink’s business and are,
arguably, the main value-add to Amazon. Blink was still in its
infancy at the time of the acquisition, having raised a single seed
round for $5.8M in 2015.
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Focus on early-stage, US
Since 2010, Amazon has favored buying early, acquiring 10 Series
A-stage companies, followed by 8 seed/angel-stage companies.
Notably, Amazon’s Souq acquisition bucked the company’s
geographic norm. Despite its desire to expand overseas, almost
all of Amazon’s acquisitions have been US-based companies.
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Morever, the majority of Amazon’s revenue is generated in the US,
though its “rest of world” revenue has steadily grown, rising more
rapidly than US revenue in recent years.
In summary, Amazon mainly acquires companies that align
with its Prime, AWS, and Marketplace pillars. There are some
blockbuster deals to “dreamy businesses” that have scaled up
well, but more often Amazon uses small, practical purchases to
develop. After all, this is the same company whose CEO drove a
Honda and proudly made new employees fashion desks out of
doors as “a symbol of frugality and a way of thinking.”
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Investments
When it comes to corporate venture, Amazon is beginning to get
more active.
As a fledgling internet company in the late 1990s, Amazon lost
hundreds of millions investing in now-infamous dot-com startup
failures such as Drugstore.com, Pets.com, and Kozmo.com,
among a host of others (the company reportedly lost $60M on
Kozmo alone).
Narrowly evading death itself in the bust, the company would
be licking its wounds for years and was decidedly inactive in
investment until the mid-2000s.
In recent years, Amazon’s investment focus has shifted to more
forward-looking ventures across industries spanning healthcare,
voice, IoT, and communications platforms. The majority of these
investments are thematically linked to the AWS ecosystem,
which now encompasses voice, AI, development tools, and cloud
computing, among others.
In June 2015, Amazon committed $100M to found its first
standalone corporate venture capital (CVC) unit, the Alexa Fund.
The fund, which specifically invests in voice and IoT technology
to bolster its Alexa Voice ecosystem, is relatively small (Google
Ventures, for reference, started with a $100M per year investment
goal that’s since grown to $300M+) and lags far behind other tech
CVCs like Google Ventures and Microsoft Ventures.
However, the fund is also growing. Amazon committed an
additional $100M to the Alexa Fund in November 2017, in addition
to starting its accelerator program, Alexa Accelerator, in July 2017.
Moreover, the Amazon Catalyst program has operated for a
number of years, providing dozens of grants to university
students attempting to find technological solutions to world
problems — from genetically engineered pollution-reducing plants
to low-cost water desalination.
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Here’s a look at Amazon’s investing frequency for both Amazon
proper and the Alexa Fund & Accelerator (Amazon Catalyst not
included):
Last year, Amazon’s investment activity was bolstered by its Alexa
Accelerator program. Amazon corporate made 3 investments
directly, while the Alexa Fund & Accelerator made 15. Of these
15 investments, 10 were completed as part of the accelerator
program in July 2017, while 5 were made independently of the
accelerator program.
Amazon’s corporate deal activity remains on par with its numbers
over the last decade, when the company was expanding its
modest e-commerce business.
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Compared to its tech competitors’ investments, Amazon falls
in the middle. Google is far and away the biggest deal-maker,
whereas Facebook and Apple hardly invest, opting instead to
purchase companies outright or not invest at all.
With the Alexa Fund & Accelerator propelling Amazon’s
investment effort, the company is showing a renewed interest in
investing, with its activity reaching its highest levels ever.
ALEXA FUND & ACCELERATOR
As Amazon makes its big foray into the AI world with its Alexa
platform product, its corporate venture fund serves as a
bellwether for its efforts to build the go-to platform for voice tech.
The fund has existed for nearly 3 years, and to date (2/26/18) has
completed 40 deals, 7 of which were announced at the fund’s
inception. These include investments from both the primary
Amazon Alexa Fund and the Alexa Accelerator started in 2017.
The Alexa Fund mostly invests in early-stage companies (seed
& Series A), though it has participated in Series B rounds to
consumer IoT heavyweights Ecobee (home automation) and
Owlet Baby Care (baby monitors).
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While later-stage investments are rare for the Alexa Fund, the
CVC group backed connected doorbell maker Ring as part of a
Series C and smart toy maker Sphero as part of a Series G. (Toys
actually had a significant impact on Amazon Corporate’s bottom
line in 2017, estimated to earn $4.5B in revenue throughout the
year.)
Notably, these startups all play into the voice category, the
primary use case for Alexa, or into new human-computer
interaction models.
Here’s a quarterly breakdown of the fund’s investment history:
The Alexa Fund has historically done just a deal or two per month,
which, as previously mentioned, is well below the activity level
of Google Ventures. However, the fund completed a record high
number of deals in 2017. The Alexa Accelerator, Amazon’s new
IoT accelerator operated by TechStars, was responsible for 10 of
the 15 deals.
After a successful inaugural class in July 2017, Amazon recently
announced a second Alexa Accelerator program, launching
summer 2018.
Nearly all Alexa Fund & Accelerator investments so far have a
potential integration into Alexa’s smart home voice controls.
These include Rachio (connected sprinkler system), TrackR
(small items finder and Tile competitor), June (smart oven),
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Nucleus (connected intercom system), Mojio (connected car
device), Novel Effect (read along sound effects), Petnet (smart
pet feeder), Musaic (connected speakers), and Scout Security
(security camera).
Investments here likely offers more strategic and synergistic
value in bringing these products closer into the Alexa ecosystem
than a chance at serious returns.
Other notable bets have included Thalmic Labs, whose
gesture-tracking arm band could add a new mode to control
the Echo, and DefinedCrowd, which supplies crowdsourced
natural language processing (NLP) training data for 90% of world
languages. (Presently, Alexa Voice Service only works in English.)
A more forward-looking move might be detectable in Alexa’s 2015
investment into Invoxia, which makes portable GPS trackers.
More recently, the fund backed Mojio, a developer of connected
car devices for tracking and vehicle diagnostics, and Tinitell,
which provides wearable mobile phones and GPS trackers for
kids. These investments signal Amazon’s interest in expanding
Alexa integration beyond the home.
In a deviation from the its other investments, the Alexa Fund
also backed mobile phone developer Essential Products as part
of a $300M Series B in June 2017. Despite failed attempts to
build a mobile phone within Amazon (Fire Phone), the company
continues to show interest in the mobile hardware market, if in
less direct ways.
The Alexa Fund has also invested in artificial intelligence com-
panies Comet and Semantica Labs. While Semantica Labs uses
machine learning to predict possible user responses — ideal for
Amazon’s Alexa — Comet offers a platform for tracking machine
learning projects and experiments, a tool that supplements Alexa
as much as it does AWS.
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Alexa Fund’s typical deal partners include familiar names among
the most active IoT investors such as Intel Capital, Foundry
Group, and Felicis Ventures.
Notably, the Alexa Fund has seen a high proportion of exits in the
last few years. The first exit for the fund was realized in December
2015, just 6 months after the Alexa Fund’s initial investment: while
The Orange Chef, which made a connected food scale, was sold
to food discovery platform Yummly, the exit was no home run as
the company was essentially sold for parts.
Since then time there have been 4 other exits. Artificial intelli-
gence chatbot development platform KITT.AI (acquired by Baidu),
home smart alarm system Scout Alarm (IPO), and manufacturing
services firm Dragon Innovation (acquired by Avnet) all exited
in 2017. Most recently, Luma Home, which develops home Wi-Fi
extenders, was acquired by Newell Brands in January 2018 at a
valuation of $10M.
AMAZON CORPORATE INVESTMENTS
Investments coming from Amazon’s corporate entity are relatively
infrequent — which perhaps comes as a surprise for a company
with a stated strategy to “experiment patiently, accept failures,
plant seeds, protect saplings, and double-down when you see
customer delight.” As we’ll later explore, however, Amazon is
beginning to make more diverse bets.
The investments the company has made include bets within
logistics, cloud apps, and media, with Amazon’s recent forays
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into logistics and media foreshadowing areas of new business
interest.
Since 2015, Amazon’s stock has grown at nearly 5x the rate it did
from 2012 – 2015. It may seem counterintuitive that a company
with such a meteoric rise in stock price would slow down its
corporate venture efforts — but that seems to be exactly what
Amazon has done.
The company’s already-sparse activity slowed in 2016 and
remained limited in 2017. Investment peaked in 2011 with 9 deals.
Since then, annual investments have averaged less than half of
that peak.
Despite this recent slowdown in activity, Amazon is putting
capital behind a wider variety of industries. From 2010 – 2013,
the company solely did deals to internet companies, whereas
between 2014 – 2017, it has also invested in media, healthcare,
auto & transport, and mobile.
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This parallels some of Amazon’s broader new business initiatives:
live online business broadcasting startup Cheddar aligns
with Amazon’s initiatives in proprietary video content, while
on-demand home services marketplace HouseJoy aligns with
Amazon’s growing home & office services marketplace.
But perhaps the most intriguing new investment area for Amazon
is in the healthcare sector.
Early in 2017, the company invested in its first biotech startup:
GRAIL, which focuses on genomics for cancer diagnosis. The
deal marks interesting new territory for Amazon, and because
genomic sequencing requires intensive computing power, GRAIL
and other genomics applications could align nicely with Amazon’s
existing AWS business.
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Unsurprisingly, gene sequencer Illumina, from which GRAIL spun
out, is featured as a customer success story on the AWS website.
Notably, Amazon tends to invest mainly where it can make
strategic partnerships. For example, Mumbai-based ShoppersStop
may help to expand Amazon’s e-commerce reach in India. Twilio
and other tech companies have partnerships with AWS, while
Amazon’s investment in Cheddar will provide insight into live
online streaming. In 2016, Amazon’s investment in Ionic Security
also featured a “collaboration” with AWS to create data protection
infrastructure for regulated industries.
The Charts tab from the CB Insights database shows how Amazon’s
corporate team has heavily favored mid-to-late-stage deals over
the past 5 years. Most of Amazon corporate’s deals have fallen
into the $15M – $25M range, and nearly one-third of deals have
been at Series E+.
30
Interestingly, Amazon has frequently co-invested with the same
investment syndicate that helped the company launch.
As mentioned above, Amazon originally raised from Kleiner
Perkins Caufield & Byers (KPCB) and angel Tom Alberg of
Madrona Venture Group — so it’s worth noting that both firms and
Amazon continue to do deals together today.
Other Amazon co-investors include a number of “smart money”
venture capital investors — in other words, firms with the best
combination of portfolio valuations and investment outcomes.
In addition to KPCB, other smart money investors investing before,
alongside, or after Amazon include Bessemer Venture Partners,
New Enterprise Associates, General Catalyst, Accel Partners,
Lightspeed Venture Partners, and Andreessen Horowitz. All have
invested in at least one company backed by Amazon.
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Patents
Next-generation computing and logistics are two of Amazon’s top
R&D priorities.
Nearly 40 of Amazon’s 2017 patents are focused on developing
its cloud computing systems, while the company also filed over
30 patents focused on improving its logistics network. This
logistics focus comes not long after Amazon announced plans
to launch its own delivery service (Seller Flex), directly targeting
the growing number of third-party sellers on Amazon. This service
will allow Amazon to cut costs and reduce reliance on carriers like
UPS and FedEx.
Early on, Amazon’s zealous use of intellectual property sparked
some controversy. One of the company’s early patents, “Method
and System for Placing a Purchase Order Via a Communication
Network,” perhaps better known by its trademarked name 1-Click,
was granted in 1999. The patent is still used today in Amazon’s
online store, which, as the name implies, allows orders to be
completed in one click based on user data saved from previous
orders. Notably, the 1-Click patent expired in 2017, and a number
of e-commerce players, including Google, are already working on
one-click browsers.
4
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The 1-Click patent ended up being a central issue in Amazon’s
early life, and according to Brad Stone’s book “The Everything
Store,” Amazon was aggressive in protecting IP from competitors:
“Critics charged that the idea behind
1-Click was rudimentary and that its
approval by the U.S. patent office was
a symptom of lazy bureaucracy and a
broken patent process. Bezos didn’t alto-
gether disagree — intellectually he was an
advocate for patent reform — but he was
determined to exploit the status quo for
any possible advantage. He sued Barnes
& Noble for infringing on the patent in late
1999 and won a preliminary ruling that
forced the bookseller to add an extra step
to its checkout process. Amazon licensed
the patent to Apple in 2000 for an undis-
closed sum and tried to use it, ineffectively,
to gain some leverage over a rising and
worrisome rival that first showed up on
Amazon’s radar in mid-1998: eBay.”
Since the dot-com era, Amazon’s patents have shifted and tracked
Amazon’s new business priorities. In recent years, Amazon has
built a trove of patents, which we explore below in greater depth.
Note: This analysis comes with a few caveats, primarily that the
patent filing process involves a significant time lag before the
publishing of patent applications. This delay can range from
several months to years. We also focused on Amazon proper
for the purposes of this analysis, which would exclude patents
absorbed through external acquisitions.
In recent years, Amazon has put more resources toward
intellectual property efforts. From a modest 582 patents filed in
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2010, the company filed over 1500 patents just a few years later
in 2014. As with investment activity, Amazon is at roughly half as
many applications in comparison to Google’s patent efforts.
To dig deeper into Amazon’s strategy focus, we mined each year’s
applications and teased out recurring keywords from the patent
abstracts, using a significance weighting scheme to surface
words and phrases.
The key phrases data illustrates Amazon’s diverse business pri-
orities, albeit with some time lag. In the early 2010s, applications
frequently used keywords like “electronic tablet” and “content
item,” which ostensibly would help dig a moat around Amazon’s
Kindle efforts.
Similarly, Amazon’s AWS business, which took off in the
mid-2000s, offers virtualization services through Elastic Cloud
Compute, or EC2. Evidently, securing IP around virtual machines
is still a high priority: related phrases like “machine instance” were
top patent keywords throughout the years, and “virtual machine”
has been a top phrase for 5 consecutive years.
34
While patents are still being released weekly, the ones that have
rolled in from 2016 and 2017 indicate new interest in drones and
cybersecurity, given the sudden prominence of keywords like
“aerial vehicles” and “digital fingerprint”.
Aerial drones are a large part of Amazon’s strategy to expand its
Prime Air logistics network, which Bezos announced in 2013. In
March 2017, the company began making demo flights delivering
sunscreen.
With logistics and UAVs front-and-center in its patent portfolio, we
isolated patents containing logistics-related keywords. 2017 (a
year that will likely see even more patents surfacing) already has
a record 32 logistics-related patents to date.
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Amazon’s patent portfolio also feature some forward-looking
patents that give a peek into the futuristic logistics network the
company may one day engineer.
In 2016, an application for a patent came to light that suggests
Amazon is trying to create a flying warehouse that would dispatch
package-laden drones to the ground. Called an “Airborne
Fulfillment Center” (AFC), the patent describes the vehicle as “an
airship that remains at high altitude.”
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In the following year (2017), Amazon was awarded a patent for
an augmented reality interface that may be used by fulfillment
center employees to locate goods more efficiently.
And in a more recent patent from 2018, Amazon entertains the
idea of drones providing energy, whether electric batteries or
traditional fuel, to autonomous vehicles while in motion.
All of these above Amazon patents were surfaced using our
patent search engine.
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The ‘river delta’: Where
Amazon’s many businesses
meet
Amazon operates in a wide range of businesses, but at the heart
of the company is online shopping and a focus on leveraging
technology to offer the fastest, most convenient way to buy things.
The best way to think about Amazon is as an amalgamation of
many businesses with solid tech at its core. Ben Thompson on
Stratechery wrote,
“A more nuanced approach considers
the fact that Amazon is not a monolithic
operation, but rather a collection of
businesses sharing resources, including
a channel (Amazon.com), logistics, and a
common technological foundation.”
Amazon might have its hand in every business imaginable, but
underlying it all is the company’s technological prowess.
While revenue has grown massively, Amazon has hardly turned
a profit because it continually reinvests its cash into new
businesses, from building new warehouses to beefing up AWS
data centers. The philosophy and motivation behind Amazon’s
bold reinvestment strategy is highlighted by CEO Jeff Bezos:
“I very frequently get the question: What’s
going to change in the next 10 years?
And that is a very interesting question; it’s
a very common one. I almost never get
the question: What’s not going to change
in the next 10 years? And I submit to you
5
38
that that second question is actually the
more important of the two — because
you can build a business strategy around
the things that are stable in time.
… [I]n our retail business, we know that
customers want low prices, and I know
that’s going to be true 10 years from
now. They want fast delivery; they want
vast selection. It’s impossible to imagine
a future 10 years from now where a
customer comes up and says, ‘Jeff I
love Amazon, I just wish the prices were
a little higher;’ ‘I love Amazon, I just
wish you’d deliver a little more slowly.’
Impossible. And so the effort we put into
those things, spinning those things up,
we know the energy we put into it today
will still be paying off dividends for our
customers 10 years from now. When you
have something that you know is true,
even over the long term, you can afford
to put a lot of energy into it.”
Always thinking about how to build tomorrow today, Amazon is
investing in and improving its core business by developing new
ones. In nearly all its main categories, Amazon’s position as a
platform works in a data feedback loop.
Amazon owns perhaps the richest dataset on how consumers
consume, how sellers sell, and how developers develop. This, in
turn, allows Amazon to optimize its online shopping experience,
logistics network, developer environment, and even its voice AI,
39
which in turn make Amazon’s offerings even richer.
In short, many of Amazon’s businesses follow the classic network
effect flywheel. And, as we’ll explore below, some of Amazon’s
network effects are starting to collide.
One theme that emerges in Amazon’s initiatives is the concept
of diffusing internal tools as products. The company began as
the sole seller on Amazon.com, and eventually opened up its
e-commerce platform (and logistics network) for 3rd parties
to sell on. It opened up the computing infrastructure it spun up
in-house and sold its computing and storage tools through the
now-dominant AWS.
Now, Amazon is in a position to do the same in cutting-edge
areas like machine learning, workerless retail tech, drone delivery,
and voice computing. As these startup-dominated industries gain
traction, Amazon may position itself as the necessary middleman
for companies looking to succeed through online commerce —
benefiting from companies willing to pay the “Amazon tax” that
allows them to stay competitive.
CORE BUSINESS IN COMMERCE & RETAIL
Borrowing from Walmart’s “Everyday Low Price” playbook that
was popularized in 1990s retail, Amazon delivered value through
competitive pricing. After considering a list of 20 different items,
Bezos originally settled on bookselling because of the markup on
books and because no physical store could hold all book titles.
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Not having physical stores allowed Amazon to maintain a
selection of over 1.1 million book titles, as well as to develop new
customer-friendly (and now-standard) e-commerce features like
a personalized web page and book recommendation algorithms.
By 1998, the company would offer music and DVDs. And today,
everything from cars to uranium ore can be bought online through
Amazon.
Amazon’s dominance is still often linked to its pricing strategy. From
the beginning, the lower cost structure of having no stores allowed
savings to be passed on to customers. Early on, Amazon would use
a web crawler to find competitor prices and undercut them.
As Bezos famously sketched out on a napkin, Amazon’s lasting
value is derived from the virtuous cycle that it creates.
For most of the past decade, any company that competed
with Amazon was either acquired (Zappos, Diapers.com) or
simply steam-rolled. On the whole, Amazon seemed relatively
unaffected by the rise (and subsequent demise, in some cases)
of on-demand startups bringing goods via apps, although it did
start its own version of these with Prime Now.
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As retailers are shuttering stores, Amazon’s e-commerce business
is still growing. In 2017, Amazon accounted for approximately
44% of all e-commerce spending in America.
In 2000, Amazon gave outside companies the ability to sell on
Amazon.com, and this program now accounts for over 50% of the
goods it ships. Behind the scenes, Amazon’s retail marketplace
is something like a massive slowed-down stock exchange, where
its more than 2 million registered merchants leverage algorithms
to undercut competitors. Prices even for commodity goods spike
and fall like those in a volatile exchange.
Increasingly, manufacturers are also going through Amazon and
its Marketplace division to reach consumers, and Marketplace
continues to be the company’s largest source of revenue after retail.
Not coincidentally, in April 2017 the company had more than
1,200 open jobs listed for its seller services division alone. In
February of 2018, that number has dwindled to less than 400 —
though this is possibly attributable to a growing pool of quality
candidates or improved retention rates.
Where Amazon can compete, it will often develop its own
products as a competing supplier. About a two years ago Amazon
began selling over a dozen private-label goods for households. In
addition to home essentials sold under its AmazonBasics brand,
the company now has private labels in apparel, CPG, luggage, and
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diapers, among dozens of other categories. Today, the number of
AmazonBasic goods exceed 1,000.
The strategy behind private-label goods is that Amazon can take
advantage of higher profit margins: the company doesn’t need to
spend much on marketing and brand development, and with its
e-commerce data it already knows which products will resonate
with customers.
However, Amazon’s leverage as the seller and the platform owner
makes for an awkward relationship. Amazon has the power to
put its products higher in search rankings, in which case resentful
suppliers may want to take their business elsewhere — or, if they
can’t afford to lose the distribution channel, be forced to compete
with the store brand.
Amazon Prime — the membership program created to gratify more
time-sensitive and less price-conscious customers — is probably
best known for offering two-day shipping with an annual member-
ship fee. But Prime has expanded far beyond free shipping, and
now includes Prime Video media streaming, music streaming,
unlimited photo storage, discounts from Whole Foods, free
restaurant delivery, free eBooks, free audiobooks, and a number of
other exclusive services to keep its subscription rates high.
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Breaking into brick-and-mortar
After decades thriving as a storeless internet company, Amazon
is making its first forays into brick-and-mortar retail on several
fronts: Amazon Go, AmazonFresh, AmazonBooks, and even
Whole Foods.
Amazon Go is arguably the company’s most ambitious brick &
mortar initiative to date. The stores will employ RFID tech and
computer vision to allow any Amazon Prime member to shop
without a checkout process or in-store employees.
Amazon ran into issues with the technology in early trials, but
seems to have successfully worked past such obstacles, opening
its first Amazon Go store in Seattle in January 2018. The
company reportedly has plans to open 6 additional Amazon Go
locations in the US throughout 2018.
A patent recently granted to the company outlines a wristband
that could monitor the performance and efficiency of employees.
Needless to say, many shamed the idea of tagging and tracking
employee performance with such oversight. But with the increas-
ing adoption of smartwatchs and wristbands by consumers, this
technology could prove useful in Amazon Go stores where patrons
take items from designated locations throughout the store.
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In addition to the cashier-less Amazon Go, AmazonFresh Pickup
(now with two locations in Seattle) offers car-side grocery pickup.
Both the Amazon Go and AmazonFresh Pickup models may soon
be adopted by Whole Foods as Amazon continues to grow its
share of the massive grocery market.
Finally, Amazon is also increasing its brick-and-mortar footprint
with physical bookstores, now with 13 locations across the US
and 3 more on the way (as of 2/25/18).
Moving into brick-and-mortar allows Amazon to expand its reach
with an offline presence. Some consumers prefer touching and
seeing certain goods in person, especially apparel, which Amazon
is now supplying with AmazonBasics and its various private labels.
The move to physical retail may seem counterintuitive, as stores,
with their limited selection, were once the antithesis of Amazon.
But by having a last-mile channel for books, groceries, and big-
ticket sales like furniture and appliances, physical stores may help
Amazon effectively sell what it wouldn’t otherwise be selling online.
Expansion in India
India is expected to become the world’s fastest-growing
e-commerce market, and Amazon has said it will invest $3B in its
India business, with a focus on its grocery store offerings.
In just the few years it’s operated in India, Amazon has signed
contracts with major delivery services and started its own
delivery service to augment these. (It’s rumored that the success
of Amazon’s proprietary delivery service in India is basis for its
current shipping initiatives here in the US.)
Amazon’s investments in India-based companies like in-home ser-
vices company HouseJoy, e-commerce platform Shoppers Stop,
and insurance marketplace BankBazaar further its involvement in
India’s tech ecosystem.
45
However, Amazon faces challenges in the region too, not the least
of which is the fact that currently, only 35% of India’s population is
connected to the internet. Additionally, Amazon faces tough local
competition from unicorns like Flipkart and Snapdeal, which are
backed by investors like Tencent and Alibaba respectively.
TRANSPORTATION & LOGISTICS
Shipping items faster and cheaper has long been Amazon’s
way of making customers happy. As Amazon has grown to
deliver hundreds of millions of packages per year, scaling up its
fulfillment infrastructure has been a priority.
Early on, Amazon realized its shipments were all unique combina-
tions of goods, and that its warehouse techniques would actually
be closer to manufacturing than shipping. It poached heavily from
Walmart’s executives to grow its logistics network.
When Amazon bought warehouse robotics maker Kiva Systems
in 2012, it might have been difficult to see the immediate value.
But now Amazon has more than 45,000 robots in its warehouses.
The acquisition of Kiva, according to Bloomberg, “set off an arms
race among robot makers and shippers who scurried to keep up
with the e-commerce giant” and its efficiencies.
Amazon has been eager to grow its fulfillment center coverage.
As of 2016, 44% of Americans lived within 20 miles of an Amazon
warehouse, compared to just 5% in 2015. In addition to expanding
its warehouse coverage, the company is now offering its own
shipping services to external parties — namely, its third-party sellers.
In doing so, Amazon accomplishes a number of things: the
company becomes less reliant on third-party services (UPS and
FedEx), improves shipping times of non-Prime goods, and cuts
costs. With an estimated $20B+ spend on third-party shippers in
2017, Amazon has plenty of incentive to build a service of its own.
Amazon’s efforts to achieve independence by land, air, and sea
are bold. The company recently purchased 210 acres for the
development of a $1.5B air freight center in Hebron, Kentucky.
Amazon further plans to lease 40 “Prime Air” cargo jets, and to
offer China-based sellers use of its proprietary delivery network.
In addition, the company is acting as a freight forwarder by
helping Chinese suppliers book space on ocean vessels.
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Drones
Unmanned logistics and delivery capabilities remain an open
question with an uncertain timeline, though the company has
filed patents in this area. On the drones front, Amazon is heavily
focused on an in-house effort to add autonomous aerial drones to
its arsenal of delivery methods. While still hypothetical, Amazon
filed a patent for a “beehive” like fulfillment center just last year.
Drones would dispatch to local customers, or moving vehicles, to
deliver goods and/or services.
While it’s been several years since Amazon first announced deliv-
ery via drone, the biggest question going forward will be about
if and how the company can integrate drones into its logistics
network, especially as FAA regulations have made domestic test
flights more complicated. To avoid these complications, drone
startups like Zipline International have tested in less regulated
skies in Africa, where others simply focus on terrestrial drones —
two options Amazon may show interest in exploring as it tests its
own technology.
AI & VOICE
Amazon’s work in AI is most obvious in its Alexa Voice Service
(AVS), which applies AI to natural language processing (NLP)
to offer a voice interface powered by the cloud. A portion of
Amazon’s voice tech is built atop technology developed by a
startup called Evi Technologies, which Amazon acquired in 2013,
and which lead to a consumer tech home run.
Right around the time Amazon released its ill-fated Fire phone in
late 2014, it also quietly released the Amazon Echo, a screenless
47
cylindrical computer running its AVS cloud software. With NLP
that appears to work better than competitors’ technology, the
Echo has been a smash hit.
Over the last two years, Amazon has expanded its line of Echo
products to include smaller devices like the Echo Dot and visually
enabled devices like the Echo Show. According to estimates,
Amazon has shipped more than 20 million Alexa enabled devices,
while Amazon’s app store for voice “skills” now tallies over 10,000.
Alexa also unlocks a new source of revenue: vocal commerce.
Alexa’s “skills” allow users to seamlessly order more Amazon
goods, in addition to hailing cabs and ordering pizzas through a
growing list of third-party integrations.
It’s estimated that Amazon is selling Alexa hardware at a 10% –
20% net loss (which totaled $300M in 2016 and was estimated
to reach a ~$600M deficit in 2017), all in pursuit of being the
dominant platform for NLP. But these might only be short-term
expenses. Subsidizing its Alexa-powered hardware is a clear path
to becoming the prevailing player within consumer and developer
circles, and Amazon has conveyed it has no desire to make its bet
solely on hardware.
Instead, Amazon’s end goal is to offer cloud-based voice software
powering everything from car dashboards to consumer wearables.
As Don Morrill of the Alexa team explained, “You can run a skill
[as a developer] for pennies a month. And so we find that’s the
best way: we want to eliminate as much friction to Alexa as
possible, and keeping it open and free is the way to adoption.”
Amazon has thrown lots of resources behind this effort, including
giving free AWS credits to Alexa and AI developers. At a recent
product event, the company revealed that it has more than 5,000
people working on the company’s digital assistant. And as of
February 2018, Amazon has over 1,100 jobs listings for additional
roles on its Alexa team.
While it’s currently the preeminent voice platform, Amazon is
up against tough competition. Google’s rival offering, Home, is
powered by its own Google Assistant, while Apple’s HomePod is
powered by Siri. Both are becoming popular Echo competitors.
Where Amazon might have the first-mover advantage, Google
benefits from its extensive AI research, while Apple benefits from
seamless integration across its macOS and iOS devices.
Deepening Amazon’s moat in voice is important, especially
if consumers perceive a quality edge in Google’s assistant or
48
Apple’s Siri, or other emerging competitors. The switching costs
are low, and very quickly, Alexa could lose luster and market share.
On the subject of commercial AI, Bezos has said: “All of the
major tech companies will do this… Right now, bigger companies
like Amazon have a bigger advantage especially because of the
training data sets required to do this. You need a lot of data to do
extraordinary things with the algorithms we have.”
As with its cloud-based voice software, widely diffusing its AI
tools seems to be key to Amazon’s strategy going forward.
Amazon’s AI strategy is about being everywhere, or more
technically speaking, achieving scale by being the ubiquitous
platform that developers use to access AI services.
Amazon recently began selling Machine Learning-as-a-Service
with Amazon SageMaker. This product offers users the ability to
create, train, and deploy machine learning models without the need
for the weighty and expensive infrastructure typically required.
Similar to how server racks were enormously cost-prohibitive for
startups pre-AWS, the same is presently true for training machine
learning algorithms. Startups are continually devising creative
(and expensive) hacks to train their algorithms. Amazon AI‘s goal
is to serve both big and small developers who want AI without the
upfront costs or hassle.
Amazon AI unveiled offerings that will work like an API and allow
any developer to access Lex (the NLP inside Alexa), Amazon Polly
(speech synthesis), Amazon Rekognition (image analysis), and
Amazon DeepLens (wireless deep learning video camera). With a
drone effort involving vision for obstacle avoidance in the works,
it seems likely that Amazon will continue to move into the vision
space and offer more pre-built algorithms.
In a shareholder letter recapping 2016, Bezos wrote extensively
about Amazon’s AI strategy going forward, highlighting in no
uncertain terms how Amazon’s tools in voice NLP, computer
vision, Amazon Go, and AI infrastructure will carry it forward:
“We’re in the middle of an obvious [trend]
right now: machine learning and artificial
intelligence. Over the past decades com-
puters have broadly automated tasks that
programmers could describe with clear
49
rules and algorithms. Modern machine
learning techniques now allow us to do
the same for tasks where describing
the precise rules is much harder. At
Amazon, we’ve been engaged in the
practical application of machine learning
for many years now. Some of this work
is highly visible: our autonomous Prime
Air delivery drones; the Amazon Go
convenience store that uses machine
vision to eliminate checkout lines; and
Alexa our cloud-based AI assistant.
(We still struggle to keep Echo in stock,
despite our best efforts. A high-quality
problem, but a problem. We’re working on
it.) But much of what we do with machine
learning happens beneath the surface.
Machine learning drives our algorithms
for demand forecasting, product search
ranking, product and deals recommenda-
tions, merchandising placements, fraud
detection, translations, and much more.
Though less visible, much of the impact
of machine learning will be of this type –
quietly but meaningfully improving core
operations. Inside AWS, we’re excited to
lower the costs and barriers to machine
learning and AI so organizations of
all sizes can take advantage of these
advanced techniques.“
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Bezos also mentions “quieter” machine learning and AI products
working in the background. Amazon owes the development of
Alexa hardware to Lab126 and many of its early recommendation
algorithms to A9, both of which are secretive divisions in Silicon
Valley. These bold bets on skunkworks teams have ended up
paying off big, and the fruits of these labors are now front-and-
center in Amazon’s computing strategy.
Of course, as everything becomes more digitized, applying AI to
more novel areas like healthcare could create new breakthroughs.
Amazon’s investment in genomics startup GRAIL was a vote of
confidence in the area, while outside of Amazon, healthcare is
already one of the hottest areas for AI startups.
With AWS being the go-to place for anything big data-related,
Amazon is well-positioned to pivot once AI has its watershed
moment. While AI is certainly heating up in the startup world,
Bezos’ words seem to suggest that AI could also be Amazon’s
next pillar, up there with Prime and AWS.
AWS & ENTERPRISE CLOUD
AWS is now Amazon’s second-largest source of revenue, with
nearly $17.5B in sales in 2017 and close to $4.5B in profit
according to the company’s recent 10K.
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AWS began as a result of Amazon overhauling its own internal
capacity for cloud services. Repurpose as a service for external
clients, AWS allowed startups to migrate from expensive server
hardware and software. Subsequently, Amazon AWS played
no small part in the new wave of startups that flourished in the
aftermath, including present-day unicorns like Palantir and Slack.
However, AWS’ relationship to the venture world started off as
somewhat fraught. Amazon CTO Werner Vogels said that VCs
initially loathed AWS because it “robbed them of the opportunity
to get significant chunks of young businesses” by providing
previously unaffordable computer infrastructure.
However, Vogels also noted that AWS has increasingly been
accepted because it allows VCs to spread risk across a greater
number of smaller startups. Nowadays, VCs often give away AWS
gift certificates to their startups.
As Brad Stone wrote, “It is not hyperbole to say that AWS, particu-
larly the original services like S3 [storage] and EC2 [VMs], helped
lift the entire technology industry out of a prolonged dot-com
malaise.” Stone also wrote that, more importantly, Amazon was
also able to shake its own image as a simple e-commerce player
and transform itself into a big-league tech company:
“Perhaps the greatest makeover was of
Amazon’s own image. AWS enlarged
the scope of what it meant to be the
everything store and stocked Amazon’s
shelves with incongruous products like
spot instances and storage terabytes. It
made Amazon a confusing target for
52
Walmart and other rival retailers and gave
the company fresh appeal to the legions
of engineers looking to solve the world’s
most interesting problems. Finally, after
years of setbacks and internal rancor,
Amazon was unquestionably a technol-
ogy company, what Bezos had always
imagined it to be.”
With cybersecurity heating up as a startup category, it’s no
surprise that AWS wants to beef up its cybersecurity offerings. As
indicated by its patents and acquisitions, Amazon is very focused
on improving and securing the stack.
In the fall of 2016, AWS suffered DDoS attacks, causing many
websites across the internet to be affected due to AWS’ status as
the go-to solution for corporate computing. It soon released AWS
Shield, a product intended to protect applications running on AWS.
More recently, however, Tesla’s AWS servers were breached
by cryptominers using the misconfigured AWS servers to earn
cryptocurrency free of charge. This in mind, it wouldn’t be sur-
prising to see more cybersecurity M&A, such as Amazon’s recent
acquisitions of Sqrrl and Harvest.ai, to continue the company’s
efforts to strengthen its offerings.
AWS likely got a head start due to classic Innovator’s Dilemma
nearsightedness, where many of its competitors didn’t see
infrastructure-as-a-service (IaaS) as a threat. Now that AWS has
reached a critical mass, the strategy going forward will likely be
centered on making code deployment even more seamless.
We’ll also likely see more “as-a-service” offerings that make
deployment flexible and dead simple. One example in this
arena is AWS’ Lambda’s serverless computing, which easily
runs a snippet of code upon request, so developers don’t need
to consider provisioning or managing servers. (In essence, this
is the micro-service version of EC2, but EC2 is still a full server
that has to be managed — think Airbnb as opposed to renting an
apartment.) With Lambda, developers can quickly go live in a way
that was previously cost and time-prohibitive, using fast, one-time
bits of code.
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In addition, AWS now offers per-second billing for EC2 Instances,
further reducing costs of organizations that used to pay per min-
ute. This strategy seemed so effective that Google followed suit
just a week later, offering more services within the per-second
model. To ward off competitors, AWS will need to offer more
services like Lambda, along with its AI and voice APIs, at cheaper
costs to attract and empower smaller coders.
MEDIA & ADVERTISING
Amazon upended the bookselling industry years back with
features like “Look Inside,” and later brought books into the
digital era with its Kindle e-readers, another product of Amazon’s
R&D arm Lab126. Its acquisition of Audible continues to supply
audiobooks, which is currently the fastest-growing format in
publishing. Back in its infancy, Amazon would throw its weight
around the publishing world by threatening to lower the store
rankings of publishers who didn’t meet their digitization demands.
Now, the e-commerce giant has expanded far beyond books when
it comes to its media and entertainment offerings.
To bolster its Prime subscriptions — which represent Amazon’s
third-largest source of revenue, after e-commerce and
Marketplace — Amazon has introduced another special benefit to
membership: Prime Video streaming.
Bezos has publicly explained the flywheel effect of Prime Video.
With a suite of premium streaming, users are more likely to
renew their (decently large ticket) Prime memberships, and are
also inclined to buy more, which, in turn, makes for more Prime
memberships and e-commerce sales.
“Amazon Studios is making original
content for Prime Video…from a business
point of view for us, we get to monetize
this content in an unusual way. Winning
a Golden Globe helps us sell more
shoes and it does that in a very direct
way. If you look at Prime members, they
buy more on Amazon than non-Prime
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members. One of the reasons they do
that is because they’ve paid their annual
fee, they’re looking around to see how to
get more value out of the program. They
look across more categories… We’ve
monitored that Prime Video customers
renew [Prime] at higher rates, and they
convert from free trials at higher rates.”
Interestingly, Bezos also said that he doesn’t see Netflix as a
competitor, arguing that Amazon doesn’t necessarily compete head-
to-head with Netflix on the demand side: “When it comes to these
over-the-top subscriptions, I think people are going to subscribe to
Netflix, and Prime Video, and Hulu, and HBO, and so on.”
But similar to Netflix, Amazon has moved beyond simply distrib-
uting content. Amazon Studios produced movies that racked up
three Academy Award wins at the 2017 Oscars: “Manchester By
the Sea” won Best Actor and Best Original Screenplay, and “The
Salesman” won best Foreign Film. (That’s two more Oscars than
Netflix, which won for a short-subject documentary.)
Amazon’s interest in content could further transform the
entertainment industry: Amazon spent an estimated $4.5B on
content in 2017 — twice HBO’s budget. But that’s still trailing
Netflix’s aggressive $6B budget for 2017 content, which is double
what Netflix spent in 2016.
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Last year, Amazon also streamed Thursday Night Football as
part of a $50M contract with the NFL. It wouldn’t be surprising to
see Amazon renew this contract, or enter new agreements with
additional professional sports organizations for streaming rights
in the future.
Beyond video streaming entertainment, Amazon is also making
strides in the gaming space.
As interest in e-sports (competitive video-gaming) continues
to rise, Twitch, the video game broadcast site Amazon bought
for just shy of a billion dollars, has grown to become one of the
largest bandwidth users in the US, boasting more than 15 million
daily active users.
The company has attracted YouTube gaming stars and pop
culture celebrities. The platform also now sells video games
directly on the site, an expansion that competes with the game
marketplace world of Steam and Valve. Twitch membership is
free with Prime, making joining Amazon attractive to gamers who
are already well accustomed to buying their gaming titles online.
With its unique incentive to sell more subscriptions by offering
more content and services, Amazon is able to offer a premium
media suite at a cost its competitors cannot compete with.
Fred Wilson of Union Square Ventures recently expressed
concerns that Amazon has an unfair advantage in its ability to
bundle content with other Prime services:
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“I worry Amazon has an almost unfair
advantage in the content business
because of Prime. It’s the craziest thing
ever. Who would have ever thought
shipping physical products to people
at a loss would become this incredible
competitive moat in the television
business? Who dreamt that up? I happen
to believe that it’s an accident, that Bezos
woke up one day and said ‘Wow, actually
we can take Prime and we can use that
revenue to subsidize our way into the
content business.’ But honestly, if you’re
a Prime subscriber it doesn’t cost you any
more to get their TV. And I gotta come
out-of-pocket with Netflix. If you’re only
going to have one, which one are you
going to have? …People who don’t have
hundreds of dollars a month to spend
on entertainment might choose just one
[entertainment provider], and Amazon
might be the one they choose because
they’re already Prime. They gotta buy their
groceries anyway. It’s just this incredible
bundle.”
Advertising
The Amazon store’s position as a hub for eyeballs makes it a
valuable resource for selling ads. Amazon has implemented a
programmatic ad product that was estimated to generate $2.8B
in online ad revenue in 2017, and is expected to continue its
growth by generating $4.5B in 2018 and $6.6B in 2019.
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If this catches on, Amazon could break up the Facebook-Google
duopoly in internet advertising. Martin Sorrell, the head of
advertising giant WPP, said Amazon’s potential in this area is what
keeps him up at night, since it could connect directly with the
brands and manufacturers that are now WPP’s clients.
Amazon’s advertising potential looms even larger as voice
becomes an increasingly popular medium for conducting
commerce.
When asking Alexa for a generic good or service, say paper
towels or house cleaning, the voice assistant won’t deliver the
plethora of results that can be found online. Rather, it will deliver
a single result, or pair of results, that are typically categorized
as “Amazon’s Choice” — that is, well-rated, lower-priced good
that ships via Prime. But these recommendations could very well
change if Amazon were to implement a similar programmatic
ad product for voice. Brands may willingly shell out to be the top
Alexa recommendation.
While the increase in advertising revenue may be tempting for
Amazon, it presents a slippery slope when it comes to consumer
trust. The company will have to execute in a way that keeps
consumers’ best interest in mind. That said, if Amazon is able to
position itself appropriately, advertising would become another
example of Amazon’s ability to transform markets and ability to
capitalize on shifting consumer trends.
HARDWARE & DEVICES
Along with its aforementioned line of Echo hardware products run-
ning its voice software, Amazon has a host of hardware products,
including Fire TV stick, dash buttons, and a line of tablets.
The hardware R&D group Lab126 was the visionary behind these
successes, and the Echo’s popularity has allowed Amazon to be
the go-to name for voice computing. However, Lab126 was also
responsible for the massive failure of the Fire phone, which fell
from being priced as a $199 iPhone competitor to selling for just
99 cents.
Fire phone’s flop was caused by a string of strategic errors, with
some coming straight from the top: Bezos was known to have
played a large part in the demise, obsessing over the 3D feature
that fell flat with consumers. (His taste in design also proved
questionable with the Kindle, for which he demanded a clunky
keyboard that in later iterations was removed.)
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Amazon has had its share of mega-hits, but hardware might be its
Achilles heel. Increasingly, it seems the company has recognized
this by playing to its strengths in the cloud and focusing on the
software platforms behind its IoT devices.
While Amazon develops smart security devices of its own, it’s
recently strengthened its hardware offerings with the purchase
of two smart security systems, Blink (December 2017) and Ring
(February 2018). These two acquisitions are clear indicators of
Amazon’s commitment to frictionless logistics and commerce.
While Blink’s energy-efficient chips will likely primarily improve
the performance of (wireless) Amazon devices, Ring may allow
Prime members to provide guests and delivery companies with
temporary access to their homes.
In addition to expanding and improving its own line of hardware
products, Amazon also allows independent third-party device
makers, like Invoxia and Sonos, access to its Alexa Voice Service.
This highlights a key part of Amazon’s apparent strategy when
it comes to hardware: opening its products up to third parties
in order to further product development. It’s a bold strategy
compared to famously secretive competitors like Amazon, but in
the long run this openness may pay dividends.
How Amazon will build on the success of its Echo devices
remains up in the air, though third-party creativity is likely to play
an important role in developing the hardware of Amazon’s future.
Going forward, we may also see Amazon’s rekindle its interest
in mobile phones, a possibility suggested by the Amazon Alexa
Fund’s investment in hardware startup Essential, founded by
Android co-founder Andy Rubin.
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OTHER NEW BUSINESSES
Amazon has been experimenting with financial technology that
could widen its reach. In India, the company is offering thousands
of loans to e-sellers so suppliers can expand their operations
and manage seasonal spikes. The company’s acquisition of
Emvantage Payments has also made it easier for Amazon’s
India-based customer to pay online, which is always a key focus
for the e-commerce giant.
Amazon is also expanding its financial reach by launching
Amazon Cash, which allows users to add to their Amazon.com
balance by showing barcodes at brick-and-mortar checkout
locations. The move is reportedly a bid to better appeal to
underbanked users who are accustomed to dealing with cash and
might be new to online commerce.
The company has also improved its own line of credit cards,
partnering with Chase to release the Amazon Rewards Visa
Signature Card. The no-fee card offers an instant $70 Amazon
gift card for sign up, in addition to 5% back on all Amazon.com
and Whole Foods purchases for Prime members.
In addition to targeting adults, Amazon’s investment in Greenlight
Financial allows parents to issue and manage smart debit cards
for their children. Parents can control spending limits and reload
the card with the use of a mobile app.
Beyond fintech, Amazon might have its eyes on augmented
and virtual reality (AR/VR). In particular, Amazon’s Lumberyard,
a game development engine on AWS, could play a role in the
development of VR content.
In November 2017, Amazon added an augmented reality feature
to its iOS Amazon app, which allows users to visualize certain
goods (furniture, kitchen tools, TVs, etc.) in their homes before
purchase. It also recently did the same for its Android app in
February 2018.
Amazon is also rumored to be integrating more augmented reality
tech into its brick & mortar efforts, so patrons can visualize how
goods and furniture will look in their homes. Amazon’s acquisition
of Body Labs, which develops advanced tech for analyzing human
body size, shape, and motion, will likely play an important role in
the process of building these technologies.
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Building off recent efforts to grow its market share in groceries,
Amazon is looking to enter the highly competitive food delivery
space with Amazon Restaurants. While the company will be
competing with players like Seamless, Grubhub, and Uber
Eats, Amazon limits markups and offers free delivery to Prime
members.
Such initiatives in fintech, AR/VR, and hospitality could help
Amazon provide more frictionless commerce to its customers.
But beyond the hypercompetitive commerce markets, Amazon
looks to enter the more heavily regulated industries like
healthcare and education.
Today, Amazon offers a variety of open source educational
resources for the public, including tools to assign coursework,
applications for improving math proficiency, and courses to
teach programming. The company also recently hired Candace
Thille, a specialist in learning science, cognitive science, and open
education at Stanford University, a sign of Amazon’s focus on
strengthening its internal development and educational programs.
While this doesn’t indicate the development of a consumer-facing
program to replace or supplement formal education, it does
signal Amazon’s interest in understanding how people can learn
more effectively.
While formal education may be a stretch for the company,
healthcare is something it looks to tackle head-on. In partnership
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with JP Morgan and Berkshire Hathaway, Amazon is looking to
become an independent healthcare provider for its US employees.
The three companies say this initiative will be “free from
profit-making incentives and constraints,” but have not detailed
the long-term vision of the partnership.
In a January 2018 statement, Jeff Bezos acknowledged the
challenges within the healthcare industry: “the health care system
is complex, and we enter into this challenge open-eyed about the
degree of difficulty. Hard as it might be, reducing health care’s
burden on the economy while improving outcomes for employees
and their families would be worth the effort.”
With Amazon’s cost-cutting strategies, JP Morgan’s access to
capital, and Berkshire’s experience as a reinsurer, the combined
businesses have many of the right tools to better serve their 1M+
collective employees. Whether or not an effective model for the
broader population will emerge is yet to be determined.
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Closing words
Given its mutually reinforcing lines of business in commerce,
cloud computing, and AI-as-a-service, it’s not easy to find chinks
in the Amazon armor. But in the AI arena at least, Amazon is up
against more research-oriented peers in Silicon Valley who are
aggressively recruiting the top AI talent and have data troves at
least as large as Amazon’s to train their algorithms on.
And Amazon is fighting the technical AI battle while it is simulta-
neously working across an ever-widening range of industries, in
addition to waging bare-knuckle fights for e-commerce market
share in India and the Middle East.
Jeff Bezos, who has made relatively few missteps in twenty years
of tenure, seems capable of carrying the company forward. As
Brad Stone wrote, “In a way the entire company is scaffolding built
around his brain — an amplification machine meant to disseminate
his ingenuity and drive across the greatest possible radius.”
It’s almost impossible to imagine Amazon carrying forward
without Bezos at the helm, and there’s hardly an inkling that he is
going anywhere. At the same time, it’s also not clear that Bezos
has cultivated the next generation of leadership to move toward a
central vision without him driving the company forward.
As Amazon continues to expand, the biggest threat to its growth
could be Amazon itself. Its outsized role in the commerce
ecosystem, The Economist reports, could attract criticism from
regulators: “If Amazon does become a utility for commerce, the
calls will grow for it to be regulated as one.”
Another question Amazon will have to confront is how long
investors will stand for deferred profits. As the Times wrote back
in 2013:
“In its 16 years as a public company,
Amazon has received unique permission
from Wall Street to concentrate on
expanding its infrastructure, increas-
ing revenue at the expense of profit.
Stockholders have pushed Amazon
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shares up to a record level, even though
the company makes only pocket change.
Profits were always promised tomorrow.”
Having earned a reputation as a “profit miser,” Amazon only
recently began posting profits, largely due to the success of AWS.
As Amazon dips deeper into its coffers to streamline its logistics
network, boost web offerings, and develop artificial intelligence, it
will face increasing pressure to also reward patient shareholders,
balancing the demands of today’s investors with its vision of
tomorrow.