The Grand Theory of Amazon

Summary

The video discusses Amazon's vast influence, exemplified by an internet outage affecting major sites like Netflix and Spotify, all hosted by Amazon Web Services. It delves into Amazon's diverse business model, from e-commerce to owning numerous consumer brands, and its relentless pursuit of scale and customer satisfaction. The script highlights Amazon's strategy of leveraging data and user growth for product improvement, its willingness to operate at a loss for customer benefit, and its potential future as a dominant force across various industries, facing few competitors other than possibly the government.

Takeaways

• 🌐 On February 28th, 2017, a major internet outage affected services like Netflix, Spotify, and Reddit, highlighting the dependency on Amazon Web Services (AWS).
• 📚 Amazon's beginnings as an online bookstore were strategic due to the scalability of the internet, which allowed it to carry an inventory beyond physical limitations.
• 📈 Amazon's business model is not product-centric but scale-centric, focusing on the advantages of operating at a large scale to offer services and products that smaller businesses cannot.
• 🔄 The 'snowball effect' is central to Amazon's growth strategy, where they aim to attract as many users as possible to collect data, improve products, and attract more users in a virtuous cycle.
• 🛒 Amazon's acquisition of Whole Foods and its logistics capabilities position it to potentially compete with traditional shipping giants like UPS and FedEx.
• 💸 Amazon's approach to pricing is customer-centric, often prioritizing lower prices for consumers over immediate profitability, which is a strategy that has resonated with its customer base.
• 🔑 Amazon's long-term thinking is enabled by its shareholders' willingness to tolerate short-term losses for the potential of significant future gains, setting it apart from companies focused on immediate profits.
• 🛍️ The company's diversification into various industries, from pharmaceuticals to groceries, is a testament to its ambition and the breadth of its influence.
• 🏢 Amazon's customer-centric approach and scale have made it a formidable competitor, with the potential to challenge even the largest companies in the world.
• 🛂 The company's expansion and dominance across industries may eventually lead to regulatory challenges, as governments may intervene to ensure fair competition and protect consumers.

Q & A

What event occurred on February 28th, 2017, that affected many internet users?

On February 28th, 2017, there was a major internet outage that lasted for 4 hours, affecting services like Netflix, Spotify, Buzzfeed, Reddit, Dropbox, Pinterest, Imgur, League, Tinder, and thousands of others.

What was the cause of the internet outage on February 28th, 2017?

The internet outage was caused by an Amazon engineer's typo, which demonstrated the scale and power of Amazon Web Services, which hosts a significant portion of the internet.

How does Amazon's business model differ from traditional retailers?

Amazon is not just a retailer but a scale company. It focuses on providing convenience and services that benefit from being scaled up, such as one-click shopping and a vast range of products.

What is the snowball effect as described in the context of Amazon's business strategy?

The snowball effect refers to Amazon's strategy of acquiring more users, which leads to more data, improving the product, attracting even more users, and creating a self-reinforcing cycle of growth.

Why did Amazon purchase Whole Foods, and what is its strategy behind this acquisition?

Amazon purchased Whole Foods to integrate groceries into its ecosystem, making it a part of customers' routines and leveraging its shipping and distribution capabilities to potentially compete with traditional grocery stores.

How does Amazon's approach to pricing and customer service differ from companies like Facebook and YouTube?

Amazon focuses on customer-centric pricing, often aiming to charge customers less, while companies like Facebook and YouTube are advertising companies, which may prioritize advertisers over users or creators.

What is the significance of Amazon's willingness to operate at a loss for certain products or services?

Amazon's willingness to operate at a loss for certain products or services is part of its long-term strategy to prioritize customer satisfaction and scale, which can lead to greater market share and profitability in the future.

How does Amazon's approach to innovation and experimentation set it apart from other companies?

Amazon embraces a culture of innovation and experimentation, even if it means initial failures like the Fire Phone. This approach allows it to explore new markets and technologies without being constrained by short-term profitability.

What is the 'hedonic treadmill' mentioned in the script, and how does it relate to Amazon's customer philosophy?

The 'hedonic treadmill' is a concept where people's expectations adjust to improvements in their lives, never being fully satisfied. Amazon embraces this by continuously improving its products and services to meet always-rising customer expectations.

Why do some people view Amazon as a potential monopolistic threat due to its diversification and scale?

Amazon's diversification and scale across various industries raise concerns about monopolistic practices because of its ability to dominate markets, influence prices, and control a significant portion of consumer spending.

What is the role of Amazon Web Services (AWS) in Amazon's overall business strategy?

Amazon Web Services (AWS) is a key component of Amazon's business strategy, providing the company with a significant revenue stream that funds other projects and services, and also competes with other tech giants like Google Cloud.

Outlines

00:00

🌐 The Internet's Reliance on Amazon Web Services

The video begins by highlighting a significant internet outage on February 28th, 2017, which affected major services like Netflix, Spotify, and Reddit, demonstrating the internet's dependency on Amazon Web Services (AWS). It discusses Amazon's evolution from an online bookstore to a behemoth that hosts a vast portion of the internet, offering a wide range of services and products. The video also touches on Amazon's diverse business interests, including Twitch, Whole Foods, Kindle, and Alexa-enabled devices, emphasizing Amazon's strategy of rapid expansion into new industries and its broad definition of competition.

05:04

🛒 Amazon's Customer-Centric Business Model and Expansion

This section delves into Amazon's business philosophy, which is centered around customer satisfaction and scale. It explains how Amazon's focus on providing the best possible customer experience, even at the cost of short-term profits, sets it apart from companies reliant on advertising models. The video discusses Amazon's willingness to take losses on products like the Kindle to offer customers lower prices and its strategy of using data to improve products and services. It also covers Amazon's entry into the grocery market with the acquisition of Whole Foods, its logistics ambitions, and its commitment to lowering prices and improving the customer experience.

10:06

💸 Amazon's Financial Strategy and Future Prospects

The final paragraph discusses Amazon's unique financial strategy, which prioritizes long-term growth over immediate profitability. It contrasts Amazon's approach with that of other companies that may struggle to maintain investor confidence during periods of loss. The video mentions Amazon's ability to fund ambitious projects through the profits of AWS and its freedom to experiment, even if it means occasional failures like the Fire Phone. It also speculates on the potential challenges Amazon may face in the future, including competition from Google and potential regulatory hurdles, while emphasizing the enduring appeal of low prices, fast delivery, and convenient shopping.

Keywords

💡Amazon Web Services (AWS)

Amazon Web Services is a subsidiary of Amazon that provides on-demand cloud computing platforms and APIs to individuals, companies, and governments, on a metered pay-as-you-go basis. In the video, AWS is highlighted as a significant part of Amazon's business that hosts a vast portion of the internet, demonstrating Amazon's size and power. The script mentions an incident where AWS experienced an outage, causing widespread internet disruption, which underscores the company's pivotal role in the digital ecosystem.

💡Scale

Scale in the context of the video refers to the magnitude or extent to which Amazon operates. Amazon is not just an online store but has expanded its operations to various sectors, leveraging economies of scale to offer services and products more efficiently. The video emphasizes that Amazon's specialty is not in specific products but in its ability to operate at a large scale, which allows it to innovate and dominate multiple markets.

💡Snowball Effect

The snowball effect, as mentioned in the video, is a metaphor for the process by which Amazon grows its user base and improves its products. It starts with acquiring a large number of users, which generates more data, leading to product improvements that attract even more users. This cycle continues, creating a self-reinforcing system that helps Amazon expand its reach and influence, as exemplified by the script's discussion of Amazon's customer acquisition strategies and data-driven product enhancements.

💡Dollar Shave Club

Dollar Shave Club is a subscription-based service that provides personal grooming and personal care products. The video is sponsored by this company, and it is used as an example of a business model that focuses on customer convenience and affordability. The script mentions a special offer for new members, highlighting the company's strategy to attract customers with low-cost trial offers, which is a common tactic in the subscription economy.

💡Echo

Echo is a brand of smart speakers developed by Amazon that is controlled by Amazon's virtual assistant, Alexa. The video discusses the Echo product line, which includes various models like Echo, Echo Plus, Echo Dot, and others, showcasing Amazon's expansion into the smart home device market. The Echo devices are part of Amazon's strategy to integrate its services into consumers' daily lives and gather more data to improve its services.

💡Prime

Amazon Prime is a subscription service offered by Amazon that provides free two-day shipping within the contiguous United States on all eligible items, access to streaming services like Prime Video, and other benefits. The video discusses Prime as a strategic move by Amazon to lock in customers and make it difficult for them to shop elsewhere due to the convenience and benefits it offers.

💡Whole Foods

Whole Foods is an American supermarket chain that focuses on selling organic and healthy food products. The video mentions Amazon's acquisition of Whole Foods as a strategic move to enter the grocery market and establish a physical presence. This acquisition is part of Amazon's broader strategy to diversify its business and integrate into various aspects of consumers' lives.

💡Discontent

In the video, 'discontent' refers to the idea that customers are never fully satisfied and always seek better products and services. Amazon embraces this concept by continuously innovating and improving its offerings to meet rising customer expectations. The script quotes Jeff Bezos discussing the 'divinely discontent' nature of customers, which aligns with Amazon's philosophy of constant improvement and innovation.

💡Hedonic Treadmill

The hedonic treadmill is a psychological concept that suggests that people quickly return to a relatively stable level of happiness despite major positive or negative events or life changes. In the video, this concept is used to explain why Amazon constantly needs to improve its products and services to keep up with the ever-rising expectations of its customers, as their satisfaction levels tend to adjust to new standards.

💡Shareholders

Shareholders are the owners of a company who hold shares in it. In the context of the video, shareholders are mentioned as the ultimate decision-makers in a company, and their patience and long-term vision are crucial for Amazon's strategy of reinvesting profits into new projects and innovations. The video highlights how Amazon's approach to business, which sometimes involves short-term losses for long-term gains, is supported by its shareholders.

💡Competitor

A competitor in the video refers to any company or entity that offers products or services that are in direct competition with those of Amazon. The video discusses how Amazon's broad range of products and services makes it a competitor to a vast array of companies across different industries. It also touches upon how Amazon's scale and customer-centric approach give it a competitive edge in the market.

Highlights

On February 28th, 2017, a major internet outage affected services like Netflix, Spotify, and Reddit, highlighting the dependency on Amazon Web Services.

Amazon Web Services (AWS) hosts a significant portion of the internet, demonstrating Amazon's size and power in the digital realm.

Amazon's business model is not just an online store but also includes handling marketing, shipping, and returns for other companies.

Amazon's convenience offers a vast range of products, from gummy bears to unusual items like pythons and crisp $2 bills.

Amazon's business extends beyond retail to include services like Twitch, Whole Foods, Kindle, and Alexa-enabled devices.

Amazon's strategy involves entering and quickly dominating new industries, as seen with their impact on Blue Apron's stock.

Amazon's definition of competitors is broad, including all types of media publishers, producers, and distributors.

Amazon's approach to business is characterized by a lack of focus on specific products, instead aiming for scale and efficiency.

Jeff Bezos' philosophy centers on scale, which allows Amazon to achieve things that smaller businesses cannot.

Amazon's snowball effect strategy involves acquiring users, collecting data, and using it to improve products and attract more users.

Amazon's Prime service, despite potentially losing money on heavy users, is part of a larger strategy to secure customer loyalty.

Amazon's acquisition of Whole Foods and its ability to lower prices is a strategic move to integrate groceries into customers' routines.

Amazon's logistics and shipping capabilities position it to compete with traditional delivery services like UPS and FedEx.

Amazon's approach to pricing, as stated by Bezos, aims to charge customers less, which is a stark contrast to traditional business models.

Amazon's customer-centric model prioritizes customer satisfaction over immediate profits, aligning with the interests of consumers.

Amazon's long-term thinking, supported by patient shareholders, allows for significant investments in new projects and services.

Amazon's potential future challenges may include competition from the government, which could regulate its expansive business practices.

Dollar Shave Club's sponsorship of the video is highlighted, offering a $5 starter set and emphasizing convenience and quality.

Transcripts

This video is sponsored by Dollar Shave Club.

Use the link in the description for a special $5 starter set.

On February 28th, 2017, you might’ve thought the internet was down.

4 hours without Netflix, Spotify, Buzzfeed, Reddit, Dropbox, Pinterest, Imgur, League,

Tinder, and thousands of others,

Even the site that reports outages.

That’s embarrassing.

If the world was more productive that day, now we know why.

r/Outside become, just, ya know, outside.

A shark hadn’t bitten an underwater cable, nor was it five/nine, Just an Amazon engineer’s

typo.

Probably a stressful afternoon in Seattle, but also an impressive demonstration of the

company’s size and power:

Amazon Web Services hosts so much of the internet that for many people, myself included, it

basically is the internet.

We know Amazon as an online store, Companies store their products in its warehouses, which

handle the marketing, and shipping, and returns.

For us, this means total convenience - one click away from $125, 27-pound gummy bear

pythons, or 5, crisp, 2 dollar bills for $20.

Wait, that's not how money works…

A hundred thousand companies make over a hundred thousand dollars a year this way.

But for Amazon, it’s only a fraction of their business.

There’s also Twitch, Whole Foods, Kindle, Alexa sensibly named Echo, Echo Plus, Echo

Dot, Echo Dot Kids, Amazon Tap, Echo Connect, Echo Spot, Echo Show, and Echo Look, also

a completely different Alexa, Fire Tablets and TV, Prime Music, Video, Pantry, Ring Doorbell,

Zappos, IMDb, Fresh, GoodReads, and over 70 consumer brands you’d never know they owned.

whew.

Hardly a month goes by where they don’t enter and dominate a new industry,

Just trademarking the slogan “We do the prep.

You be the chef.” was enough to drop Blue Apron’s stock 12%.

They’re even investigating pharmaceuticals, education, and finance.

Amazon defines its competitors as “publishers, producers, and distributors of physical, digital,

and interactive media of all types and all distribution channels”, among others.

That’s, like, everyone.

Which raises the question: is Amazon… scatter-brained?

Many of these products have nothing in common.

Yesterday they wanted to conquer streaming video.

Today, sell organic grapes in grocery stores.

Tomorrow, who knows?

And their ideas, increasingly let’s say, creative: 2-day delivery?

How about 2-hour delivery, a 3D smartphone, a grocery store without employees, a front

door that unlocks for delivery drivers, A flying warehouse complete with detachable

drones.

For all its success as an online store, more and more, it also seems distracted.

At least, that’s how it looks.

The only way to make sense of their actions and mistakes, and anticipate their future,

is to see the world as they do.

And there are three pillars to Amazon’s plan for world domination:

To really understand Amazon you have to understand Jeff Bezos

Like Steve Jobs or Elon Musk, the philosophy of the man is that of the company.

Apple was founded by people in love with technology and its design.

No matter how big the company gets, this will always be reflected in its decisions, priorities,

even mistakes.

Amazon began as a bookstore, but that was never its heart and soul.

or spine

Bezos chose books because no one bookstore could hold all of them, warehouses visited

on the internet could.

But make no mistake: They aren’t a book company, a website, a delivery network, or

even a retailer.

Amazon is a scale company.

Bezos understood that when you take something and multiply it a hundred, thousand, million

times, you can do things all the small businesses in the world never could.

A tree is a tree.

But put 400 billion together and you have the Amazon rainforest, a force so powerful

it controls the world’s climate.

From any other company, this sounds like generic business-speak.

But Amazon really means it.

We say a company is focused if it specializes in beverages, or cars, or bad website design,

and puts all its XP into that ability.

Amazon is rare in that its specialty isn’t the product itself but its scale.

That’s the focus.

When considering a new product, the flowchart is pretty simple: “Would this benefit from

being a thousand times quicker, bigger, easier?”

If so, you can bet Amazon either sells it, or soon will.

It’s easy to stop there, Sit back and enjoy the profit.

But Amazon asks “Okay, now what can we do?”

And this is why it’s unstoppable: the snowball effect.

First, get as many users as possible.

Give out $50 tablets, free shipping, license Echo to every company willing.

More users bring more data, which helps improve the product.

And the better product attracts even more users.

They aren’t just making it easy to live off Amazon, they’re making it hard not to.

That’s the power of data in the hands of someone operating at this scale.

It’s why there’s now a movement to limit this,

why companies like Digi.me, who I’ve previously mistaken for a data collection company, actually

let users manage and safeguard their information.

And the results are things like Prime: It may lose money on the heaviest shoppers, but

with a hundred million of them, they’re winning a lot more than they’re losing.

So why purchase competitors like Whole Foods?

Exactly because it’s not what they’re good at:

Books never expire, well, some do.

But groceries, not so much.

You have to go back repeatedly, putting Amazon in your routine.

And with so much shipping,

Spending $11 billion fulfilling 300 million packages in 2015, they can do something almost

no-one else can: Compete with UPS and FedEx.

They already lease 32 Boeing 767 cargo jets, and plan a massive cargo hub in Kentucky,

But that’s just the beginning.

After announcing a new $79 Kindle, Bezos wrote

“There are two types of companies: those that work hard to charge customers more, and

those that work hard to charge customers less.

Both approaches can work.

We are firmly in the second camp.”

And he’s really not kidding…

The parts alone cost $78.59, plus $5.66 for assembly.

That’s a loss of $5.25 for every Kindle sold, not including things like marketing,

licensing, and support.

And sure, there are ads, but only as an option,

Companies like Facebook and YouTube are fundamentally advertising companies.

No matter how well-intentioned YouTube employees are, unless something drastic changes, the

company will always prioritize advertisers over creators.

That’s the business model.

And then there are customer companies - where You and I decide what gets demonetized.

Apple is comfortable charging more for †he very best experience,

And for Amazon, helping the customer means making us pay as little as possible.

Both are loved in a way that’s impossible for an advertising company.

You might say - “They only care about the customer to make more money”

And maybe you’re right, there’s no way to know, but the effects are the same,

When Apple refused to unlock the San Bernardino iPhone,

When Amazon takes a loss for the sake of our wallets,

and offers some of the best customer support I’ve ever had,

It may only be a calculated business decision, But it’s great for us.

Of course, when the customer comes first, everyone else comes second.

Employees can be easily be forgotten in this never-ending quest to satisfy us.

Here’s how Bezos describes it:

“One thing I love about customers is that they’re divinely discontent.

Their expectations are never static.

It’s human nature.

We didn’t ascend from our hunter-gatherer days by being satisfied.”

This is the hedonic treadmill - no matter how much our lives improve, our expectations

simply adjust.

Almost any other company would resent this - constantly having to improve their products,

even the rate at which they improve.

But Amazon embraces it - they’re just as discontent as we are.

Except, if there are billions to be made by concentrating on scale and customers, why

can’t anybody else do the same?

How can a tiny online bookstore do something exponentially better than Walmart, the world’s

largest company by revenue?

It's easy to think of the CEO as the supreme leader of a company

but “Even Bono Has A Boss”.

In this case, shareholders.

The longer a company loses money, the greater its risk, and the more anxious get investors.

But for Amazon - lack of profit isn’t just tolerated, it’s celebrated -

They could stop and make a dollar, they’d rather wait and make five, Using profit from

things like AWS to fund projects like Kindle and Echo.

Because Bezos is so open about this, shareholders sign off, and they can think far into the

future.

Those cargo planes?

Not so cheap.

But that doesn’t stop Amazon.

Supermarkets operate at a 1% profit margin - but Amazon can buy Whole Foods, and actually

lower prices.

It also gives them freedom to experiment.

The Fire Phone was never ready for, ahem Prime time, but that’s a small price to pay for

this strategy.

MoviePass, Snapchat, Uber, Spotify, Blue Apron, all starving companies following in Amazon’s

footsteps, crossing their fingers money will come later.

Ex-Google CEO Eric Schmidt says Amazon is already Google’s biggest competitor.

AWS competes with Google Cloud, Echo with Google Home, Prime and Express, YouTube and

Twitch Even search.

A company this diversified will face plenty of challenges,

A lot will change in 10 years, but we’ll always want low prices, fast delivery, and

easy shopping.

As Amazon conquers one industry after another,

they may only have one real competitor: the government, who may say “Do not pass go,

and do not collect $200”.

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